UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Eaton Vance Tax-Advantaged Bond and Option Strategies Fund

(Exact Name of Registrant as Specified in Charter)

Two International Place, Boston, Massachusetts 02110
(Address of Principal Executive Offices)

Maureen A. Gemma
Two International Place, Boston, Massachusetts 02110
(Name and Address of Agent for Services)

(617) 482-8260

December 31

December 31, 2011

 

 

Item 1. Reports to Stockholders

Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (EXD) Annual Report December 31, 2011

 

 

 

Managed Distribution Plan. On March 10, 2009, the Fund received authorization from the Securities and Exchange Commission to distribute long-term capital gains to shareholders more frequently than once per year. In this connection, the Board of Trustees formally approved the implementation of a Managed Distribution Plan (MDP) to make quarterly cash distributions to common shareholders, stated in terms of a fixed amount per common share.

 

The Fund intends to pay quarterly cash distributions equal to $0.425 per share. You should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the MDP. The MDP will be subject to regular periodic review by the Fund’s Board of Trustees.

 

With each distribution, the Fund will issue a notice to shareholders and an accompanying press release which will provide detailed information required by the Fund’s exemptive order. The Fund’s Board of Trustees may amend or terminate the MDP at any time without prior notice to Fund shareholders. However, at this time there are no reasonably foreseeable circumstances that might cause the termination of the MDP.

 

Fund shares are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Shares are subject to investment risks, including possible loss of principal invested.

 

Annual Report December 31, 2011

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

Table of Contents

 

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Management’s Discussion of Fund Performance1

 

 

Economic and Market Conditions

In the early months of 2011, a sustainable U.S. economic recovery appeared to be underway. By the second quarter, however, Europe’s growing debt crisis led investors to worry about the potential impact on the U.S. economy and financial system. Investor anxiety was further fueled by persistent weakness in the labor and housing markets, Congressional wrangling over the federal debt ceiling, and the Standard & Poor’s downgrade of the long-term U.S. credit rating. Reacting to the domestic and overseas turmoil, the S&P 500 Index²fell sharply during the third quarter and spent much of the fourth quarter clawing its way back, finishing 2011 virtually unchanged from where it began the year.

 

Against this macro backdrop, Treasury and municipal interest rates rose slightly in the first quarter of 2011, only to decline amid a widespread flight to safety beginning in the second quarter. Treasury prices rose as yields fell significantly and equity markets lost ground in the third quarter. Municipals rallied as well, but not to the same degree because investors remained concerned about the ability of state and local governments to address historically large fiscal deficits and balance their budgets.

 

As the year progressed, however, several factors enabled municipal performance to rebound. The massive municipal defaults predicted by some observers did not materialize, while many issuers’ budget situations began to recover. In addition, the supply-demand equation for municipals improved as it became clearer that the number of new issues in 2011 would decline dramatically from 2010 levels.

 

With low Treasury yields driven by problems in Europe and the Federal Reserve’s “Operation Twist” program (central bank’s swapping its short-term holdings for long-term Treasury bonds), municipals offered significantly higher taxable-equivalent yields than Treasuries during 2011. The ratio of 30-year AAA⁴ municipal yields to 30-year Treasury yields — which historically has averaged less than 100% due to municipals’ federally tax-exempt status — rose from 107.3% at the start of 2011 to 122.8% by year-end. Municipal prices rallied in late 2011 as investors sought to lock in historically attractive municipal yields.

 

Against this backdrop, the Barclays Capital Municipal Bond Index — a broad-based, unmanaged index of municipal bonds — gained 10.70%, while longer-term municipals, as measured by the Barclays Capital Long (22+) Municipal Bond Index, returned 14.88%.

 

Fund Performance

At net asset value (NAV) for the 12 months ending December 31, 2011, Eaton Vance Tax-Advantaged Bond and Option Strategies Fund returned 13.69%, outperforming its primary benchmark, the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index (the Index), an unmanaged index of U.S. Treasury securities maturing in 90 days, which returned 0.10% during the period.

