Schemes for maximizing cash returns

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Mark Leavy
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Schemes for maximizing cash returns

Post by Mark Leavy » Fri Mar 19, 2021 7:38 pm

vincent recently mentioned that his implementation of the PP is via futures - which basically leaves him a ton of cash sitting idle in his account.

He then tries to maximize his return on the cash. (I'm abbreviating here, so please step in if I've cut out too much).

Being a US citizen, I don't have the same options that vincent does, but I've been looking at different ways to get better cash returns.
One possibility seems to be very conservative volatility spreads. Put 5 to 10 percent of your cash into buying the 5 month future while selling the 1 month future. Roughly equivalent to holding VIXM while shorting VIXY.

This seems to generate a reliable few percent of gain with an occasional hiccup - but overall positive. Not a growth strategy, but a decent return on a 'cash' allocation.

What are other folks doing?
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Re: Schemes for maximizing cash returns

Post by Kbg » Sat Mar 20, 2021 8:35 pm

I've been selling weekly 5 delta OTM covered calls on my holdings. With Interactive Brokers you can bring up one of their option tools and pick a delta and display its associated annualized yield. It's a lot of trading every Monday morning. With calls that far out assignment is rare. I've been assigned once this year and when I get assigned I start selling ATM puts until I'm long again. Probably don't want to do this in a taxable unless it's a trading account and you expect lots of ST gains.

For VIX futures, depending on how big a club you want to swing you could go the VIX options route which are $100 a point vs. $1000
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Re: Schemes for maximizing cash returns

Post by whatchamacallit » Sat Mar 20, 2021 8:38 pm

A whole lot more low tech here.

I gave up on LTT when 10 year FDIC CDs were higher interest rate. They were at 3% at the time. At that point I considered myself 50% intermediate term bullet instead of the barbell.

Now I am maxing out EE bonds each year to get the 3.5% while you still can. I also consider them more intermediate term bullet even though almost everybody else would consider them cash.

I don't care about re balancing. I just try to contribute to lagging asset.
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Re: Schemes for maximizing cash returns

Post by whatchamacallit » Sat Mar 20, 2021 8:59 pm

I don't use this service but it looks like you can jump through some hoops to get 3% on up to 100k in FDIC checking/savings:

https://www.hmbradley.com/

I think it has been around for a few years at this rate.
I am always hesitant to jump into those rewards checking/savings because they can drop rates so easy after you put in all the work to transfer to them.
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Re: Schemes for maximizing cash returns

Post by Mark Leavy » Sun Mar 21, 2021 4:00 pm

These are great comments! Thanks.

Today I've been reading up on using "preferred stocks" (PFF) as a "cash replacement".
The good: Nice, regular dividend in the 5% range. Taxes on the dividend are at long term capital gains rate.
The bad: They can sometimes act like stocks (instead of bonds) and crash alongside the stock market when it goes down.

Oh well, still no free lunch.

And some more thinking on the VIX spread that I listed above... I went ahead and tested it out with one long 5 month future and one short one month future. I'll let that ride for the month and see how it goes. But, I'm leaning against using VIX to harvest premium.

If I do decide to do something with volatility, I'll probably stick with naked shorts. Short the lead month with no more than 5% of my cash - and let the chips fall where they may. That would return a few % per year - with the occassional "oh shit" moment.

Or, maybe, I should stop worrying about boosting my cash allocation and just leave it all in SHY and sleep peacefully at night.

Ramblings off.
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Re: Schemes for maximizing cash returns

Post by Hal » Sun Mar 21, 2021 7:11 pm

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Re: Schemes for maximizing cash returns

Post by Mark Leavy » Sun Mar 21, 2021 7:35 pm

Interesting, Hal.

I just checked and I didn't realize that you can get US Treasury Floating Rate Notes.

I like the concept a lot for cash - as it shouldn't carry much principle risk. Reading up on it now...

Thanks!
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Re: Schemes for maximizing cash returns

Post by Hal » Sun Mar 21, 2021 9:00 pm

I am envious ;)
No floating rate Treasury ETF's in Australia.
Let us know how your research goes.
All the best!

https://etfdb.com/etfs/bond/floating-rate-treasury/

Edit: Was curious how it performed. Uploaded the chart in case anyone else was interested
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Re: Schemes for maximizing cash returns

Post by whatchamacallit » Mon Mar 22, 2021 9:26 am

So floating rate fund usfr is currently negative yield?

SEC 30-day Yield (Subsidized) -0.09%
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Re: Schemes for maximizing cash returns

Post by Kbg » Mon Mar 22, 2021 5:15 pm

Folks can hop over to the old VP thread I post on on leveraged investments...but this got me curious. Given the problem Mark noted late last year I also started looking for something that would generate yield...anyway, I'm selling 5 DTE weekly calls on my TQQQ holdings. Since January, not annualized, I've made 3.6% on stuff I'd be holding anyway. Assuming a stable situation, that could end up being 14.4% by the end of the year.

