Overwriting Jan. 2012

UBS Investment Research

Overwriting Monthly

Overwriting Conditions Are Average

Conflicting conditions complicate overwriting, beware the animal spirits While conditions are less favorable for overwriting than prior months due to lower absolute levels of volatility and a growing appetite for risk, we can still identifystocks to overwrite. The market is off to a strong start this year, though manystocks are near short-term resistance levels and the SPX is approaching overbought territory. We question the amount of upside when companies have limited abilityto further grow earnings and macro issues such as those in Europe remain, butacknowledge rising investor confidence as a risk for overwriting.

Overwrite holiday retail winners, homebuilders, avoid semi’s, railroads We prefer overwriting specialty retail names that have outperformed, as we expect arotation into underperformers. We also overwrite homebuilders, which in our viewhave attractive levels of volatility, stretched valuations and appear overbought after astrong rally. We avoid semi’s as the cycle trough appears to be passing, and avoidrailroads where we think pricing power could lead to outperformance.

Sell March calls on ADSK, CLF, LEN, RCL. Avoid CBS, QCOM, STI We recommend 16 stocks for tactical covered call writing and caution againstoverwriting 8 stocks due to potential catalysts. Our recommended group has anaverage strike that is 108% of spot and a 2.1% premium yield.

What’s New? We evaluate overwriting in 2011 vs. 20 years of history, and consider theimplications for 2012 (pg 3), provide more detailed rationale for industry leveloverwriting (pg 9) and explain our enhanced stock selection approach (pg 17).

Global Equity Research

Americas

Derivatives

Equity Derivatives

23 January 2012

www.ubs.com/investmentresearch

Mitchell S. Revsine

[email protected]

+1-212-713 1416

Brian RussoAssociate Analyst

[email protected]+1-203-719 3692

Contents Topic This Month Page

Overwriting Environment Overview Cautious Market View, But Momentum Could Persist 2

Putting 2011 Performance in Context 2011 a Good Year for Overwriting 3

Fundamental Outlook Market Risks Remain, Beware Animal Spirits 4

Volatility Perspective Volatility Less Attractive, But Still Acceptable 7

Overwriting by Industry Overwrite specialty retail, homebuilders, avoid semi’s, railroads 9

Appendix Overwriting framework, stock selection and more 15

Stock Overwriting Recommendations Overwrite Avoid 11

ADBE CTSH LVS ABX ESV

ADSK DVN RCL C FCX

AFL FFIV SLB CBS QCOM

APA HES TOL ESRX STI

CLF KLAC

COH LEN

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 21. UBS 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.

ab

mailto:[email protected]

mailto:[email protected]

Overwriting Monthly 23 January 2012

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Conflicting Conditions Complicate Overwriting This month, we focus on the following key themes that relate to overwriting:

Environment acceptable for overwriting. While conditions appear less favorable for overwriting than prior months due to lower absolute levels of volatility and a growing appetite for risk, we still view the environment as acceptable. The market is off to a strong start this year, though many stocks are approaching short-term resistance levels and the SPX is approaching overbought territory. We question the amount of upside when companies have limited ability to further expand margins to grow earnings, positive U.S. economic data surprises may slow, and macro issues in Europe remain, but acknowledge investors appear more bullish recently, which adds risk to overwriting.

Overwriting by industry. We would look to overwrite specialty retail names that performed well post December comps, as these approach short-term resistance levels, but would recommend avoiding those that performed poorly in December as investors rotate out of the winners into the losers. We also look to overwrite homebuilders, which have attractive levels of volatility, stretched valuations, and have approached overbought territory after a strong rally. We prefer to avoid overwriting semi’s as the cycle trough appears to be passing, and railroads where we think pricing power could lead to outperformance.

Fundamentals + Technicals + Volatility = Acceptable Overwriting Environment

FavorableUnfavorable

Overwriting Environment

Fundamental

Outlook

BearishBullish

Technical

Indicators

OverboughtOversold

Volatility

Perspective

OptimalSub-Optimal

= Last Month’s View

Structural risks remain, but...

Investors willing to accept risks

Strong rally over short time period

Implied volatility at lower absolute levels

Weight: 44% Weight: 22% Weight: 33%

FavorableUnfavorable

Overwriting Environment

Fundamental

Outlook

BearishBullish

Technical

Indicators

OverboughtOversold

Volatility

Perspective

OptimalSub-Optimal

= Last Month’s View

Structural risks remain, but...

Investors willing to accept risks

Strong rally over short time period

Implied volatility at lower absolute levels

Weight: 44% Weight: 22% Weight: 33%

Source: UBS. Factor weightings for this “Dashboard” explained in Appendix.


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Evaluating 2011 Overwriting Performance At the start of 2012 we thought it would be useful to reflect on the 2011 performance of overwriting. 2011 was the second best year for Index overwriting in the past decade, given a positive Index total return (Chart 2). To put this in context, we examine performance data of the CBOE Buy-write Indices (i.e., BXM and BXY), which have 20+ years of history, and are a well-recognized, independent source of overwriting performance data. One drawback is that these indices overwrite an Index position with Index calls, while the focus of our monthly note is single stock overwriting. Still, generic conclusions for overwriting can be drawn from this data and we note this approach is similar to using VIX as a proxy for historical implied vol analysis.

Table 1: Overwriting Reduces Std Deviation of Returns, Outperforms in Bear Markets

Period Average Return Standard Deviation of Returns

SPTR BXM BXY SPTR BXM BXY

Last 5 years 2.4% 3.1% 4.8% 24.0% 19.7% 22.8%

Last 10 years 5.0% 5.3% 6.8% 20.5% 15.0% 18.0%

Last 20 years 9.6% 9.1% 10.4% 19.1% 13.3% 15.9%

Bull Market (16 yrs) 17.0% 13.9% 16.4% 11.6% 7.6% 9.8%

Bear Market (4 yrs) -20.0% -10.0% -13.2% 12.6% 14.8% 13.7% Source: UBS and CBOE. SPTR is the total return of S&P500 (incl dividends). The CBOE Buy-write indices are long the SPX Index and at option expiration each month (3rd Friday) they overwrite 100% of the notional with a call to the next expiry (either a 4 or 5 week maturity). BXM targets an at-the-money strike, BXY targets 2% out of-the-money.

