Why You Should Know About Epic Investing

Written by: Kumar Shah | XoomFi

What is ‘Epic Investing’ you ask? Does it mean it is Epic in terms of its grand scope and capabilities?

Well, it is, but in the context of trading and investing it has a very special and specific meaning and we’ll get to that in a moment. First, let’s understand the context and build a framework for the discussion.

All through the history of trading and investments, we have been presented two primary investment options : Equity or Stocks and Credit or Bonds - Equity investment for the benefit of equity appreciation and Credit for Fixed Income generation. 

Credit market refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds, and short-term commercial paper. When you invest in the Credit Market, you are lending funds to the borrower in exchange for which you generate ‘Fixed Income’ but you forgo the benefit of equity appreciation or your original investment appreciating in value over time.

Conversely, when you invest in Stocks the promise is for your investment to grow in value over time but you are not generating a regular income stream from your investment other than periodic dividends.

Modern Portfolio Theory (MPT) is a mathematical technique for developing the "optimal" mix of assets (or asset classes) in a portfolio for a given amount of risk. MPT suggests combining high-risk assets (i.e. stocks) with low-risk assets (i.e. bonds or cash) to provide better long-term risk-reward characteristics overall than either asset class by itself. 

Investing strategies don't get more classic than the so-called 60/40 allocation. By holding 60% of your portfolio in stocks and 40% in bonds, the thinking goes, you get the best of both worlds: high growth potential from your riskier stocks and protection from your more conservative bonds.

So, what is an investor to do? Is there an alternative investment instrument which provides the benefits of both equity appreciation and fixed income? One that is better suited for the current economic environment? One that delivers positive returns in bull and bear markets? 

The answer to these questions is YES and the alternative investment instrument is EPIC Investing. So, back to our original question - what is EPIC Investing you ask?

Epic is an acronym for Equity Premium InCome and the associated investment instrument is Buy-Write or Covered Calls. A covered call is a two-part strategy in which stock is purchased or owned and calls or options are sold. The term “buy write” describes the action of buying stock and selling call options at the same time. Upon selling of the call option, you generate income - which is known as Equity Premium Income because it the income generated from the call option premium collected upon selling of the call option and the Premium Income is generated from the underlying Equity position.

Related: How Advisors Can Avoid the Three Deadly Sins of Cash