When investing in the Capstone Program (which combines the Cornerstone and Keystone Strategies), it can sometimes be a bit confusing as to how much capital is being allocated to each Strategy.

 

Some of this confusion can be attributed to the advanced money management techniques we are able to deploy by using portfolio margin.  

 

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When trading a portfolio margin account, we must continually be aware of two account balance components:

Component 1 is our Options Buying Power 

Component 2 is our Available Cash

 

When we trade different products (i.e. Options versus Equities), these products consume different amounts of Option Buying Power and/or Available Cash.

 

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For example: When we trade the Keystone Option Strategy, this strategy consumes a lot of Options Buying Power but consumes very little Available Cash.

 

When we trade the Cornerstone Strategy, this strategy consumes a lot of Available Cash, but very little Options Buying Power.

   

 

So if we were to trade these strategies individually, we wouldn’t be efficiently utilizing all of our available Options Buying Power and/or Available Cash... but when these strategies are combined, we can very efficiently utilize both components.

 

 

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In general, for the Capstone Program you will see us state that we allocate 80% of the Capstone Program capital to the Keystone Strategy and 20% to the Cornerstone Strategy.

You may also hear us mention that the Cornerstone Strategy is utilizing 4X leverage, yet we are not using any margin or incurring any costs for this leverage… and this is where things can sometimes get a bit confusing.

 

 

 

Technically, a more appropriate way to accurately describe the Capstone Program capital allocations would be to say we allocate 80% of the portfolio to the Keystone Strategy and 20% to the Cornerstone Strategy when viewing the account in the context of its Option Buying Power. In other words, the 80% and 20% values are referring to the account's usage of Option Buying Power.

 

 

On the other hand, if we were to accurately describe the Capstone Program capital allocations in the context of Available Cash (and not Option Buying power), we would say we allocate 80% of the entire portfolio to Cornerstone Strategy and 20% to the Keystone Strategy. In this context, the 80% and 20% values are referring to the account's usage of Available Cash. 

 

 

 

So in general, when we state that we are only investing 20% of the portfolio into the Cornerstone Strategy, that can be a bit ambiguous. This is a true statement in the context of Options Buying Power but that is NOT true in the context of Available Cash. In reality, we are investing 80% of the Capstone’s Available Cash into the Cornerstone Program.

 

 

 

In an attempt to keep things consistent and “simple”, we reconcile this disparity between the Cornerstone’s 20% value and the 80% value by always referring to the allocations in the context of Options Buying Power, and then state that the Cornerstone is using 4X leverage.

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To help explain this a little better, let's set up an example of how we would construct a $100,000 portfolio.

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1) We invest $80,000 (of our $100,000 portfolio) into the Keystone Options Strategy. This means we are consuming up to $80,000 (80%) of our Options Buying Power to enter into our option positions... but... these option positions will only consume about $20,000 (20%) of our account's Available Cash.

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2) We then invest $80,000 (of our $100,000 portfolio) into the Cornerstone Equities Strategy. This means we are consuming up to $80,000 (80%) of our Available Cash to enter into our stock/bond/ETF positions... but... these positions will only consume about $20,000 (20%) of our account's total Option Buying Power (this is a benefit of using portfolio margin).

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The benefit of us utilizing this advanced money management technique is that it allows us to utilize much of our capital "twice" across two different Programs WITHOUT using traditional margin or incurring any margin fees/costs. 

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