relative value single stock volatility

www.morganmarkets.com

Europe Equity Derivatives & Delta One Strategy07 June 2012

Relative Value Single Stock VolatilityOption Plays on the Rebound Baskets

European Equity Derivatives and Delta-One Strategy

Peng Cheng, CFA AC

(44-20) 7325-6935

[email protected]

Davide Silvestrini AC

(44-20) 7777-1018

[email protected]

Sahil Manocha AC

(44-20) 7742-3369

[email protected]

Bram Kaplan

(44-20) 7325 8183

[email protected]

J.P. Morgan Securities Ltd.

See page 10 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Click here for the Enhanced Relative Value Screen

Despite the high intraweek volatility, European equities ended the week little changed (SXXP -0.1%). However, for the first time in five weeks, the single stock volatility fell week on week. European average single stock volatility retreated 54 bps by absolute change in 3M ATMF vol and 27 bps on a fixed strike basis.

Financials led the decline in vol on a fixed strike basis, whereas Telcosand C. Staples vol rose on the week. At the country level, the vols on Dutch and Spanish names continued to rise while German and Italian vols reset lower.

Last week, the best performing sector indices were Banks (SX7P +4.6%, SX7E +8.7%) while Autos lagged (SXAP -4.7%). Basic Resources (SXPP) volatility fell more than the other sectors, adjusted for 1W return. On the other hand, Chemicals (SX4P) volatility climbed the most relative to other sectors after adjusting for returns.

Investors looking for a rebound in equities can buy call spreads, which offer attractive risk-reward, on the members of the JPM Consensual Long baskets. The basket members are selected for their potential to bounce back in a case of a rebound.

In addition, from the ERV volatility screen, we highlight AH NA, DGFP, ABBN VX, RDSA NA, REP SQ as attractive volatility buying candidates from the list of cheap names.

We also highlight SGO FP, SU FP, CA FP, RI FP, STAN LN, ASML NA as attractive volatility selling candidates from the list of rich names.

All data in this report are as of market close on 6 Jun, 2012

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Peng Cheng, CFA(44-20) [email protected]

Commentary

Despite the high intraweek volatility, European equities ended the week little changed (SXXP -0.1%). However, for the first time in five weeks, the single stock volatility fell week on week. European average single stock volatility retreated 54 bpsby absolute change in 3M ATMF vol and 27 bps on a fixed strike basis1. Currently the average single stock volatility stands at 34.0%, compared to 2Y average of 29.5% and median of 27.7% (Figure 1). The 1M realised correlations in European indices continued to grind up, but are still substantially below this year’s peak (Figure 2).

Figure 1: Average 3M SS vol -0.5% last week, compared to Euro STOXX 50 vol -2.9%

3M Volatility

Source: J.P. Morgan Equity Derivatives Strategy

Figure 2: Short-dated remained substantially below this year’s peak1M realised correlation


Sectors and Sector IndicesFigure 3: Sector 3M ATM implied volatility changes vs. sector returns last week1W change in 3M ATM volatility

1W Return

Source: J.P. Morgan Equity Derivatives Strategy.

Figure 4: Sector 3M ATM implied volatility changes vs. sector returns since the start of the correction3M ATM volatility change since 19-Mar

Return since the start of the correction (19-Mar)


Last week, the best performing sector indices are Banks (SX7P +4.6%, SX7E +8.7%) while Autos lagged (SXAP -4.7%). In Figure 3 we can see that Basic Resources (SXPP) volatility fell more than the other sectors adjusting for 1W return. On the other hand, Chemicals (SX4P) volatility climbed the most relative to other sectors after adjusting for returns. Nonetheless,

1 We compute the change in fixed strike vol by taking the difference between the current 3M ATMF implied volatility and the same strike

volatility one week ago.