Key takeaways include that overwriting tends to:

Reduce the standard deviation of portfolio returns

Underperform in a bull market and outperform in a bear market

Chart 1: Overwriting Outperformed 6 of Last 10 Years Chart 2: Overwriting Negatively Correlated to Market Return

-40%

-20%

0%

20%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SPTR BXYAnnual Return

2008

2002

2001

2000

1990

1994

2011

20052007

19921993

20042010

20061999

1996

2009

199820031991

1989

19971995

-10%

-5%

0%

5%

10%

15%

-40% -20% 0% 20% 40%S&P500 Total Return

BXY Return

y = -2.7x + 0.13

Source: UBS and CBOE. See Table 3 for definitions of SPTR and BXY. Source: UBS and CBOE. See Table 3 for definitions of BXY.

If 2012 plays out like 2011, we think it may be a good year for overwriting


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Fundamental Outlook Cautious, But Momentum Could Continue After a strong rally to start the year, we can identify two schools of investor thought currently at odds in the market. There are those who believe structural challenges including lack of global growth, decelerating earnings growth and looming government budget issues will constrain further upside in equities, and those who acknowledge such risks but believe fear of these issues is fading.

On the more cautious side are many of our fundamental analysts, who expect 4Q earnings and management guidance to reflect some of these risks, as well as our U.S. Equity strategists, whose 2012 S&P500 target of 1325 is near current levels.

The more constructive view is articulated by our Global Asset Allocation and Equity strategists, who recently advised investors to become less defensive. In a recent note, UBS Global Equity Strategist Jeffery Palma expressed his view that:

Chances for recession have eased, particularly in the U.S. where the economic data has been positive

EPS estimates remain too high, but the worst of the downgrade cycle is over

Risk appetite has recovered, has more room to run, and can expand multiples to drive stocks higher despite tepid EPS growth

It should be noted he acknowledges structural issues and risks remain, and that there may be a timing issue with respect to his positive view.

Chart 3: Are Investors Truly Bullish or Just Complacent?

1,100

1,200

1,300

1,400

1/19 2/19 3/19 4/19 5/19 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/19

SPX

Source: UBS and Bloomberg

We believe that one’s interpretation of the market rally over the past month depends on whether a person is more cautious or positive for 2012. That is, a skeptic might attribute the recent rally to complacency, with investors choosing to ignore recent negative European debt crisis headlines and any cautious company guidance. More bullish investors might view the recent rally as confirmation that “risk on” investing has returned, and that all known risks are more than fully discounted already.

Bears point to the risks, bulls respond: “we are quite familiar with the risks and you’ve overly discounted them”


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While we tend to agree with the more cautious outlook, we acknowledge an increasing number of investors are starting to become more constructive on the market for 2012. We also recognize that even if the more cautious view proves correct at some point this year, an increasing cadre of bullish investors can keep markets moving higher in the near term.

To support our more cautious stance, we highlight three main risks to a continued market rally: 1) is the momentum of positive U.S. economic surprises sustainable? 2) 4Q earnings have been lackluster; 3) Euro problems remain unresolved.

To elaborate on the first concern, we highlight the recent work of UBS Senior International Economist Andrew Cates, who recently published a report on the UBS economic surprise indices. He writes “The UBS economic surprise indices are specifically designed to capture the frequency and manner in which the incoming economic dataflow misses consensus forecasts. A downward trend in the growth surprise index, for example, suggests a tendency from economic activity to disappoint consensus forecasts. …These movements in surprise indices have coincided with market outcomes, particularly in recent years” (see his January 3 2012 report “The UBS Surprise Indices” for details).

Chart 4: Can Positive U.S. Economic Surprises Continue?

90

110

130

150

170

190

1/31/07 8/31/07 3/31/08 10/31/08 5/31/09 12/31/09 7/31/10 2/28/11 9/30/11

UBS U.S. Economic Growth Surprise IndexTop of Range?

Source: UBS

Chart 4 above shows that after a slew of recent positive surprises, the U.S. growth surprise index is at the top of its range over the past 5 years. This gives us pause and makes us wonder the extent to which the U.S. can positively surprise further. If the good news slows, we would expect the equity markets may as well.

We are in the cautious camp, but are wary of animal spirits


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Second, on a micro level, 4Q earnings have gotten off to a lackluster start. As our Chief U.S. Equity Strategist Jonathan Golub points out in his recent notes, early reporters (77 companies or ~23% of the S&P500’s market cap) have surpassed EPS expectations by a modest 1.5%, and less than half beat top-line expectations. Keep in mind 4Q EPS estimates had been revised lower by 6.2% in the final three months of 2011, substantially more than in prior quarters.

A final point that supports our cautious market outlook is that the European sovereign debt crisis has yet to be resolved. While the U.S. markets have seemed to decouple from the crisis in Europe recently, we can only be skeptical this will continue when Greece is due to pay its debt on March 20th and nations such as Portugal may also come into focus.

Technicals Supportive for Overwriting We believe that the technical setup at present is supportive for overwriting. From a technical standpoint, we tend to consider how close a stock is to key resistance levels (e.g., vs. 3-month and 1-year highs) and various measures of price momentum. Ideally, we would like a stock to be close to key resistance and have little to no price momentum in either direction. Also, while longer-term price momentum (i.e., excluding the most recent month’s performance) is not too significant, most stocks have rallied strongly in the past month, which can be construed as negative for overwriting. However, we point to the RSI (relative strength index) for the SPX as more supportive for overwriting, as current levels are moving into overbought territory (9-day RSI = 76 and 14-day RSI = 69).

Strong Januarys Have Not Made Great Overwriting Opportunities in the Past

Given that the market was up ~8% from December to January expiration, we wondered if such performance has any predictive capability on future market performance. To that end, we looked back at similar situations in the past, starting after the post World War II period, to see how the market performed during the ensuing two option expiration months (calculating returns from 3rd Friday to 3rd Friday of each relevant month). There have been only 7 previous occurrences since 1945 where the January maturity was up over 5% (Table 3 below).