 

During 2011, we fully invested in the Bond Strategy, which is designed to provide capital preservation and a stable source of tax-exempt income. We also systematically applied the Option Overlay Strategy to 100% of net assets. Both strategies contributed to 2011 performance.

 

The Bond Strategy’s strong 2011 returns were a function of both the market environment and portfolio positioning. The municipal bond market performed well, benefiting from a rally in U.S. Treasuries and the lowest municipal bond supply in more than 10 years. The Fund was well-positioned with a sizable concentration in 10- to 12-year issues, which fared better than other maturities within the municipal bond market. We favored this maturity range because at certain points during 2011, the extra yield on a 10-year municipal bond versus a five-year municipal bond was the highest in history. In addition, prices on 10-year municipal bonds versus comparable maturity Treasuries were relatively low. As yields on 10-year municipal bonds came down, we reallocated some of these assets to shorter-term bonds. The Bond Strategy had a duration of five years early in 2011, which we reduced to four years as interest rates declined.

 

The Option Overlay Strategy, which generated income by writing a series of S&P 500 Index call and put spread option transactions, is intended to provide returns that are substantially uncorrelated to the returns of the S&P 500. The Option Overlay Strategy limited potential losses to a predetermined amount, which proved to be beneficial in a year of heightened volatility.

 

 

See Endnotes and Additional Disclosures in this report.

 

Past performance is no guarantee of future results. Returns are historical and are calculated by determining the percentage change in net asset value (NAV) or market price (as applicable) with all distributions reinvested. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month end, please refer to www.eatonvance.com.

 

2

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Performance2

 

Portfolio Managers Ken Everding, Ph.D; Jonathan Orseck, each of Parametric Risk Advisors, LLC; James H. Evans, CFA

 

 

Fund Profile

 

 

Credit Quality (% of bond holdings)⁴

 

 

 

See Endnotes and Additional Disclosures in this report.

 

Past performance is no guarantee of future results. Returns are historical and are calculated by determining the percentage change in net asset value (NAV) or market price (as applicable) with all distributions reinvested. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month end, please refer to www.eatonvance.com.

 

3

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Endnotes and Additional Disclosures

 

 

Fund profile subject to change due to active management.

 

4

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Portfolio of Investments

 

See Notes to Financial Statements.

5

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Portfolio of Investments — continued

 

 

 

See Notes to Financial Statements.

6

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Portfolio of Investments — continued

 

The percentage shown for each investment category in the Portfolio of Investments is based on net assets.

 

 

At December 31, 2011, the concentration of the Fund’s investments in the various states, determined as a percentage of net assets, is as follows:

 

New York			20.9%
Texas			10.0%
Others, representing less than 10% individually			44.3%

 

The Fund invests primarily in debt securities issued by municipalities. The ability of the issuers of the debt securities to meet their obligations may be affected by economic developments in a specific industry or municipality. In order to reduce the risk associated with such economic developments, at December 31, 2011, 6.3% of total investments are backed by bond insurance of various financial institutions and financial guaranty assurance agencies. The aggregate percentage insured by an individual financial institution ranged from 0.5% to 4.9% of total investments.

 

 

See Notes to Financial Statements.

7

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Statement of Assets and Liabilities

 

See Notes to Financial Statements.

8

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Statement of Operations

 

See Notes to Financial Statements.

9

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Statements of Changes in Net Assets

 

 

See Notes to Financial Statements.

10

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Financial Highlights

 

 

See Notes to Financial Statements.

11

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements

 

1 Significant Accounting Policies

 

Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The trust was organized on January 14, 2010 and remained inactive until June 29, 2010, except for matters related to its organization and sale of initial shares of $100,000. The Fund’s investment objective is to provide tax-advantaged current income and gains.

 

The following is a summary of significant accounting policies of the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America.

