The EIOS strategy is designed to complement a core equity strategy by providing excellent returns in a flat to low return stock market. It is also used to increase income in a diversified equity portfolio strategy.
The strategy involves selling put and call options on individual stocks and market indexes. A call option gives the buyer the right to buy the underlying stock or index at a given price (strike price) for a given period of time (expiration date). Once it expires it is worthless. The buyer pays what is called a premium for this option. The seller gets the premium in exchange for allowing the buyer to buy or sell the stock to him at the agreed upon price (strike price).
Since the majority of put and call options are never exercised the seller ends up keeping the premiums and the underlying stock or index on which the option is sold. In other words, option sellers generally do better than option buyers. The EIOS strategy is a seller of options not a buyer of options.
The EIOS strategy writes options on individual stocks and market indexes. We sell put and call options and collect premiums for both. At expiration one or both of these options are worthless. The portfolio diversifies the options by both maturity date and strike price.
The portfolio will have 20% to 25% invested in 6 to 10 stocks with both puts and calls written against each position. The remaining portfolio will be invested in market indexes, primarily SPY’s (S&P 500 Index) and DIA’s (Dow Jones Ind. Avg.) with both puts and calls written against them.