Leveraging The Keystone's Unused Cash
Through the use of Portfolio Margin, we are able to institute a variety of innovative trading tactics.
The information below demonstrates one such tactic that allows us to efficiently utilize some of the unused Cash being held in the Keystone Strategy.
For this particular tactic, we monitor two different account metrics within our TD Ameritrade account:
Option Buying Power (called Stock and/or Options Buying Power in TOS).
Cash (called Cash & Sweep Vehicle in TOS)
As long as we keep both our Option Buying Power and Cash Value above $0, we are not utilizing any type of margin borrowing
(i.e. we are not borrowing funds from the broker to finance any of our positions).
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What’s interesting is that our Keystone Option Strategy consumes a lot of Option Buying Power, but because of the way the option trades are structured, it uses very little Cash.
By way of contrast, our Cornerstone Stock/ETF Strategy uses very little Option Buying Power, but consumes a large amount of Cash.
By combining the two strategies together, we are able to utilize the untapped resources of each strategy.
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Let’s examine how we can utilize these tactics in a sample $100,000 Capstone Portfolio.
As you know, The Capstone Strategy is comprised of 80% Keystone and 20% Cornerstone.
Of the $100,000, we allocated $80,000 to the Keystone Options Strategy.
Of this $80,000, the Keystone Strategy will consume all $80,000 of its allotted Option Buying Power, but it will only consume about $20,000 of its allotted Cash.
In other words, if we were to enter into a $80,000 options trade, we would see our portfolio's Option Buying Power be reduced by $80,000, but our Cash would only be reduced by $20,000 (i.e. there is still $60,000 of available Cash that can be used).
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The remaining $20,000 of the portfolio is allocated to the Cornerstone Stock/ETF Strategy.
Of this $20,000, the Cornerstone will consume all $20,000 of its allotted Cash, but it will only consume about $2,000 of its allotted Option Buying power.
For example, if we were to buy $20,000 worth of ETFs, we would see our portfolio's Cash be reduced by $20,000, but our Option Buying Power would only be reduced by $2,000.
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When the two strategies are working in unison, the Cornerstone can tap into and "use" that $60,000 of unused Keystone Cash for itself. This means that the Cornerstone can now purchase up to $80,000 of Stocks/ETFs ($20,000 from its own allotment and $60,000 from Keystone’s allotment).
So the Cornerstone can purchase $80,000 of Stocks/ETFs but technically still only be “using” $20,000 of Cash. That allows the Cornerstone to trade at a 4:1 ratio, but do so without using any additional Cash or having to borrow anything on margin
The end result:
We have used 100% of our available Option Buying Power and 100% of our available Cash while making sure both of the critical TDA account balances stay above $0.
(which means we are not borrowing funds from the broker to finance any of our positions).
Please see the diagram below for more detail:
Note: The methods above demonstrate a relatively conservative means of utilizing the idle cash within the Keystone Options Strategy in order to turbo charge the Cornerstone Strategy.
There are more aggressive blending tactics that can be employed where you can utilize “Box Trades” to overlap the Cash and Buying Power of each strategy even more, which in turn allows you to enhance returns even further. These tactics require more advanced oversite and have the potential to incur some margin costs. Since we don’t currently utilize these techniques in the Granite Program, further explanation is not warranted.