Table 3: When January Up Sharply, Overwriting Not a Great Strategy Historically

Index Returns

Year Jan Maturity Feb Maturity March Maturity Full Year Prior Year

1946 7.8% 0.8% -6.3% -11.9% 30.7%

1951 10.5% 3.6% -2.2% 16.3% 21.7%

1967 5.5% 2.1% 2.7% 20.1% -13.1%

1975 6.1% 16.4% 0.9% 31.5% -29.7%

1976 9.2% 5.3% -1.5% 19.1% 31.5%

1987 6.6% 7.2% 4.4% 2.0% 14.6%

1992 8.2% -1.8% 0.0% 4.5% 26.3%

2012 7.8% 0.0%

Average (ex-’12) 7.7% 4.8% -0.3% 11.7% 11.7% Source: UBS and Bloomberg. A maturity is the period between the 3rd Friday of a month through the 3rd Friday of the following month (e.g. Jan ‘12 Maturity is 12/16/11 – 1/20/12).

Table 2: Key Dates for European Crisis

1/30 European Leaders Meet


2/29 Italy redeems €46B of bonds/bills

3/1-2 EU Leaders Summit

3/4 S&P CreditWatch Period of 15 Sovereigns Ends (decision likely earlier)


3/20 Greek €14.5bn bond matures

Source: UBS, Bloomberg, Reuters. List not intended to be exhaustive.


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We note that in these few cases:

February maturity returns were strong on average. However, in 1992 (the most recent case) February maturity return was negative, and in 1975 (the strongest February return case) the market was likely rebounding off a disastrous prior year (market fell 30% in 1974). The March maturity performance was small on average.

2012 appears to be an anomaly, in that it is the only year in which a strong January was preceded by a year with a small return. The other cases followed either a strongly positive year (perhaps momentum was continuing) or a very negative year (possibly a momentum reversal).

If one had to make an overwriting determination based solely on the above data (which we are not suggesting), they might decide to wait another month before overwriting. Given the strong price momentum in January, it certainly seems reasonable to think the momentum could continue a bit longer.

Volatility Less Attractive, But Still Acceptable This month, analysis of the current state of volatility is particularly relevant for overwriters. Key points include:

There has been a sharp drop in near-term implied volatility over the past two months (detrimental for overwriting), and even more severe decline in short-term realized volatility

Extreme upward-sloping shape of front end of the term structure of implied volatility (which necessitates a decision about which maturity to overwrite)

Chart 5: Implied Volatility Low? Depends On Your Perspective

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15

20

25

30

35

1/19/2011 3/19/2011 5/19/2011 7/19/2011 9/19/2011 11/19/2011

SPX 3 Month Implied Volatility

Source: UBS and Bloomberg

As can be seen in Chart 5 above, which shows SPX 3-month implied volatility, note that implied is currently at the low end of the post-August crisis regime of high volatility, but also at the upper end of the pre-crisis regime. While much of this drop is a consequence of realized volatility falling as well, overwriters have

Implied vol has come down, but is still acceptable for overwriting


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been active so far this year and contributed to the declining levels of implied volatility. Given how far implied volatility has fallen over the past 5 months, the psychology among many option investors may be that implied volatility feels low. We are a bit more constructive in that only 6 months ago these premiums would have seemed attractive, so net-net current volatility levels are acceptable for overwriting in our view (but admittedly not exciting).

A related point to evaluating the fair value of volatility is one’s view on the timing, likelihood and severity of renewed macro shocks. An investor who believes that more shocks are likely to occur sooner rather than later might conclude that volatility appears cheap. Conversely, a very bullish investor might envision volatility to continue to drift lower as the U.S. economy recovers.

Chart 6: Medium-Term Volatility Expectations Significantly Greater Than Near-Term

15%

16%

17%

18%

19%20%

21%

22%

23%

24%

Jan-12 Mar-12 May -12 Jul-12 Sep-12 Nov -12 Jan-13 Mar-13 May -13

SPX Term Structure of Implied Volatility

Source: UBS EDGE

Second, not surprisingly, given expected news from Europe within the next few months, options are currently pricing in an expectation of increasing volatility. This can be seen by observing the term structure of implied volatility (Chart 6), which is very steeply upward sloping, especially at the front end. The shape of the term structure raises the topical question of whether it is preferable to overwrite to a shorter or longer term, the former having lower premiums but less time (i.e., period of uncertainty), while the latter having higher premiums but more uncertainty.

Given the shape of the term structure, we would advocate overwriting to a longer maturity. At present it appears macro concerns may supersede stock-specific catalysts (e.g., earnings) in terms of driving increases in implied volatility, and thus a volatility bet is akin to a view on the potential for the next macro shock.

If you’re a bull, volatility may actually appear expensive


UBS 9

Overwriting by Industry In this section we drill further down from our macro outlook to the industry group level (GICS level 2) and provide our overwriting preferences along with the current investment themes, volatility and technical factors that influenced our decision. We note investors should be selective when overwriting stocks within industry groups, particularly during earnings.

Table 4: Overwriting by S&P 500 Industry – Part 1 of 2

Industry Group # Stocks Overwrite Comments from Analyst and Derivative Strategist

Recommendation

Automobiles & Components 4 Overwrite With many companies having provided guidance, expect generally limited upside for suppliers and OEMs, while our analyst is slightly more cautious on auto suppliers than OEMs. These names are approaching overbought territory, have acceptable levels of volatility and appear attractive for overwriting.

Capital Goods 40 Overwrite machinery Based on high levels of implied volatility and proximity to short term resistance levels, machinery stocks appear attractive for overwriting.

Consumer Durables 14 Caution on luxury brands, overwrite homebuilders

While brands catering to higher income segments have been resilient, potential impact from weakening Europe could limit near-term upside. Homebuilders valuations are stretched after a strong rally (limiting upside), have attractive levels of volatility and are approaching overbought territory.

Consumer Services 13 Avoid fast food, overwrite casual dining, lodging & leisure

Expected continued food inflation in 1H12 positive for fast food chains, negative for casual dining. Casual dining, along with lodging & leisure stocks are close to short-term resistance and appear attractive for overwriting.

Diversified Financials 28 Overwrite Based on high levels of implied volatility and proximity to short term resistance levels, these stocks appear attractive for overwriting.