10%

20%

30%

40%

50%

Apr Jul Oct Jan Apr

Avg SSSX5EDAXFTSE

20%

30%

40%

50%

60%

70%

80%

02-Jan 02-Feb 02-Mar 02-Apr 02-May 02-Jun

SX5E

SXXP

SXAP

SXDP

SX7P

SXNPSXEP

SX3PSXQP SXKP

SXIP

SX4P

SXPP

SX6P

SXRP

y = -0.4998x - 0.0007R² = 0.8125

-3%

-2%

-1%

0%

1%

2%

3%

-6% -4% -2% 0% 2% 4% 6%

SXAP

SXDP

SX7P SXNP

SXEP

SX3PSXKP

SXIP

SX4P

SXPP

SX6P

SXRP

y = -0.3125x - 0.0082R² = 0.6194

0%

1%

2%

3%

4%

5%

6%

7%

8%

-25% -20% -15% -10% -5% 0%

3



as Figure 4 shows, since the start of the correction, the 3M vol for the Banks (SX7P) and Basic Resources (SXPP) sector options remain amongst the most elevated, both in absolute terms and relative to their histories.

Table 1: European Sector Indices with liquid options

Ticker Sector 1W Return2Y beta to

SXXP3M implied

volatilityImplied vol

2Y %ile3M realised

volatility3M 90-110% skew

Pan

-Eur

ope

SX7P Banks 4.6% 1.45 36.6% 74.2% 30.9% 8.2%

SXIP Insurance 1.0% 1.38 31.0% 75.2% 28.2% 5.9%

SXPP Basic Resources 1.9% 1.48 35.9% 71.6% 31.8% 5.8%

SXAP Automobiles & Parts -4.7% 1.54 37.1% 76.6% 33.8% 7.2%

SXEP Oil & Gas 0.3% 1.01 23.2% 71.2% 21.3% 6.9%

SXNP Industrial Goods & Services -2.3% 1.17 26.7% 60.8% 23.3% 8.5%

SX6P Utilities 0.3% 0.87 20.6% 69.6% 19.2% 5.8%

SX4P Chemicals -2.7% 1.09 24.9% 74.0% 22.8% 6.5%

SXRP Retail -1.8% 0.76 21.0% 76.0% 17.0% 4.6%

SXKP Telecommunications -0.2% 0.72 19.3% 67.3% 16.5% 4.0%

SXDP Health Care -0.7% 0.53 15.8% 72.6% 13.3% 4.9%

SX3P Food & Beverage -0.8% 0.51 15.3% 41.7% 13.4% 4.3%

Eur

o-zo

ne

SX7E Banks 8.7% 1.70 49.1% 77.6% 39.8% 7.8%

SXIE Insurance 2.2% 1.59 35.0% 81.5% 33.5% 6.6%

SXEE Oil & Gas 1.4% 1.11 24.4% 71.6% 23.2% 6.9%

SXKE Telecommunications 3.3% 0.86 23.0% 75.2% 20.3% 5.1%


The following figures and tables show the detailed changes in single name volatility for each sector, both on a relative and a fixed strike basis, at the aggregated single stock level. Financials rallied last week (SX7P + 4.7%) and led the decline in 3M ATMF vol both on a relative and fixed strike basis. On the other hand, Telcos volatility increased the most for a second week, led by KPN and Telefonica. C. Staples (led by Nestle, Diageo) vol also rose on a fixed strike basis.

Figure 5: Financials led the drop in 3M volatility, whereas consumers vol rose

Change in 3M ATMF implied volatility


Figure 6: Telecoms and C. Staples vol rose for a second week, whereas Financials and Materials vol reset down materially

Change in 3M fixed strike implied volatility


-2.5% -1.5% -0.5% 0.5%

C. Disc

Industrials

C. Staples

Health Care

IT

Telecoms

Materials

Energy

Utilities

Financials

-1.0% -0.5% 0.0% 0.5% 1.0%

Telecoms

C. Staples

Health Care

Energy

C. Disc

IT

Industrials

Utilities

Materials

Financials

4



Country breakdown

For a second straight week, the Dutch stocks (led by KPN and ING) and Spanish stocks (led by Telefonica and Repsol) had the biggest increase in volatility in terms of the 3M fixed strike volatility. On the other hand, Germany (EON, Daimler) and Italy (Unicredit, Intesa) fell more than average on a fixed strike basis.

Figure 7: Average stock volatilities fell in most countries

Change in 3M ATM implied volatility


Figure 8: Netherlands and Spain average stock volatilities reset up the most, Germany and Italy vol fell

Change in 3M fixed strike implied volatility


Names with large moves in volatility

The following tables show the changes in volatility, both on a relative and a fixed strike basis, at the single stock level.