 

A Investment Valuation — Debt obligations (including short-term obligations with a remaining maturity of more than sixty days) are generally valued on the basis of valuations provided by third party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. Short-term debt obligations purchased with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Exchange-traded options (other than FLexible EXchange traded options) are valued at the mean between the bid and asked prices at valuation time as reported by the Options Price Reporting Authority for U.S. listed options or by the relevant exchange or board of trade for non-U.S. listed options. Over-the-counter options (including options on securities and indices) and FLexible EXchange traded options traded at the Chicago Board Options Exchange are valued by a third party pricing service using techniques that consider factors including the value of the underlying instrument, the volatility of the underlying instrument and the period of time until option expiration. Investments for which valuations or market quotations are not readily available or are deemed unreliable are valued at fair value using methods determined in good faith by or at the direction of the Trustees of the Fund in a manner that most fairly reflects the security’s value, or the amount that the Fund might reasonably expect to receive for the security upon its current sale in the ordinary course. Each such determination is based on a consideration of all relevant factors, which are likely to vary from one pricing context to another. These factors may include, but are not limited to, the type of security, the existence of any contractual restrictions on the security’s disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations or relevant information obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the company’s or entity’s financial condition, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.

 

The Fund may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an affiliated investment company managed by Eaton Vance Management (EVM). Cash Reserves Fund generally values its investment securities utilizing the amortized cost valuation technique in accordance with Rule 2a-7 under the 1940 Act. This technique involves initially valuing a portfolio security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If amortized cost is determined not to approximate fair value, Cash Reserves Fund may value its investment securities in the same manner as debt obligations described above.

 

B Investment Transactions — Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized gains and losses on investments sold are determined on the basis of identified cost.

 

C Income — Interest income is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount.

 

D Federal Taxes — The Fund’s policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its taxable, if any, and tax-exempt net investment income, and all or substantially all of its net realized capital gains. Accordingly, no provision for federal income or excise tax is necessary. The Fund intends to satisfy conditions which will enable it to designate distributions from the interest income generated by its investments in municipal obligations, which are exempt from regular federal income tax when received by the Fund, as exempt-interest dividends. The portion of such interest, if any, earned on private activity bonds issued after August 7, 1986, may be considered a tax preference item to shareholders.

 

During the year ended December 31, 2011, a capital loss carryforward of $1,564,600 was utilized to offset net realized gains by the Fund.

 

As of December 31, 2011, the Fund had no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. Each of the Fund’s federal tax returns filed since the start of business on June 29, 2010 to December 31, 2011 remains subject to examination by the Internal Revenue Service.

 

E Expense Reduction — State Street Bank and Trust Company (SSBT) serves as custodian of the Fund. Pursuant to the custodian agreement, SSBT receives a fee reduced by credits, which are determined based on the average daily cash balance the Fund maintains with SSBT. All credit balances, if any, used to reduce the Fund’s custodian fees are reported as a reduction of expenses in the Statement of Operations.

 

F Organization and Offering Costs — Organization costs paid in connection with the organization of the Fund were borne directly by EVM, the Fund’s investment adviser.

 

EVM agreed to pay all offering costs (other than sales loads) that exceeded $0.04 per common share. Costs incurred by the Fund in connection with the offering of its common shares were recorded as a reduction of additional paid-in capital.

 

12

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements — continued

 

G Legal Fees — Legal fees and other related expenses incurred as part of negotiations of the terms and requirement of capital infusions, or that are expected to result in the restructuring of, or a plan of reorganization for, an investment are recorded as realized losses. Ongoing expenditures to protect or enhance an investment are treated as operating expenses.

 

H Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.

 

I Indemnifications — Under the Fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Under Massachusetts law, if certain conditions prevail, shareholders of a Massachusetts business trust (such as the Fund) could be deemed to have personal liability for the obligations of the Fund. However, the Fund’s Declaration of Trust contains an express disclaimer of liability on the part of Fund shareholders and the By-laws provide that the Fund shall assume the defense on behalf of any Fund shareholders. Moreover, the By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.

 

J Written Options — Upon the writing of a call or a put option, the premium received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written, in accordance with the Fund’s policies on investment valuations discussed above. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. When an index option is exercised, the Fund is required to deliver an amount of cash determined by the excess of the strike price of the option over the value of the index (in the case of a put) or excess of the value of the index over the strike price of the option (in the case of a call) at contract termination. If a put option on a security is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, may have no control over whether the underlying securities or other assets may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities or other assets underlying the written option. The Fund may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.

