We have been using our excess cash balance to consistently generate returns in excess of what risk-free Treasuries have been offering.
Please note that this is by no means an investment recommendation, but our objective is to discuss a very important investing concept.
Here are the steps we follow to maximise our yield on our cash balance
First, we park the cash in short term boxes or Treasuries, which have been giving us returns well above 5% (XIRR). Next, as we have this cash capital available (on maturity, or earlier if needed), we have been selling cash secured puts on great companies, at very good prices.
For example, we have been following a great payments company called Adyen since 2020.
Adyen has been overvalued most of the time since then, and has been trading within the range EUR 1.2k to EUR 2.7k per share. But in late August 2023, after the market was disappointed at its earnings, its share price finally crashed to EUR 800 and then down to EUR 600+.
We calculated Adyen’s Owner Earnings (OE), and based on the OE yield that would be attractive for us, we wanted to own Adyen at an even more conservative price between EUR 500-600/share. This would offer us the sufficient margin of safety, but unfortunately we were not lucky enough as Adyen never met our price target. So we decided to do something else. We decided to position ourselves to be able to buy Adyen at our desired price, by selling Puts at that strike price. This way, we would either be assigned the stock (which we wanted anyway) at a price of our choice, or at least we would be rewarded with an attractive yield on our cash balance.
Following this strategy, we have been selling puts on Adyen (secured by the cash we parked in boxes/ Treasuries), at strikes between EUR 400 to EUR 600. This guaranteed us an additional return of 5% to 22% (as shown in the cells shaded in yellow and orange, in the screenshot below). Remember this return is over and above the returns we generate from the short term treasuries, so overall we were able to secure a very healthy return of 10%-25% on our capital (depending on the put expiry & strike) without even owning the stock.
Less than 3 months later, in mid Nov 2023, Adyen’s share price recovered back up to >EUR 1k/share. All we had to do was log back into our IB account, and put in GTC orders to buy back the puts with longer remaining maturities, at low prices.The idea is to buy back the puts once the majority of the time value has already decayed. This way we get to realise almost the entire return from the puts (except the small buy back price) within a shorter time frame than the original expiry of the put.
A couple of months down the road, Adyen’s share price shot up again by ~20% to >EUR 1.4k, and our email alerts informed us that most of those GTC buyback orders got filled.
Because these puts were bought back at very low premiums, much before their expiry dates, the final XIRR that we enjoyed from selling these puts actually shot up to ~8% to 34%, as per the green cells in this screenshot (from the initially calculated XIRRs in the orange cells). Essentially we enhanced our returns by realising a similar upside within a shorter time period. Once the puts were bought back, it also freed up the capital (and margin) to be deployed into other opportunities.
That’s how we have been deploying our cash balances to generate high returns instead of just settling for the ~5.x% from treasuries alone, while we just wait patiently for opportunities. We have been following the exact same option buyback strategy on several other companies that we follow.
If you are keen to learn these strategies and explore other case studies discussing how we enhance our cash yields, you can enrol in the FREE preview of our Option Series program here. We cover the fundamentals of options, and demonstrate how options can be used sensibly in a risk managed way, totally aligned with our long term investing strategies.
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