How to efficiently manage the trading cash flow

For those knowing me, it is not news that I'm a value investor for my core portfolio. Over years, I have identified a group of quality dividend stocks that are good for holding for retirement. I keep them without having to worry about the fluctuation of stock prices as I know the lower the stock prices go, the better for my long-term wealth building eventually. The trick is to let their dividends to do their magic work: compounding. I'd highly encourage everyone to really think about deeply how to use this stress-free strategy to build up your nest eggs. If you want to refresh your mind what this strategy is all about, please read this blog and this one.

Having said that, nothing prevents value investors to also trade for short-term income or profits, as long as you don't gamble and do what you know and what works for you. Therefore I'm also a very busy and active trader for short-term opportunities. My trading strategy has become more and more mature and effective as time passes by and I can literally get thousands of dollars each month by trading. This has also further enhanced and grown my retirement portfolio, a win-win strategy! Now the obvious question is how to free up cash for trading without jeopardizing the need of money for long-term investment. Indeed this seems contradictory to each other. Everyone may have different ideas how to resolve the conflict but I have effectively use 3 approaches that work well for me:

• Trade on your existing positions. If you have 200 or 300 of some stock (e.g. MSFT) for retirement, you may consider to do covered call for 1 or 2 contracts every few months.  This way, even if your shares are called away, you still have some shares in your hands and you can always buy back again. This is especially effective when there is a short-term overbought of the underlying stocks. I sometimes even do deep in-the-money covered call to hedge against the short-term overbought condition.
• Wisely use your margin. Margin is to borrow money from your broker to trade. I don't like to use margin as it could lead to disaster. However, occasionally you may run into a situation that you have to buy some stocks due to your options assigned. If the underlying stock is a solid good one and you set it up when it was oversold in the first place, I don't mind holding it for a while, especially if you can further make covered calls and earn dividends. Right now the borrowing cost (interest) is quite low. It makes a lot of sense to borrow for a while as long as the money is productive. I few months ago I ran into this situation that I sold MSFT puts, which were assigned. I kept it for about a month, during which I got dividends as well as gained from a few weeks covered calls. After interest, I still gained quite a lot.
• Let call options replace your long stock positions. I love options as they have endless possibilities that may benefit you. The key is to use them wisely and appropriately. One way I figured to help me is to use them as surrogate for the stocks I want to hold and free up my cash load for trading. This is especially a useful tool for stocks that only pay dividends once or twice a year, i.e. you don't need to keep holding the stocks all the time for dividend purpose. For example, last year I had 600 shares of Novartis (NVS) which I'd like to continue to hold. NVS only pays dividends once a year in Feb. So after the ex-dividend date, I sold NVS shares and at the same time bought 6 contracts of the deep in the money calls for NVS. What it did was to allow me to control the same amount of NVS shares (600) but with only about 10-20% of the cash. I then bought back these 600 shares early this year in order to get the next dividends. Since NVS has appreciated quite a lot last year, my call options went up a lot as gain and at the same time, I also used the freed up money to generate other short-term incomes. In other words, I virtually used the same amount of money more than 100% of its capacity. Right now, I have 10K NVS shares and its ex-Div date is Feb 27. I plan to do the same to sell NVS after Feb 27 and buy NVS long-term deep-in-money call options. At the moment, the longest options for NVS are in Aug and the $90 calls are priced at around $12-13. So instead of I hold NVS with over $100K for the whole next year, I can use options to control the same 1000 shares but only use about $12K. By the way, this is also a way to reduce your risk as the maximum I can lose is $12K, instead of $102K if Ihold the shares and if NVS drops to zero (in theory). I can use the $90K to generate other short-term incomes during the year. I will then buy back the 1000 shares in Jan/Feb next year to get the dividends. This is indeed a great money management strategy with a little bit more work to make it happen. It works very well for me. But a warning that you should not use this strategy to gamble. It is only great if the money is productive.