Energy 40 Overwrite E&Ps, refiners, equipment & services, thermal coal

Near-term caution on E&Ps. Absence of weather-related demand and stronger shale gas production weighs on natural gas prices and gassy E&P CFPS estimates, while oil-weighted E&Ps have rallied sharply on the back of oil price increases partly fuelled by geopolitical tensions. Expect weak earnings for refiners as coastal refiners face increased competition from capacity additions and mid continent refiners face narrowing WTI-Brent spread. These stocks, along with equipment & services, appear attractive for overwriting due to high volatility and proximity to short term resistance levels. For thermal coal names, while stocks being down ~50% over the past 6 months is not ideal for overwriting, positive catalysts are lacking and the threat of natgas will likely keep the stocks range-bound for the next 12 months.

Food & Staples Retailing 8 Overwrite beverages, supermarkets

Upside appears limited for beverage makers KO and PEP due to limited volume upside, strengthening US dollar and valuation. Expected continued food inflation in 1H12 negative for supermarkets. We caution these stocks currently have lower than ideal levels of volatility for overwriting.

Food, Beverage & Tobacco 25 Overwrite packaged food Expected continued food inflation in 1H12 negative for packaged food companies. We caution these stocks currently have lower than ideal levels of volatility for overwriting.

Source: UBS. We use a 14-day RSI indicator as a gauge of overbought or oversold.


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Table 5: Overwriting by S&P 500 Industry – Part 2 of 2

Industry Group # Stocks Overwrite Comments from Analyst and Derivative Strategist

Recommendation

Insurance 22 Overwrite P&C For P&C, Thailand flood losses and declining investment portfolio yields are generally known, while favorable pricing trends are also mostly expected by the market, limiting upside surprise potential. These names are approaching overbought territory and have acceptable levels of volatility for overwriting.

Materials 31 Overwrite industrial commodities, chemicals, fertilizers; avoid steel, gold miners

Capital outflows from emerging markets hitting commodity demand are negative for industrial commodities and miners, though gold/gold miners expected to outperform 1H12. Steel stock earnings expected to be modestly positive with upbeat outlooks provided. Metals & mining stocks generally appear attractive for overwriting based on proximity to short-term resistance levels and high volatility. Pricing for fertilizers is expected to decline due to macro concerns, negatively impacting POT, AGU and MOS among others, while demand weakness impacts chemical firms (DOW, HUN, GGC). We note chemicals currently have lower than ideal volatility for overwriting.

Retailing 31 Overwrite holiday performers, avoid those that missed

High holiday spending expectations were met by only some retailers. Stocks that performed post Dec SSS may be due for a breather, while stocks that missed and sold off materially should be avoided. Specialty retail names are generally attractive for overwriting based on current volatility and proximity to short-term resistance levels.

Semiconductors 19 Avoid semi’s generally, overwrite solar

The cyclical recovery for semi’s appears to have begun earlier than expected based on guidance from early reporters. For solar, 20%+ oversupply in the industry combined with weaker than expected demand weighs on margins and uncertain regulation in Europe are positive for overwriting, beware industry consolidation.

Software & Services 32 Overwrite software, avoid IT Services

Software names are close to short term resistance levels, and the first few months of the year are typically weak as IT budgets are not yet finalized and spending slows after any year-end budget flush. Potential impact of European recession and customer hesitation around large deals also weighs. For IT Services specifically, volatility appears too low to be attractive for overwriting.

Technology Hardware 22 Overwrite computers & peripherals, caution on comm equipment

Overwriting could be good for computers & peripherals, as these have attractive volatility levels and are close to short-term resistance levels. Slowing carrier capex weighs on comm equip and supply chains, including certain chip and EMS companies, and while these stocks are approaching overbought territory recent earnings have positively surprised.

Transportation 9 Avoid railroads Railroad stocks outperformed SPX for 8th consecutive year and trend should continue in 2012 driven primarily by continued pricing power with solid 4Q11 earnings expected.

Source: UBS. We use a 14-day RSI indicator as a gauge of overbought or oversold.


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Stock Analysis and Overwriting Recommendations Tables in this section include:

Table 6: Stocks to overwrite with analyst/strategist commentary

Table 7: Suggested call maturities and strikes for Table 6 stocks

Table 8: Stocks to avoid overwriting

Consider Longer-Dated Maturities

How investors should think about selecting ideal strikes and maturities for overwriting depends on a view of several factors that we discuss in the Appendix. Considering the steepness of the term structure as discussed earlier in this report, we prefer selling longer-dated maturities to capture the extra premium associated with higher levels of volatility. While that is our preference, we note strikes and maturities must be tailored to individual investor stock views.

Figure 1: Term Structure Steepness Makes Longer-Dated Maturities Worth Considering

Further from the Money

Strike Maturity

March/Further

February

Current Recommendation

Closer to the Money

Further from the Money

Strike Maturity

March/Further

February

Current Recommendation

Closer to the Money

Source: UBS


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Overwrite Candidates Table 6: Stocks Recommended for Overwriting – No Material Catalysts Expected

Ticker Sector Commentary from Analyst and Derivative Strategist Earnings 8Q Historical Return 2M 110%

Date Est Earnings Reaction 1M 3M Impl Vol

ADBE Tech No material catalysts expected until earnings 3/19 and a user conference “Digital Marketing” on 3/20-3/23. Not in period - 8.2% 9.9% 27.8%

ADSK Tech While earnings represents an upside risk, this stock is highly levered to macro conditions in Europe and elsewhere, and our overwrite recommendation is predicated on the expectation that global macro conditions will not improve meaningfully in the near term. 02/28/2012 6.4% 14.4% 8.9% 36.8%

AFL Financials This stock is highly levered to global macro conditions, and our overwrite recommendation is predicated on the expectation that these will not improve meaningfully in the near term. Outside of macro risks, the main catalyst is earnings. 01/31/2012 4.1% 12.6% 16.2% 27.6%

APA Energy Expecting in-line earnings in mid-February. 02/16/2012 2.9% 6.2% 2.4% 29.8%

CLF Materials Given the stock’s strong performance over the past month, believe overwriting makes sense if target is in the $80 area. Expecting an EPS miss on earnings however, commentary from mgmt and steel companies expected to be upbeat. Risks include weather issues in iron ore producing regions help iron ore pricing and the post-Chinese New Year buying season could influence spot pricing and support the stock.