 

K Purchased Options — Upon the purchase of a call or put option, the premium paid by the Fund is included in the Statement of Assets and Liabilities as an investment. The amount of the investment is subsequently marked-to-market to reflect the current market value of the option purchased, in accordance with the Fund’s policies on investment valuations discussed above. As the purchaser of an index put option, the Fund has the right to receive a cash payment equal to any depreciation of the value of the index below the strike price of the option (in the case of a put) or equal to any appreciation in the value of the index over the strike price of the option (in the case of a call) as of the valuation date of the option. If an option which the Fund had purchased expires on the stipulated expiration date, the Fund will realize a loss in the amount of the cost of the option. If the Fund enters into a closing sale transaction, the Fund will realize a gain or loss, depending on whether the sales proceeds from the closing sale transaction are greater or less than the cost of the option. If the Fund exercises a put option on a security, it will realize a gain or loss from the sale of the underlying security, and the proceeds from such sale will be decreased by the premium originally paid. If the Fund exercises a call option on a security, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid. The risk associated with purchasing options is limited to the premium originally paid.

 

L When-Issued Securities and Delayed Delivery Transactions — The Fund may purchase or sell securities on a delayed delivery or when-issued basis. Payment and delivery may take place after the customary settlement period for that security. At the time the transaction is negotiated, the price of the security that will be delivered is fixed. The Fund maintains security positions for these commitments such that sufficient liquid assets will be available to make payments upon settlement. Securities purchased on a delayed delivery or when-issued basis are marked-to-market daily and begin earning interest on settlement date. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract.

 

2 Distributions to Shareholders

 

Subject to its Managed Distribution Plan, the Fund intends to make quarterly distributions from its net investment income, net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) and other sources. The Fund intends to distribute all or substantially all of its net realized capital gains (reduced by available capital loss carryforwards from prior years, if any). Distributions are recorded on the ex-dividend date. The Fund distinguishes between distributions on a tax basis and a financial reporting basis. Accounting principles generally accepted in the United States of America require that only distributions in excess of tax basis earnings and profits be reported in the financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary income. Distributions in any year may include a substantial return of capital component.

 

13

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements — continued

 

The tax character of distributions declared for the year ended December 31, 2011 and the period ended December 31, 2010 was as follows:

 

 

 

During the year ended December 31, 2011, accumulated net realized loss was decreased by $188 and accumulated distributions in excess of net investment income was increased by $188 due to differences between book and tax accounting, primarily for accretion of market discount. These reclassifications had no effect on the net assets or net asset value per share of the Fund.

 

As of December 31, 2011, the components of distributable earnings (accumulated losses) and unrealized appreciation (depreciation) on a tax basis were as follows:

 

 

The differences between components of distributable earnings (accumulated losses) on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to purchased and written options contracts, the timing of recognizing distributions to shareholders, investment in partnerships and accretion of market discount.

 

3 Investment Adviser and Administration Fee and Other Transactions with Affiliates

 

The investment adviser and administration fee is earned by EVM as compensation for management, investment advisory and administrative services rendered to the Fund. The fee is computed at an annual rate of 1.25% of the Fund’s average daily net assets up to and including $1.5 billion and at reduced rates on daily net assets over $1.5 billion, and is payable monthly. The Fund invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. For the year ended December 31, 2011, the investment adviser and administration fee amounted to $2,406,154 or 1.25% of the Fund’s average daily net assets. Pursuant to a sub-advisory agreement, EVM has delegated a portion of the investment management to Parametric Risk Advisors LLC (PRA). PRA is an indirect affiliate of EVM. EVM pays PRA a portion of its advisory and administration fee for sub-advisory services provided to the Fund.

 

Except for Trustees of the Fund who are not members of EVM’s organization, officers and Trustees receive remuneration for their services to the Fund out of the investment adviser and administration fee. Trustees of the Fund who are not affiliated with EVM may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the year ended December 31, 2011, no significant amounts have been deferred. Certain officers and Trustees of the Fund are officers of EVM.