With TQQQ assuming stable is not a good assumption BTW.

Completely different topic...read an article about effectively laddering bonds more efficiently and profitably by calibrating various term bond ETFs. It was eye opening. The article was a bit dated, but a concept I'd never really thought of. And if you aren't into managing bonds, like I'm not, but interested in laddering then it was a cool approach I thought
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Re: Schemes for maximizing cash returns

Post by Hal » Mon Mar 22, 2021 8:47 pm

whatchamacallit wrote:
Mon Mar 22, 2021 9:26 am
So floating rate fund usfr is currently negative yield?

SEC 30-day Yield (Subsidized) -0.09%
https://www.wisdomtree.com/-/media/us-m ... r-1648.pdf ;)
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Re: Schemes for maximizing cash returns

Post by williswine » Mon Mar 22, 2021 9:24 pm

Kbg wrote:
Mon Mar 22, 2021 5:15 pm
Completely different topic...read an article about effectively laddering bonds more efficiently and profitably by calibrating various term bond ETFs. It was eye opening. The article was a bit dated, but a concept I'd never really thought of. And if you aren't into managing bonds, like I'm not, but interested in laddering then it was a cool approach I thought
Can you share a link to this article?
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Re: Schemes for maximizing cash returns

Post by Kbg » Tue Mar 23, 2021 8:32 am

williswine wrote:
Mon Mar 22, 2021 9:24 pm
Kbg wrote:
Mon Mar 22, 2021 5:15 pm
Completely different topic...read an article about effectively laddering bonds more efficiently and profitably by calibrating various term bond ETFs. It was eye opening. The article was a bit dated, but a concept I'd never really thought of. And if you aren't into managing bonds, like I'm not, but interested in laddering then it was a cool approach I thought
Can you share a link to this article?
Go here...https://orcamgroup.com/understanding-money/

Search on...Bond Ladder vs. Bond Fund Ladder
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Re: Schemes for maximizing cash returns

Post by Mark Leavy » Tue Mar 23, 2021 3:52 pm

vincent_c wrote:
Tue Mar 23, 2021 10:44 am
Just to remind people some of the reasons to do this (implement a Portfolio using futures) ...
This is a great list, thanks! I put a copy in my investment notes for regular review.

After noodling through every possible scenario, I pulled the trigger yesterday afternoon and moved my permanent portfolio to a mix of physical gold and futures. UB (25 year treasury bonds) and NQ (Nasdaq 100). No stocks or etfs or bonds.

This leaves me with physical gold and cash. And a bunch of contracts that will have profits and losses that update my cash balance every minute.

For now, I'm going to let the cash sit while I become comfortable with the action and do some more exploring. The carry cost on the futures is so low right now, I don't feel any urgency to generate interest on the cash sitting in my account.

The biggest incentive for me was to get rid of bond interest and stock dividends. I also like the daily mark to market and the blended long and short term capital rates. It completely eliminates any tax concern as to timing on buying and selling.

Thanks for bringing the idea up, vincent.
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Re: Schemes for maximizing cash returns

Post by Kbg » Tue Mar 23, 2021 10:46 pm

Bond futures compared to actual treasuries...realistically what is the expectation of futures return vs. physical return. I've read quite a bit trying to figure it out and much of it seems to conflict.

So...let's eliminate all the what ifs and assume everything is stable/unchanging.

Today, what would be the difference in return between the future and the treasury at the future's expiration and what numbers are the key ones to be aware of?
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Re: Schemes for maximizing cash returns

Post by Mark Leavy » Wed Mar 24, 2021 10:06 am

I was a bit confused about bond futures when I first started looking at them. Here's what I've come up with.

One UB contract is nominal $100,000 face value of bonds with 25 to 30 years remaining on them. The contract also supports 'physical delivery'. So you are getting a random mix of bonds - presumably different for every contract.

Yet, when I look at a single contract, it is about $183,000 right now. I'm pretty sure 25 year bonds aren't going for $183. Closer to $110.

So what is the deal?

The fine print says that the contract includes a multiplier which assumes all of the bonds have a 6% coupon rate. That commoditizes the bundle. Okay, that makes sense. A 25 year bond with a 6% coupon would go for about $183 in this environment.

That aside, the price action seems to mirror TLT pretty closely. You have to watch over a few days as the opening and closing times are different.

That's all I've got so far.
U.S. Treasury bonds with remaining term to maturity of not less than 25 years from the first day of the futures contract delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6 percent.
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Re: Schemes for maximizing cash returns

Post by Mark Leavy » Wed Mar 24, 2021 12:59 pm

vincent_c wrote:
Wed Mar 24, 2021 12:50 pm

For all other bond futures other than UB, there is negative convexity so what you will find is that SHY will perform better than ZT. By choosing exposure to the short end of the curve you usually benefit from a steepening yield curve but when it's negative convexity your ZT will underperform SHY under those same conditions.
Thank you! I was asking myself that very question this morning. I couldn't make the numbers work on ZT. It seemed like it would be the obvious choice as a futures version of SHY, but it just wasn't happening.
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Re: Schemes for maximizing cash returns

Post by Kbg » Thu Mar 25, 2021 9:00 am

Thanks v_c as well!