02/22/2012 5.2% 11.8% 20.8% 40.8%

COH Discretionary Biggest upside risks include earnings on 1/24 and RL earnings read-throughs for luxury in early Feb. 01/24/2012 3.8% 5.5% 4.9% 32.7%

CTSH Tech Material near-term upside not expected. Catalysts include earnings on 2/8 and NASSCOM conference 2/14. 02/08/2012 3.1% 9.0% 0.3% 30.2%

DVN Energy Expecting in-line earnings mid-February. With an analyst day in early April, company likely will hold back meaningful news post earnings until that date. 02/15/2012 2.3% 3.6% 5.1% 28.5%

FFIV Tech Earnings from peer companies RVBD and other “cloud stocks” like VMW and CTRX could be important, along with the Mobile World Congress wireless trade show the week of February 27th, though we do not expect these to represent materially positive catalysts.

Not in period - 13.6% 36.2% 41.1%

HES Energy Expecting weak earnings and guidance results on 1/25 along with Anadalan well offshore Indonesia. 01/25/2012 2.1% 7.8% 4.4% 29.9%

KLAC Tech While earnings and investor conferences on 2/13 and 2/27 are risks, we believe the most significant risk to overwriting is the potential for takeout, as 2 peers were acquired in 2011. KLAC’s size limits likely buyers, however, and we are less concerned about this risk near term. 01/26/2012 2.2% 5.5% 14.2% 29.8%

LEN Discretionary Upside limited given recent performance and outlook for slower recovery than would justify valuation. Not in period - 15.5% 39.9% 37.8%

LVS Discretionary Catalysts include earnings, LVS’s 70%-owned Sands China will vote on instating its first dividend on 1/31, and LVS’s Macau resort will open in March and could support shares if Chinese New Year volumes look strong. 02/06/2012 6.2% 10.2% 14.1% 37.5%

RCL Discretionary Expect negative headlines regarding the cruise industry post the shipwreck of a CCL cruise ship. 02/02/2012 7.1% 10.7% 1.7% 42.4%

SLB Energy No material catalysts expected. Not in period - 7.4% 9.2% 27.2%

TOL Discretionary Upside limited given recent performance and outlook for slower recovery than would justify valuation. 02/29/2012 2.6% 14.5% 29.6% 35.2% Source: UBS and Bloomberg. As of 1/23 intra-day, expected earnings date, absolute value average of past 8 quarters’ stock reaction to earnings, 1-month and 3-month return, 2-month implied volatility of 110% option. Returns exclude fees and commissions.


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Investors may have a minimum acceptable threshold for the amount of premium collected for selling a call. This threshold may vary for each investor, depending on factors including: their stock view, volatility environment, rationale for considering overwriting and risk tolerance. Further, some investors may have criteria for determining the call strike (e.g., at least 5% above the stock price). Given that we are recommending exchange-listed options the strikes/premiums do not always conform to a rigid set of investment criteria. Therefore, this report shows two call strikes for each overwrite recommendation. Depending on the number of strikes available, we show either the two nearest to-the-money calls, or two call strikes that seem reasonable for consideration.

Table 7: Covered Call Recommendation Detail

Closer Call Strike Further Call Strike

Stock Strike Premium Call Away Strike Premium Call Away

Ticker Price Maturity $ % $ % Return % Delta Impl Vol

$ % $ % Return % Delta Impl Vol

ADBE $30.64 March 32 104% 0.61 2.0% 6.4% 0.33 26.1

ADSK $35.16 March 37 105% 1.30 3.7% 8.9% 0.39 39.5 39 111% 0.72 2.0% 13.0% 0.26 38.3

AFL $48.31 March 50 103% 1.22 2.5% 6.0% 0.38 27.1

APA $97.95 March 100 102% 3.25 3.3% 5.4% 0.42 30.4 105 107% 1.66 1.7% 8.9% 0.26 29.7

CLF $72.65 March 77.5 107% 2.43 3.3% 10.0% 0.36 38.9 80 110% 1.64 2.3% 12.4% 0.27 37.8

COH $64.59 March 67.5 105% 1.95 3.0% 7.5% 0.38 32.7 70 108% 1.15 1.8% 10.2% 0.27 31.5

CTSH $70.75 March 72.5 102% 2.60 3.7% 6.1% 0.44 31.3 75 106% 1.60 2.3% 8.3% 0.33 30.3

DVN $65.19 March 67.5 104% 1.81 2.8% 6.3% 0.39 28.4

FFIV $121.71 March 130 107% 3.30 2.7% 9.5% 0.32 37.8 135 111% 2.06 1.7% 12.6% 0.23 37.0

HES $61.82 March 65 105% 1.42 2.3% 7.4% 0.34 29.2

KLAC $51.33 March 55 107% 0.90 1.8% 8.9% 0.27 30.2

LEN $22.38 March 23 103% 0.95 4.2% 7.0% 0.44 36.9 24 107% 0.58 2.6% 9.8% 0.32 35.5

LVS $47.37 March 50 106% 1.79 3.8% 9.3% 0.40 37.2 52.5 111% 0.99 2.1% 12.9% 0.27 36.0

RCL $28.50 March 30 105% 1.16 4.1% 9.3% 0.40 42.0 31 109% 0.83 2.9% 11.7% 0.32 41.2

SLB $73.86 March 77.5 105% 1.83 2.5% 7.4% 0.36 27.6

TOL $23.10 March 24 104% 0.80 3.5% 7.4% 0.40 35.8 25 108% 0.50 2.2% 10.4% 0.29 35.3 Source: UBS and Bloomberg. Data columns are ticker, maturity, stock price, strike price and strike as % of stock price, premium and premium as % of stock price. Call away return % is defined as premium + strike over the stock price. Delta is mid and implied vol is bid side. Data as of 11am 1/23/12 and excludes fees and commissions.


