Options Traders: Making High Cash Balances Work for Us

arizonadreamer · Feb 3, 2009

I'm not sure this dilemma has been addressed recently, so I'll open up a forum for discussion.

For many types of trades (credit spreads, condors, straddles, strangles, etc.) we have little or no cash "yanked" from our accounts. Most of our funds are tied up for maintenance requirements still leaving us with high cash balances.

In the not too distant past, it was possible to receive a "fair" rate on our free cash balances. This was either through the brokerage itself or through some type of money market fund linked to the brokerage account.

Now, rates are so low they often begin with a decimal point.

The question is, what do we do to try to earn some extra $$$ and make the high cash balance work for us? What can we get into that is marginable and brings us some "safe" cash.

Here are some ideas:

1) Just stay with the low rates offered by brokerages and money market instruments.

2) Buy treasuries. (still low.)

3) Buy bonds. (would need to diversify.)

4) Buy bond funds.

5) Buy high-yield ETFs.

And the list goes on . . .

Is anyone doing anything relatively safe (Who needs more risk when condors, credit spreads, and the like are already dangerous enough in these current conditons?) they would like to share? A yield of 3% - 6% would look great these days.

All ideas are welcome.

Hmm, I suppose we can convert 100% of our cash balance to JNK at a yield of 13.7%.

AZD

Div_Arb · Feb 3, 2009

Quote from arizonadreamer:

Hmm, I suppose we can convert 100% of our cash balance to JNK at a yield of 13.7%.

AZD

JNK has like 60% of its bonds invested in the industrial sector. Not very diversified for the 13.7% annual yield. Furthermore, it would be a terrible idea to 'convert' 100% of your cash balance to JNK since you would only have half of your cash balance available for spreads. Why not accept the broker's interest rate and keep writing spreads with ALL of your cash? If you are skilled at writing spreads and managing the risk, you should be able to net 13.7% per month. That seems like the better option to me.

arizonadreamer · Feb 3, 2009

Quote from Div_Arb:

JNK has like 60% of its bonds invested in the industrial sector. Not very diversified for the 13.7% annual yield. Furthermore, it would be a terrible idea to 'convert' 100% of your cash balance to JNK since you would only have half of your cash balance available for spreads. Why not accept the broker's interest rate and keep writing spreads with ALL of your cash? If you are skilled at writing spreads and managing the risk, you should be able to net 13.7% per month. That seems like the better option to me.

Greetings Div_Arb,

I was being somewhat facetious when I mentioned JNK.

Making 13.7% is not very impressive when the underlying falls from 47 to 31. Ouch.

No matter how skilled one is, making 13.7% a month on spreads (especially in this environment) would be quite impressive. It would also require extraordinary risk.

I'm not sure I know of anyone who is capturing that much these days.

AZD

arizonadreamer · Feb 3, 2009

One more "option" I neglected to mention was buying a high-yield ETF and selling DEEP in-the-money calls. The biggest risk on the upside is early assignment.

AZD

Div_Arb · Feb 3, 2009

Quote from arizonadreamer:

One more "option" I neglected to mention was buying a high-yield ETF and selling DEEP in-the-money calls. The biggest risk on the upside is early assignment.

AZD

Look at the b/a spreads and OI for the high-yield ETFs. You will make alot of friends in the pits with that trade.. ..

arizonadreamer · Feb 3, 2009

Quote from Div_Arb:

Look at the b/a spreads and OI for the high-yield ETFs. You will make alot of friends in the pits with that trade.. ..

Making friends is a good thing.

I'm sure that we would be more acquaintances than friends as I would be using limit orders, making sure the options did not sell below parity.

AZD

4444CJones4444 · Feb 3, 2009

Quote from arizonadreamer:

No matter how skilled one is, making 13.7% a month on spreads (especially in this environment) would be quite impressive. It would also require extraordinary risk.

I was going to comment on that, but I don't want the market to hear me, as mean and spiteful as it is.

How do you define extraordinary risk?

arizonadreamer · Feb 3, 2009

Quote from 4444CJones4444:

I was going to comment on that, but I don't want the market to hear me, as mean and spiteful as it is.

How do you define extraordinary risk?

Maybe I should say "extraordinary" relative to spread trading.

Earning 14% per month on a consistent basis spread trading would require opening spreads on high IV stocks/indices, and/or close to the money or in-the-money - - - with consistent profits. You would have to be great at predicting direction.

Maybe not extraordinary, but more than average risk . . .

AZD

Div_Arb · Feb 4, 2009

Quote from 4444CJones4444:

I was going to comment on that, but I don't want the market to hear me, as mean and spiteful as it is.

How do you define extraordinary risk?

Yeah I am scared to comment on this as well. Best of luck AZD

arizonadreamer · Feb 4, 2009

Quote from Div_Arb:

Yeah I am scared to comment on this as well. Best of luck AZD

I guess we are getting a little off-topic, but what is it you guys are "scared" to comment on? Are you saying that you are doing very well with spreads (the 14%+ mentioned) and don't want Mr. Market to hear ya?

AZD