So from a practical trading perspective, where is the line in terms of bond maturity length that you would favor an ETF/real bonds over the futures equivalent? Is there a line? Assume for answering this question one had no opinion (PP like) as to which direction interest rates were heading. The intent was simply to match the returns from the bond itself as closely as possible.
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Re: Schemes for maximizing cash returns

Post by Kbg » Thu Mar 25, 2021 2:23 pm

vincent_c wrote:
Thu Mar 25, 2021 10:42 am
I'm not sure if this answers your question, but hey KBG what happened to our money debate? I still have lots I want to discuss let alone moving on to the other parts of the PP.
Good info thanks. I'll have to go back and check, but I thought I had served last and was waiting for the return volley. :)
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Re: Schemes for maximizing cash returns

Post by Kbg » Thu Mar 25, 2021 2:27 pm

So quick question and I think I'll be good on bond futures...futures contain the cost of financing as part of their pricing mechanism. I believe that is the case for treasuries. So for UB/ZB does that mean a risk free rate is financing the longer rate and more importantly on ZT is it basically a wash due to the law of arbitrage? This last part is what I find confusing. (again, factoring out the market's expectations just pure pricing theory).
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Re: Schemes for maximizing cash returns

Post by StrategyDriven » Wed Mar 31, 2021 4:33 pm

Max My Interest

Heard the guy behind this interviewed by Meb Faber, sounded really cool.
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Re: Schemes for maximizing cash returns

Post by Cortopassi » Fri Jan 07, 2022 2:52 pm

Kbg wrote:
Sat Mar 20, 2021 8:35 pm
I've been selling weekly 5 delta OTM covered calls on my holdings. With Interactive Brokers you can bring up one of their option tools and pick a delta and display its associated annualized yield. It's a lot of trading every Monday morning. With calls that far out assignment is rare. I've been assigned once this year and when I get assigned I start selling ATM puts until I'm long again. Probably don't want to do this in a taxable unless it's a trading account and you expect lots of ST gains.

For VIX futures, depending on how big a club you want to swing you could go the VIX options route which are $100 a point vs. $1000
kbg, how has the 5 delta strategy been working?

I just started dabbling in weeklies on GLD, SLV and TLT. All will expire worthless, so far so good. (I am amazed, I could still make $3 a contract on TLT 11 minutes before expiration, with a large distance between price and strike. Sure, only $3, but for pressing like 3 buttons...?!)

Years ago, I sold covered calls trying for income, and got burned because the underlyings all dropped hard during the financial crisis.

This time around, since my plan is to hold the underlyings in the PP perpetually, I think it may work better.

I have been looking at selling way ITM calls alternatively, specifically on SLV. Some articles got me thinking about it.

For example, I can sell a monthly SLV 19.5 call right now and pocket the premium. And get about 6% downside protection. After I get called out (ideally) I rebuy and do again, 12x a year, with the current effective rate being about 13.5%.

I am mentally trying to compare that with going OTM at a strike that gets me similar effective returns. Some potential upside here, but no protection.

Thoughts?
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Re: Schemes for maximizing cash returns

Post by Don » Fri Jan 07, 2022 4:42 pm

How's this for a scheme?

You buy CDs using a 2% cash back credit card and you instantly have a 2% tax free return.

I know someone who's been doing this for years.
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Re: Schemes for maximizing cash returns

Post by Xan » Fri Jan 07, 2022 4:52 pm

Don wrote:
Fri Jan 07, 2022 4:42 pm
How's this for a scheme?

You buy CDs using a 2% cash back credit card and you instantly have a 2% tax free return.

I know someone who's been doing this for years.
You're talking about certificates of deposit, not compact discs, right? How do you buy CDs (the certificates) with a credit card?
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Re: Schemes for maximizing cash returns

Post by Cortopassi » Fri Jan 07, 2022 5:19 pm

Xan wrote:
Fri Jan 07, 2022 4:52 pm
Don wrote:
Fri Jan 07, 2022 4:42 pm
How's this for a scheme?

You buy CDs using a 2% cash back credit card and you instantly have a 2% tax free return.

I know someone who's been doing this for years.
You're talking about certificates of deposit, not compact discs, right? How do you buy CDs (the certificates) with a credit card?
I did, for years, take cash advances on my credit cards when they were offered at 0% for 6 months to 12 months or so, and deposit that into my now famous 5% money market. Now that was risk free.

Yes, I'd like to know where you can buy CDs with a CC as well!
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