UBS 14

Stocks to Avoid Overwriting

Table 8: Avoid Overwriting – Material Catalysts or Volatility Expected

Ticker Sector Commentary from Analyst and Derivative Strategist Earnings 8Q Historical Return 2M 110%

Date Est Earnings Reaction 1M 3M Impl Vol

ABX Materials Main catalysts include earnings and a possible preliminary production report ahead of earnings as peers have done. UBS sees near-term upside in gold. 02/16/2012 2.2% 1.1% -1.4% 29.5%

C Financials CCAR “stress test” results by 3/15 could be a positive for sentiment. Not in period - 10.2% -2.0% 39.1%

CBS Discretionary Main catalyst is February earnings, where company may increase the dividend and provide an update on pace of buybacks. CBS will also be presenting at 2 investor conferences the week of 2/27 and has the potential to announce an online video distribution deal. 02/15/2012 3.2% 6.6% 16.4% 30.7%

ESRX Health Care FTC ruling on proposed ESRX/MHS merger very likely in 1H12, represents material potential catalyst. 02/29/2012 4.8% 14.9% 35.1% 33.4%

ESV Energy Expecting a strong earnings report. 03/01/2012 4.2% 6.2% 6.5% 29.1%

FCX Materials While the UBS macro call on industrial commodities is for limited upside near term, we do favor copper, and we view the company’s ability to restart production at two key mines and execute its growth story as a key upside risk.

Not in period - 14.5% 14.9% 34.4%

QCOM Tech Potentially positive catalysts include earnings on February 1 and an industry trade show – Mobile World Congress (MWC) in last week of February. At MWC, we expect to see significant product announcements, which will point to widening competitive gap that QCOM enjoys over its competitors. 02/01/2012 6.6% 7.2% 12.0% 24.0%

STI Financials While housing, unemployment data and 3 investor conferences are potential positive catalysts, our main concern is the CCAR “stress test” results due by 3/15 that we think could green-light STI to raise dividends and increase buybacks.

Not in period - 19.9% 13.4% 34.4%

Source: UBS and Bloomberg. As of 1/20, expected earnings date, absolute value average of past 8 quarters’ stock reaction to earnings, 1-month and 3-month return, 2-month implied volatility of 110% option.


UBS 15

Appendix I. Overwriting Framework…………………….…………...………...……15

II. Stock Selection Methodology…..……………………………………….17

III. View Dictates Strike and Maturity Selection………………………...…18

IV. What Overwriters Should Expect to Receive ………………………......19

I. Overwriting Framework: Ideal Environments

In considering how optimal the current environment is for overwriting, we highlight two market environments that we view as most ideal for overwriting:

When stocks have rallied a lot and appear to be over bought, either from afundamental or technical perspective. In this an instance, even if volatility isat worst slightly below average, the strong fundamental/technical signalscompensate for below average vol levels.

When macro uncertainty causes implied volatility to increase and markets tobecome choppy, even without a market correction. In this instance, themacro uncertainty and unclear technical picture (which may be neutral foroverwriting) are offset by well above average levels of volatility.


UBS 16

I. Overwriting Framework We incorporate 3 perspectives in our overwriting framework: our fundamentalview is most important, followed by our volatility perspective and then technicalindicators. We weight fundamental over volatility views since we would sell acall even if volatility was low, presuming we could accurately predict a stockhad limited upside. By contrast, if we knew that the realized volatility over thelife of the option would be lower than the implied volatility, this informationalone would not reveal anything about the direction of the stock. That is, it couldgrind up slowly over time and finish well above the strike price.

In considering fundamentals we weigh each analyst’s stock-specific view as most important. However, we also overlay the macro market views of ourstrategists. When evaluating volatility, we focus on the absolute level of implied volatility as opposed to a comparison with realized volatility for two reasons:

We are most concerned with the absolute amount of premium we can collectfor selling a covered call

Since realized volatility is a historical measure, we view it as less significant than the absolute level of implied volatility and our forward-looking fundamental stock view

For example, assume we have identified a stock suitable for overwriting basedon the fundamental perspective (no near-term catalyst). We then prefer theimplied volatility to be as high as possible even if it is slightly below recentrealized volatility (e.g. prefer 1-month implied of 30% when 1-month realized is 32% vs. 1-month implied of 25% vs. 1-month realized of 21%).

However, regardless of the fundamental/technical view, we want to avoid sellingoptions when implied volatility is far below recent realized volatility. Such asituation could serve as a “red flag” warning, for selling options too cheaply, ifthe option market may be under-estimating future stock uncertainty.

With respect to technical indicators, our primary focus is at the stock level, butwe also overlay sector and Index-level indicators as well.

Overwriting Framework – Relative Importance of Decision Factors Fundamental Outlook 44%

Technical

Indicators

22%

Volatility

Perspective

33%

Stock-Specific

Macro

Stock-Specific

Index / Sector

Absolute

Relative

Source: UBS

Fundamental Outlook 44%

Technical

Indicators

22%

Volatility

Perspective

33%

Stock-Specific

Macro

Stock-Specific

Index / Sector

Absolute

Relative

Fundamental Outlook 44%

Technical

Indicators

22%

Volatility

Perspective

33%

Stock-Specific

Macro

Stock-Specific

Index / Sector

Absolute

Relative

Source: UBS


UBS 17

II. Stock Selection Methodology We employ a systematic approach to identifying stocks that we deem favorable to overwrite. The ideal stock would have insignificant price momentum in either direction, be close to key resistance levels, have a high absolute level of implied volatility, a relatively high implied-to-realized volatility and no known material catalysts during the life of the option term. In reality, the “ideal” setup rarely exists. Rather, by reducing our expectation slightly for various factors we often are able to identify a set of stocks that appear reasonable to overwrite. Also, some discretion is employed in our process.

In order to seek to identify such stocks as described above, we focus on the universe of UBS-covered stocks with sufficient option liquidity, we select stocks to consider for overwriting based on a multi-step approach. We aim to identify around 30-40 stocks to consider, from a universe of ~300+ UBS-covered stocks with sufficient option liquidity.

To help narrow the universe of stocks, the first step is to consider only technical and volatility factors. Technical factors include price momentum and resistance, and volatility factors include both the absolute level of implied volatility as well as the traditional implied-to-realized volatility comparison.