Table 2: Names with biggest decrease in fixed strike vol

TickerCurrent 3M ATMF

Implied Vol1W Change in

Fixed Strike Vol 1W Stock Return

CS FP 46.8% -3.0% 5.8%

CSGN VX 37.1% -3.0% 1.4%EOAN GY 30.9% -2.8% -3.1%

DAI GY 39.5% -2.3% -7.1%

UCG IM 59.8% -2.3% 12.3%NOK1V FH 64.4% -2.1% 2.1%

BMW GY 40.1% -1.9% -5.8%

DBK GY 43.6% -1.8% -1.5%CA FP 40.7% -1.6% 0.3%

BAS GY 30.7% -1.5% -3.8%


Table 3: Names with biggest increase in fixed strike vol

TickerCurrent 3M ATMF

Implied Vol1W Change in

Fixed Strike Vol 1W Stock Return

KPN NA 42.0% 3.9% 0.0%

CNA LN 22.3% 1.7% 0.3%UHR VX 34.1% 1.5% -3.0%CFR VX 36.0% 1.4% -6.3%

BNP FP 51.1% 1.2% 13.6%NESN VX 16.1% 1.1% -2.0%

GSK LN 20.5% 1.1% 1.2%

DGE LN 21.8% 1.1% 3.5%BATS LN 22.5% 1.0% 1.8%

TEF SQ 38.6% 0.8% 8.2%


-4.0% -3.0% -2.0% -1.0% 0.0% 1.0%

Switzerland

Netherlands

Germany

United Kingdom

France

Spain

Italy

-1.5% -1.0% -0.5% 0.0% 0.5%

Netherlands

Spain

United Kingdom

Switzerland

France

Italy

Germany

5



Table 4: Names with biggest 1W decrease/increase in 3M ATMFimplied vol

TickerCurrent Implied

Vol1W Change in

Vol1W Stock

Return

UCG IM 59.8% -6.7% 12.3%ISP IM 57.2% -5.9% 11.7%CS FP 46.8% -5.9% 5.8%

BNP FP 51.1% -4.4% 13.6%GLE FP 61.2% -4.2% 10.7%CNA LN 22.3% 1.6% 0.3%

NESN VX 16.1% 1.9% -2.0%UHR VX 34.1% 2.5% -3.0%CFR VX 36.0% 3.4% -6.3%KPN NA 42.0% 3.9% 0.0%Average 34.0% -0.5%


Table 5: Names with lowest/highest implied-realised vol spread

Ticker3M ATMF

IV3M Realised

VolImplied-Realised

Spread

AH NA 22.4% 22.0% 0.4%ZURN VX 24.3% 22.6% 1.7%

UL FP 26.4% 24.6% 1.7%ATCOA SS 38.3% 36.3% 1.9%

ADS GY 33.4% 31.3% 2.1%ASML NA 33.5% 28.0% 5.5%

AAL LN 39.5% 33.9% 5.6%VIV FP 36.1% 30.1% 6.0%

UBSN VX 36.1% 29.3% 6.8%ALV GY 35.8% 26.4% 9.4%


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Trade Ideas

Investors wishing to gain exposure to a potential rebound in equity markets can purchase options on the constituents of ourJ.P. Morgan Global ‘Consensual Long’ baskets. The basket members are selected by the JPM Quantitative Research team for their potential to bounce back in a potential rebound. On the 10 largest market cap names (Table 6) in the European basket, clients can buy a Sep-12 105% - 115% call spread for 2.75% for a maximum payoff-cost ratio of 3.6x, or a Sep-12 105%-120% call spread for 3.25% for a maximum payoff-cost ratio of 4.6x (equally weighted, quanto EUR).

Table 6: Investors can buy call spreads on the European basket of names below

Ticker Name Sector JPM Rating Last PriceRDSA NA Royal Dutch Sh-A Energy Neutral 25.2BLT LN BHP Billiton Plc Materials Neutral 1769.0BP/ LN BP Plc Energy Overweight 413.1GSK LN Glaxosmithkline Health Care Neutral 1441.5FP FP Total SA Energy Overweight 35.0RIO LN Rio Tinto Plc Materials Overweight 2886.0VOW3 GY Volkswagen-Pfd Consumer Discretionary Overweight 124.1AZN LN Astrazeneca Plc Health Care Neutral 2629.5SAN SQ Banco Santander Financials Overweight 4.8GSZ FP GDF Suez Utilities Neutral 16.3

Source: J.P. Morgan Equity Derivatives & Quantitative Strategy

Additionally, investors can gain global exposure on the basket in Table 7, which contains the 15 largest market cap names across the global baskets. A Sep-12 105% - 115% call spread costs 2.90% for a risk-reward ratio of 3.4x, and a Sep-12 105%-120% call spread costs 3.55% for a maximum payoff-cost ratio of 4.2x. (equally weighted, quanto USD).