 

4 Purchases and Sales of Investments

 

Purchases and sales of investments, other than short-term obligations and including maturities, for the year ended December 31, 2011 were as follows:

 

 

14

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements — continued

 

5 Common Shares of Beneficial Interest

 

The Fund may issue common shares pursuant to its dividend reinvestment plan. Transactions in common shares were as follows:

 

 

 

6 Federal Income Tax Basis of Investments

 

The cost and unrealized appreciation (depreciation) of investments of the Fund at December 31, 2011, as determined on a federal income tax basis, were as follows:

 

 

7 Financial Instruments

 

The Fund may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include written options and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. A summary of written options at December 31, 2011 is included in the Portfolio of Investments.

 

Written options activity for the year ended December 31, 2011 was as follows:

 

 

At December 31, 2011, the Fund had sufficient cash and/or securities to cover commitments under these contracts.

 

The Fund is subject to equity price risk in the normal course of pursuing its investment objective. The Fund enters into a series of S&P 500 written call and put option spread transactions to enhance return while limiting any potential loss. A written call option spread on a stock index consists of selling call options on the index and buying an equal number of call options on the same index and with the same expiration, but with a higher exercise price. A written put option spread on a stock index consists of selling put options on an index and buying an equal number of put options on the same index and with the same expiration, but with a lower exercise price. Any net premiums received are reduced by the premiums paid on the purchased options. The risk of loss if written options expire in the money is limited to the difference in exercise price of the written and purchased option positions. The Fund’s use of option spreads rather than stand alone options, staggering roll dates across the option position portfolio, and utilizing exchange-traded options guaranteed by the Options Clearing Corporation, a market clearinghouse, serve to mitigate risk in its option strategy.

 

15

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements — continued

 

The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is equity price risk at December 31, 2011 was as follows:

 

 

 

The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary underlying risk exposure is equity price risk for the year ended December 31, 2011 was as follows:

 

 

 

The average number of purchased options contracts outstanding for the year ended December 31, 2011, which is indicative of the volume of this derivative type, was approximately 6,300 contracts.

 

8 Fair Value Measurements

 

Under generally accepted accounting principles for fair value measurements, a three-tier hierarchy to prioritize the assumptions, referred to as inputs, is used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in the three broad levels listed below.

 

 

In cases where the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level disclosed is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

16

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Notes to Financial Statements — continued

 

At December 31, 2011, the hierarchy of inputs used in valuing the Fund’s investments and open derivative instruments, which are carried at value, were as follows:

 

 

17

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Report of Independent Registered Public Accounting Firm

 

To the Trustees and Shareholders of Eaton Vance Tax-Advantaged Bond and Option Strategies Fund:

 

We have audited the accompanying statement of assets and liabilities of Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (the “Fund”), including the portfolio of investments, as of December 31, 2011, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for the year then ended and for the period from the start of business, June 29, 2010, to December 31, 2010. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Eaton Vance Tax-Advantaged Bond and Option Strategies Fund as of December 31, 2011, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for the year then ended and for the period from the start of business, June 29, 2010, to December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 16, 2012

 

18

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Federal Tax Information (Unaudited)

 

The Form 1099-DIV you received in January 2012 showed the tax status of all distributions paid to your account in calendar year 2011. Shareholders are advised to consult their own tax adviser with respect to the tax consequences of their investment in the Fund. As required by the Internal Revenue Code and/or regulations, shareholders must be notified regarding exempt-interest dividends and capital gains dividends.

 

Exempt-Interest Dividends. The Fund designates $577,387 as an exempt-interest dividend.

 

Capital Gains Dividends. The Fund designates $5,366,708 as a capital gain dividend.