Until now we employed strict thresholds for including stocks for consideration, such as requiring the one-month price return to be within -8% to +8% or requiring a minimum implied volatility of 30%. However, we have decided to relax strict thresholds for all factors under consideration. Instead, stocks with a less desirable level for a factor are penalized for that factor, but are still in consideration for overwriting, especially if the stock scores well on other factors. For example, a stock with a 26% implied volatility would not automatically be excluded from consideration. Rather, it would be viewed less favorably, although still in consideration if other factors, such as lack of price momentum, were favorable. The rationale for the change in approach is to take a more holistic view of a stock, and not be overly concerned with a single less favorable factor.

Once a set of stocks is selected for overwriting consideration, based on both price and volatility factors, we next solicit the view of our fundamental analysts to determine if any important catalysts exist during the life of the option term. We seek to avoid recommending stocks to overwrite if an important catalyst is imminent, especially if it is likely to be positive, while we favor overwriting stocks that have been downgraded over the past month.

When the option term includes earnings for many stocks (earnings season), as an additional pre-step to fundamental consideration we exclude stocks that have had numerous positive earnings surprises in the past. The rationale for this step is that surprises tend to repeat for a given company, and we thus wish to avoid stocks with a history of having positive earnings surprises, which is unfavorable for overwriting.


UBS 18

III. View Dictates Strike and Maturity Selection How investors should think about selecting ideal strikes and maturities for overwriting depends on a view of several factors.

As illustrated in Figure 2 below, high implied volatility makes it more attractive (greater premium) to sell calls with strikes further from the money than if implied volatility was lower. Conversely with lower implied volatility, strikes need to be closer to the money to earn more attractive premiums. Higher volatility also makes the premium of shorter dated maturities more attractive, while in periods of low volatility, investors may need to choose maturities further out in time to collect attractive premiums.

Additionally, investors’ bias or view of which direction they believe the stock is likely to go will influence choice of strikes. If a stock is seen as more likely to rise over the maturity, strikes further from the money are best and vice versa.

Last, when investors have a clear view of stock drivers over a specific time period they can tailor the most attractive strikes and maturities to their view. For example, if visibility is good that the stock has limited upside due to lack of positive catalysts over the next several months, investors may earn more premium by choosing strikes closer to the money and maturities that are further out in time. If visibility is poor however, it would be prudent to select shorter maturities with higher strikes to minimize the risk of loss due to upside surprise in the stock.

Figure 2: Strike and Maturity Selection Factors

Volatility

Strike Maturity

Stock Price Bias

VisibilityGood

Poor

View

High

Low

Framework

Volatility

Strike Maturity

Stock Price Bias

VisibilityGood

Poor

View

High

Low

Framework

Volatility

Strike Maturity

Stock Price Bias

VisibilityGood

Poor

View

High

Low

Framework

Source: UBS

Higher implied volatility makes higher strikes and shorter maturities more attractive than lower volatility

Select higher strikes given moderately bullish stock view, lower strikes given neutral/negative stock view

Tailor strikes and maturities around catalysts and visibility


UBS 19

IV. How Much Premium Should Overwriters Expect to Receive For Selling a Call? Investors may not have a feel for the amount they should receive for selling a call option. However, it is possible to look at a table that shows the premium received, for the combination of a given maturity, strike and level of implied volatility. Studying such a table would help an investor gain perspective on the amount of premium that it is possible or reasonable to receive.

To that end, we show options prices, represented as a percentage of the stock price, for maturities of one, two, three, four, six, nine and twelve months, for various strikes, for implied volatility levels of 20%, 30%, 40% and 50%. For simplicity, we assume no dividend and 0% interest rates.

In general, such table could be created, for any maturity, for any set of strikes and for any range of implied volatility levels.

Table 9: Premium as % of Stock Price by Maturity, Strike and Implied Volatility (1, 2, 3-Month Maturities) 1-Month Strike -----> 100% 105% 107.5% 110%

IMPL Vol

20% 2.3% 0.6% 0.3% 0.1%

30% 3.4% 1.6% 1.0% 0.6%

40% 4.6% 2.6% 1.9% 1.4%

50% 5.7% 3.7% 2.9% 2.3%

2-Month Strike -----> 100% 105% 110% 115%

IMPL Vol

20% 3.2% 1.4% 0.5% 0.2%

30% 4.8% 2.9% 1.6% 0.8%

40% 6.5% 4.4% 2.9% 1.9%

50% 8.1% 6.0% 4.4% 3.2%

3-Month Strike -----> 100% 110% 115% 120%

IMPL Vol

20% 4.0% 1.0% 0.4% 0.1%

30% 6.0% 2.5% 1.5% 0.9%

40% 8.0% 4.3% 3.1% 2.1%

50% 9.9% 6.2% 4.8% 3.7% Source: UBS. Assumes no dividend and 0% interest rates.


UBS 20

Table 10: Premium as % of Stock Price by Maturity, Strike and Implied Volatility (4, 6, 9, 12-Month Maturities)

4-Month Strike -----> 100% 110% 115% 120%

IMPL Vol

20% 4.6% 1.4% 0.7% 0.3%

30% 6.9% 3.3% 2.2% 1.4%

40% 9.2% 5.5% 4.1% 3.1%

50% 11.5% 7.7% 6.3% 5.1%

6-Month Strike -----> 100% 110% 120% 130%

IMPL Vol

20% 5.6% 2.2% 0.7% 0.2%

30% 8.5% 4.8% 2.5% 1.3%

40% 11.3% 8.5% 4.8% 2.5%

50% 14.1% 8.5% 4.8% 2.5%

9-Month Strike -----> 100% 110% 120% 130%

IMPL Vol

20% 6.9% 3.3% 1.4% 0.6%

30% 10.3% 6.6% 4.0% 2.4%

40% 13.8% 10.0% 7.2% 5.1%

50% 17.1% 13.4% 10.5% 8.2%

12-Month Strike -----> 100% 110% 120% 130%

IMPL Vol

20% 8.0% 4.3% 2.1% 1.0%

30% 11.9% 8.1% 5.4% 3.6%

40% 15.9% 12.1% 9.2% 5.4%

50% 19.7% 16.1% 13.1% 10.7% Source: UBS. Assumes no dividend and 0% interest rates.