Table 7: Additionally, Investors can buy call spreads on the global basket of names below

Ticker Name Sector JPM Rating Last PriceRDSA NA Royal Dutch Sh-A Energy Neutral 25.2BLT LN BHP Billiton Plc Materials Neutral 1769.0BP/ LN BP Plc Energy Overweight 413.1GSK LN Glaxosmithkline Health Care Neutral 1441.5FP FP Total SA Energy Overweight 35.0RIO LN Rio Tinto Plc Materials Overweight 2886.0C UN Citigroup Inc Financials Neutral 27.1VOW3 GY Volkswagen-Pfd Consumer Discretionary Overweight 124.1AZN LN Astrazeneca Plc Health Care Neutral 2629.5AIG UN American Interna Financials Neutral 29.9SAN SQ Banco Santander Financials Overweight 4.8GSZ FP GDFSuez Utilities Neutral 16.33328 HK Bank Of Commun-H Financials Overweight 5.1AAL LN Anglo Amer Plc Materials Neutral 2108.0F UN Ford Motor Co Consumer Discretionary Not Covered 10.6

Source: J.P. Morgan Equity Derivatives& Quantitative Strategy


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In Figure 9 and Figure 10 we show the cheapest and richest names in our Enhanced Relative Value ranking. We reiterate our previous recommendations of buying 1x2 call ratio on Schneider and call spreads on Volvo, and selling puts on Standard Chartered. We highlight AH NA, DG FP, ABBN VX, RDSA NA, REP SQ as attractive volatility buying candidates from the list of cheap names. We also highlight SGO FP, SU FP, CA FP, RI FP, STAN LN, ASML NA as attractive volatility selling candidates from the list of rich names.

Figure 9: Cheapest names ranked by the ERV model


Figure 10: Richest names ranked by the ERV model


Ticker Name Sector

Risk

Premium

Z-Score

Risk

Premium

Rank

Fundamental

Z-Score

Fundamental

Rank

Combined

Rank

Trading

Signal

Ticker Name Sector EWMA Z- EWMA Fundamental Fundamental Combined Trading AH NA Koninklijke Ahold NV Consumer Staples -1.64 5 -0.69 20 1 Cheap

EOAN GY E.ON AG Utilities -0.77 16 -1.29 9 2 CheapCS FP AXA SA Financials -1.76 4 -0.41 29 3 Cheap

LIN GY Linde AG Materials -0.89 13 -0.69 21 4 CheapBAS GY BASF SE Materials -0.31 30 -1.39 7 5 Cheap

ROG VX Roche Holding AG Health Care -0.43 25 -1.05 15 6 CheapZURN VX Zurich Insurance Group AG Financials -0.14 41 -1.78 1 7 CheapUL FP Unibail-Rodamco SE Financials -0.71 18 -0.60 25 8 Cheap

DG FP Vinci SA Industrials -0.56 20 -0.53 27 9 CheapRDSA NA Royal Dutch Shell PLC Energy -0.08 45 -1.52 5 10 Cheap

REP SQ Repsol YPF SA Energy -1.44 7 -0.09 43 11 CheapOGZD LI Gazprom OAO Energy -0.74 17 -0.24 34 12 CheapG IM Assicurazioni Generali SpA Financials -0.81 15 -0.12 37 13 Cheap

HEIA NA Heineken NV Consumer Staples -0.33 28 -0.61 24 14 CheapMC FP LVMH Moet Hennessy Louis Vuitt Consumer Discretionary -1.56 6 -0.02 47 15 Cheap

ABBN VX ABB Ltd Industrials -0.06 46 -1.36 8 16 CheapBP/ LN BP PLC Energy -0.05 47 -1.28 10 17 Cheap

FP FP Total SA Energy 0.16 55 -1.75 2 18 CheapBAYN GY Bayer AG Health Care -0.21 35 -0.62 23 19 Cheap

