However, the portfolio also takes general market volatility and implied volatility of the options markets into account to construct the portfolio. At times, the market volatility can be sufficiently high that having exposure through short put options on a stock has a more interesting risk/return profile than holding the stock outright. So strikes can be chosen to be a bit further out of the money and still the option premium earned can be sufficiently attractive to prefer this option position over an outright investment.

The portfolio will also consist of option positions in the VIX or on the VXX (an ETN on the VIX). Especially when single stock volatility is not so high, but there is cash in the portfolio to serve as collateral for stock market exposure, calls can be written on these products. Again, it earns a yield and will most of the time expire worthless. The risk is a rising volatility level in the market, which cause losses in these positions, but will enable selling puts on single stocks again at much more advantageous price levels.

When market volatility is low and single stock volatility is low and a specific stock is at a very attractive price level, starting an uptrend, exposure can also be built up using long single stock calls.

With this strategy, the portfolio “breathes with the market”. With rising markets, risk tends to be reduced by selling calls on stock positions and eventually stocks being called. With falling markets, exposure tends to be built up, by selling puts on value stocks which have fallen in price or selling calls on volatility indices until attractive positions on value stocks open up. Meanwhile, attractive option premiums are continuously being collected, which generally enable a steady, fundamental uptrend in the portfolio.