PEP was developed to help enhance the return on an existing portfolio of assets. An options-based strategy offers a diversifying element to a portfolio and lower correlation to stocks and bonds. PEP is a market-agnostic strategy that uses mathematical modeling to uncover opportunities to profit through writing uncovered index options. As options traders, the portfolio managers are net sellers of calls and puts on the S&P 500 Index. The managers collect the option premiums from these sales. An option is uncovered when an investor sells options contracts without holding the underlying stock or an offsetting long option position.
A unique characteristic of PEP is that no additional monetary investment is required. Rather, existing portfolio securities are used as collateral, which is known as a Special Memorandum Account within a margin account. Different types of assets release different amounts of their current portfolio value for collateral.
Other customized strategies are developed for individual clients wishing to generate income, hedge portfolios or speculate on market direction.
Selling uncovered options involves inherent risk and is not suitable for all investors. In some cases, losses can be unlimited. Suitability requirements include financial sophistication and the ability to withstand a loss of equity. Please read Characteristics and Risks of Standardized Options-and related supplements-for a detailed explanation of the risks.