Ticker Name SectorRisk

Premium Z-Score

Risk Premium

Rank

Fundamental Z-Score

Fundamental Rank

Combined Rank

Trading Signal

Ticker Name Sector EWMA Z- EWMA Fundamental Fundamental Combined Trading SAN SQ Banco Santander SA Financials 3.98 92 3.09 91 87 RichBBVA SQ Banco Bilbao Vizcaya Argentari Financials 2.73 91 2.67 90 86 RichNOK1V FH Nokia OYJ Information Technology 1.68 90 2.03 89 85 RichINGA NA ING Groep NV Financials 0.98 81 0.55 72 84 RichSGO FP Cie de St-Gobain Industrials 1.11 85 0.40 67 83 RichPHIA NA Koninklijke Philips Electronic Industrials 0.51 70 0.73 78 82 RichBLT LN BHP Billiton PLC Materials 0.94 79 0.44 69 81 RichRI FP Pernod-Ricard SA Consumer Staples 0.39 66 0.75 79 80 RichVIV FP Vivendi SA Consumer Discretionary 0.19 57 1.64 87 79 RichEAD FP European Aeronautic Defence an Industrials 0.21 59 1.23 85 78 RichUBSN VX UBS AG Financials 0.63 72 0.52 71 77 RichTEF SQ Telefonica SA Telecommunication Services 0.64 73 0.43 68 76 RichGLE FP Societe Generale SA Financials 0.83 76 0.36 64 75 RichSU FP Schneider Electric SA Industrials 0.34 64 0.62 75 74 RichCA FP Carrefour SA Consumer Staples 1.23 87 0.04 51 73 RichASML NA ASML Holding NV Information Technology 0.02 50 1.80 88 72 RichIMT LN Imperial Tobacco Group PLC Consumer Staples 0.63 71 0.40 66 71 RichBT/A LN BT Group PLC Telecommunication Services 0.95 80 0.12 55 70 RichBARC LN Barclays PLC Financials 0.12 54 0.76 81 69 RichRB/ LN Reckitt Benckiser Group PLC Consumer Staples 1.08 84 0.01 50 68 RichBATS LN British American Tobacco PLC Consumer Staples 1.01 82 0.00 49 67 RichSTAN LN Standard Chartered PLC Financials 0.89 77 0.08 52 66 RichRIO LN Rio Tinto PLC Materials 0.06 52 0.56 73 65 Rich




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Universe: Our single stock universe consists of all the names in the Euro STOXX 50 index, top 25 names in the FTSE 100 index, top 10 names in the SMI index, top 5 names in the RDXUSD index, top 5 names in the OMX index, plus names outside of the Euro STOXX 50 but in the top 20 names in the CAC index, top 15 names in the DAX index, top 10 names in the AEX index.

Enhanced Relative Value Methodology: For the detailed methodology please refer to our ERV model initiation report.

Risk Premium Z-Score: we compute the exponentially weighted moving average (EWMA) volatility for a company, and regress the 3M implied to EWMA volatility spreads against the companies' CDS spreads across our universe. The Z-Scores are the residuals from the regression standardised by the standard deviation of the residuals. High Z-score implies rich implied volatility.

Fundamental Z-Score: we regress the 3M implied volatility against the company’s 1Y beta to the SXXP index and its 3M return. The Z-Score is the residuals from the regression standardised by the standard deviation of the residuals. High Z-score implies rich implied volatility.

Combined Rank: the average of the Risk Premium Ranking and Fundamental Ranking.

Earnings Day Implied Move: We assume that the market prices implied volatility with one day of excess volatility on the earnings announcement day, and all other days with a lower “background” volatility. There are three potential indicators of what the “background” volatility of a stock may be, excluding the earnings day itself:

1. The forward-starting implied volatility between the two option expiries falling directly after the earnings announcement

2. The implied volatility of the front option expiry if that expiry falls prior to the earnings announcement day

3. The hypothetical implied volatility for a maturity corresponding to the earnings announcement day, interpolated from the J.P.Morgan “model implied volatility term structure” (which is based upon a natural log regression for the expiries falling directly after the earnings announcement day, and the implied volatility at these maturities).

Having estimated the background implied volatility, we can estimate the excess volatility for the earnings announcement day that is implied by the volatility term structure. We convert this excess volatility into an “expected earnings-day move”. This figure can then be compared to the size of stock moves on previous earnings announcement days, in order to highlight potential opportunities.