UBS 21

Statement of Risk

Investing in options involves numerous risks. Such risks include, but are not limited to, the following: a long option position is negatively impacted by a decrease in implied volatility, lack of movement in the underlying stock or Index and the passage of time. A short option investor is negatively impacted by an increase in implied volatility, a large directional movement in the underlying stock or Index and the lack of the passage of time. For options purchased the maximum loss is the premium. For an uncovered call sold the maximum loss is unlimited, while for an uncovered put sold the maximum loss is put strike minus premium. For uncovered options margin must be posted. Because uncovered option selling involves significant risks this strategy should be under taken only by sophisticated investors. Complex option strategies involve either the simultaneous purchase or sale of multiple options or the simultaneous purchase and sale of numerous options, such as spreads or collars. Their pay off profile and risks can be complicated, and should only be undertaken by sophisticated investors. Complex option strategies can often be broken down into individual component options, and their risks can be identified and analyzed. Complex strategies may have limited or unlimited loss potential, and in cases where uncovered options are sold margin is required to be posted. Also see options risk disclosure within the Required Disclosures section of this document.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 22

Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 57% 36%Neutral Hold/Neutral 37% 35%Sell Sell 7% 17%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 0%Sell Sell less than 1% 12%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 December 2011. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 23

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities LLC: Mitchell S. Revsine; Brian Russo.


UBS 24

Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Adobe Systems Inc.6c, 7, 16 ADBE.O Buy N/A US$30.50 20 Jan 2012 AFLAC Inc.6b, 7, 16 AFL.N Sell N/A US$47.91 20 Jan 2012 Agrium Inc.16 AGU.N Buy N/A US$80.01 20 Jan 2012 Apache Corporation4a, 6a, 6c, 7, 16 APA.N Buy N/A US$96.80 20 Jan 2012 Autodesk Inc.8a, 8b, 16 ADSK.O Buy N/A US$35.04 20 Jan 2012 Barrick Gold Corporation2, 4b, 5b, 6a,

16, 18b, 22 ABX.N Buy N/A US$45.83 20 Jan 2012

CBS Corp.4a, 6a, 13, 16, 22 CBS.N Buy N/A US$28.04 20 Jan 2012 Citigroup Inc2, 4a, 5a, 6a, 6b, 6c, 7, 16 C.N Buy N/A US$29.64 20 Jan 2012 Cliffs Natural Resources, Inc.6c, 7,

16 CLF.N Buy N/A US$71.50 20 Jan 2012

Coach Inc.16 COH.N Neutral N/A US$64.84 20 Jan 2012 Coca-Cola Co.2, 4a, 6a, 6b, 6c, 7, 16 KO.N Neutral N/A US$68.09 20 Jan 2012 Cognizant Technology Solutions Corp.4a, 6a, 13, 16 CTSH.O Buy N/A US$70.17 20 Jan 2012

Devon Energy Corporation2, 4a, 6a,

6c, 7, 16, 22 DVN.N Buy N/A US$63.29 20 Jan 2012

Dow Chemical6a, 6b, 6c, 7, 13, 16, 22 DOW.N Buy N/A US$33.39 20 Jan 2012 ENSCO PLC16 ESV.N Buy N/A US$51.28 20 Jan 2012 Express Scripts Inc.6a, 16 ESRX.O Buy N/A US$51.90 20 Jan 2012 F5 Networks, Inc.16, 20 FFIV.O Neutral (CBE) N/A US$120.27 20 Jan 2012 Freeport-McMoRan4a, 6a, 13, 16 FCX.N Buy N/A US$43.10 20 Jan 2012 Georgia Gulf Corp.16 GGC.N Buy N/A US$34.50 20 Jan 2012 Hess Corp.4a, 6a, 16 HES.N Buy N/A US$61.27 20 Jan 2012 Huntsman Corp.16 HUN.N Buy N/A US$11.47 20 Jan 2012 KLA-Tencor Corp.16 KLAC.O Buy N/A US$51.50 20 Jan 2012 Las Vegas Sands Corp.4a, 5a, 6a, 16, 20 LVS.N Buy (CBE) N/A US$46.46 20 Jan 2012 Lennar2, 4a, 5a, 6a, 6b, 7, 16, 20 LEN.N Neutral (CBE) N/A US$22.06 20 Jan 2012 Mosaic Co2, 4a, 16 MOS.N Buy N/A US$55.01 20 Jan 2012 PepsiCo Inc.3, 4a, 5a, 6a, 6b, 6c, 7, 16, 18c PEP.N Neutral N/A US$66.28 20 Jan 2012 Potash Corporation of Saskatchewan Inc.4b, 6a, 13, 16 POT.N Buy N/A US$44.75 20 Jan 2012

Qualcomm Inc.6b, 7, 16, 18a QCOM.O Buy N/A US$57.73 20 Jan 2012 Royal Caribbean16 RCL.N Neutral N/A US$28.03 20 Jan 2012 Schlumberger Ltd.16, 18d SLB.N Buy N/A US$73.80 20 Jan 2012 SunTrust Banks, Inc.2, 4a, 5a, 6a, 6b, 6c,

7, 16 STI.N Buy N/A US$21.29 20 Jan 2012

Toll Brothers16, 20, 22 TOL.N Neutral (CBE) N/A US$22.89 20 Jan 2012

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 3. UBS AG Hong Kong Branch is acting as financial advisor to PepsiCo (China) on the formation of a strategic alliance with

Tingyi Cayman Islands Holdings Corp. 4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity. 4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking

services from this company/entity. 5a. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services

from this company/entity within the next three months. 5b. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking

services from this company/entity within the next three months.


UBS 25

6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.

7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.

8a. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company.

8b. The equity analyst covering this company, a member of his or her team, or one of their household members has a long options position in this company.

13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common

stock position in Qualcomm Inc. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Barrick Gold Corp. 18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in PepsiCo Inc. 18d. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Schlumberger. 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR

exceeds the MRA by 10% (compared with 6% under the normal rating system). 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end

(or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). Options, structured derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Past performance is not necessarily indicative of future results. Various theoretical explanations of the risks associated with these instruments have been published. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "The Characteristics and Risks of Standardized Options." You may read the document at http://www.optionsclearing.com/about/publications/character-risks.jsp or ask your salesperson for a copy. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration.


UBS 26

Global Disclaimer This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning UBS AG, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. UBS does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. The report should not be regarded by recipients as a substitute for the exercise of their own judgement. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. 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Overwriting Jan. 2012

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