 

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Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Dividend Reinvestment Plan

 

The Fund offers a dividend reinvestment plan (Plan) pursuant to which shareholders automatically have distributions reinvested in common shares (Shares) of the Fund unless they elect otherwise through their investment dealer. On the distribution payment date, if the NAV per Share is equal to or less than the market price per Share plus estimated brokerage commissions, then new Shares will be issued. The number of Shares shall be determined by the greater of the NAV per Share or 95% of the market price. Otherwise, Shares generally will be purchased on the open market by American Stock Transfer & Trust Company, the Plan agent (Agent). Distributions subject to income tax (if any) are taxable whether or not Shares are reinvested.

 

If your Shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the Plan on your behalf. If the nominee does not offer the Plan, you will need to request that the Fund’s transfer agent re-register your Shares in your name or you will not be able to participate.

 

The Agent’s service fee for handling distributions will be paid by the Fund. Plan participants will be charged their pro rata share of brokerage commissions on all open-market purchases.

 

Plan participants may withdraw from the Plan at any time by writing to the Agent at the address noted on the following page. If you withdraw, you will receive Shares in your name for all Shares credited to your account under the Plan. If a participant elects by written notice to the Agent to sell part or all of his or her Shares and remit the proceeds, the Agent is authorized to deduct a $5.00 fee plus brokerage commissions from the proceeds.

 

If you wish to participate in the Plan and your Shares are held in your own name, you may complete the form on the following page and deliver it to the Agent. Any inquiries regarding the Plan can be directed to the Agent at 1-866-439-6787.

 

20

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Application for Participation in Dividend Reinvestment Plan

 

 

 

The following authorization and appointment is given with the understanding that I may terminate it at any time by terminating my participation in the Plan as provided in the terms and conditions of the Plan.

 

Please print exact name on account:

Shareholder signature                                   Date

Shareholder signature                                   Date

 

Please sign exactly as your common shares are registered. All persons whose names appear on the share certificate must sign.

 

YOU SHOULD NOT RETURN THIS FORM IF YOU WISH TO RECEIVE YOUR DISTRIBUTIONS IN CASH. THIS IS NOT A PROXY.

 

This authorization form, when signed, should be mailed to the following address:

 

Eaton Vance Tax-Advantaged Bond and Option Strategies Fund

c/o American Stock Transfer & Trust Company

P.O. Box 922

Wall Street Station

New York, NY 10269-0560

 

Number of Employees

The Fund is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company and has no employees.

 

Number of Shareholders

As of December 31, 2011, Fund records indicate that there are 3 registered shareholders and approximately 5,774 shareholders owning the Fund shares in street name, such as through brokers, banks, and financial intermediaries.

 

If you are a street name shareholder and wish to receive Fund reports directly, which contain important information about the Fund, please write or call:

 

Eaton Vance Distributors, Inc.

Two International Place

Boston, MA 02110

1-800-262-1122

 

New York Stock Exchange symbol

 

The New York Stock Exchange Symbol is EXD.

 

21

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund

 

December 31, 2011

 

 

Management and Organization

 

Fund Management. The Trustees of Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (the Fund) are responsible for the overall management and supervision of the Fund’s affairs. The Trustees and officers of the Fund are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. The “Noninterested Trustees” consist of those Trustees who are not “interested persons” of the Fund, as that term is defined under the 1940 Act. The business address of each Trustee and officer is Two International Place, Boston, Massachusetts 02110. As used below, “EVC” refers to Eaton Vance Corp., “EV” refers to Eaton Vance, Inc., “EVM” refers to Eaton Vance Management, “BMR” refers to Boston Management and Research and “EVD” refers to Eaton Vance Distributors, Inc. EVC and EV are the corporate parent and trustee, respectively, of EVM and BMR. EVD is a wholly-owned subsidiary of EVC. Each officer affiliated with Eaton Vance may hold a position with other Eaton Vance affiliates that is comparable to his or her position with EVM listed below. Each Trustee oversees 180 portfolios in the Eaton Vance Complex (including all master and feeder funds in a master feeder structure). Each officer serves as an officer of certain other Eaton Vance funds. Each Trustee serves for a three year term. Each officer serves until his or her successor is elected.

 

 

22

 

Eaton Vance

Tax-Advantaged Bond and Option Strategies Fund