An alternative method is to estimate what the earnings day move will be (perhaps using the average historical delivered earnings day move over the last several earnings announcements, for example) and then exclude this anticipated excess volatility from the actual implied volatility term structure. The underlying (“ex-earnings”) implied volatility term structure can then be analysed in order to identify relative value.

Note that we do include one additional constraint that the earnings day move should never be less than the estimated “background” volatility.

Please note that there are important considerations when trading earnings-day moves, including other potential sources of excess volatility (such as M&A activity, economic data flow, etc.) that may also explain the premium of actual implied volatility to background volatility estimates.


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Risks of common option strategies

Risks to Strategies: Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of "Characteristics and Risks of Standardized Options". We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents

Put Sale. Investors who sell put options will own the underlying stock if the stock price falls below the strike price of the put option. Investors, therefore, will be exposed to any decline in the stock price below the strike potentially to zero, and they will not participate in any stock appreciation if the option expires unexercised.

Call Sale. Investors who sell uncovered call options have exposure on the upside that is theoretically unlimited.

Call Overwrite or Buywrite. Investors who sell call options against a long position in the underlying stock give up any appreciation in the stock price above the strike price of the call option, and they remain exposed to the downside of the underlying stock in the return for the receipt of the option premium.

Booster. In a sell-off, the maximum realised downside potential of a double-up booster is the net premium paid. In a rally, option losses are potentially unlimited as the investor is net short a call. When overlaid onto a long stock position, upside losses are capped (as for a covered call), but downside losses are not.

Collar. Locks in the amount that can be realized at maturity to a range defined by the put and call strike. If the collar is not costless, investors risk losing 100% of the premium paid. Since investors are selling a call option, they give up any stock appreciation above the strike price of the call option.

Call Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the stock is below the strike price of the call option.

Put Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the stock is above the strike price of the put option.

Straddle or Strangle. The seller of a straddle or strangle is exposed to stock increases above the call strike and stock price declines below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the stock would have limited losses should the stock rally. Covered writers are exposed to declines in the long stock position as well as any additional shares put to them should the stock decline below the strike price of the put option. Having sold a covered call option, the investor gives up all appreciation in the stock above the strike price of the call option.

Put Spread. The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher ratio put spread has unlimited downside below the lower strike (down to zero), dependent on the number of lower struck puts sold. The maximum gain is limited to the spread between the two put strikes, when the underlying is at the lower strike. Investors who own the underlying stock will have downside protection between the higher strike put and the lower strike put. However, should the stock price fall below the strike price of the lower strike put, investors regain exposure to the underlying stock, and this exposure is multiplied by the number of puts sold.

Call Spread. The buyer risks losing 100% of the premium paid. The gain is limited to the spread between the two strike prices. The seller of a call spread risks losing an amount equal to the spread between the two call strikes less the net premium received. By selling a covered call spread, the investor remains exposed to the downside of the stock and gives up the spread between the two call strikes should the stock rally.

Butterfly Spread. A butterfly spread consists of two spreads established simultaneously. One a bull spread and the other a bear spread. The resulting position is neutral, that is, the investor will profit if the underlying is stable. Butterfly spreads are established at a net debit. The maximum profit will occur at the middle strike price, the maximum loss is the net debit.

Pricing Is Illustrative Only: Prices quoted in the above trade ideas are our estimate of current market levels, and are not indicative trading levels.

10



Disclosures

This report is a product of the research department's Global Equity Derivatives and Delta One Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions.

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker: JPMS makes a market in the stock of ASML.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for ABB, Ahold, Vinci, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, ASML, Carrefour, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, ASML, Carrefour, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, Carrefour, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, Carrefour, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from ABB, Ahold, Vinci, Royal Dutch Shell A, Royal Dutch Shell B, ASML, Carrefour, Pernod-Ricard SA, Saint-Gobain, Schneider Electric, Standard Chartered, Repsol, Volvo.

Broker: J.P. Morgan Securities Ltd. acts as Corporate Broker to Standard Chartered.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’

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11



coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 12%IB clients* 51% 45% 34%

JPMS Equity Research Coverage 43% 48% 9%IB clients* 70% 61% 53%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ.South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

http://www.optionsclearing.com/publications/risks/riskstoc.pdf

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Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures sectionabove. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised April 18, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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