I get a lot of emails from investors wondering what I do with my cash when it is not being traded in equities. As investors who have read my strategy paper know, I keep 30% of my portfolio in cash, waiting for opportunities such as we saw in 2008 and 2009, 2010 and even in 2011.
But these kinds of events don’t happen often. The rest of the time I usually am using small amounts of my capital to investing in short-term trades that are designed to boost my cash return.
Norfolk Southern Corp Stock (NSC)
The trade this morning in Norfolk Southern Corp Stock is a good example of how I keep my cash that sits on the sidelines, still growing. I picked up just shy of 2.5% for a couple of weeks at a great put strike. I sold the the May 19 $110 put and bought the $110 put for a spread of $10.00. Often I will spot these types of far out of the money trades for a couple of weeks and place some of my cash into them.
The key is to keep only small amounts of the cash in the markets at given times and stay with short expiries. As well I choose stocks that are in uptrend and I stay far out of the money with my credit put spreads. I rarely do any other type of strategy than credit put spreads.
This is because if there is a great market for setting up credit call spreads, it is almost always because the market is dropping. That means that my cash is actually being applied t trades in stocks that are dropping valuations. Therefore I am not setting up credit call spreads as my capital is put to better use, trading in the downturn.
I keep 30% of my entire portfolio leaning toward cash so I keep an eye open for chances like the one this morning.
By the end of the year normally I can make 4% to as much as 6% on my cash capital, in what I consider to be lower risk investments.
If stock markets should turn lower, I always have the bulk of my 30% cash, available for taking advantage of dips and I can close these small cash making positions quickly if I believe there are better opportunities available. Often those opportunities will more than make up for any small losses I might take on having to close outstanding trades like the one in Norfolk Southern Corp Stock, earlier than expected.
I will write more on this in upcoming weeks as other trades develop. but it is an excellent way to grow cash capital with limited risk.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk.