Cash Allocation: The Buffer Nobody Talks About

There's a conversation we need to have about cash.

Not the sexy kind of cash talk, not the "I made 40% last month" stories or the "check out my gains" screenshots. I'm talking about the cash that's just sitting there. Doing nothing. The 15 to 25% of your portfolio that never gets deployed.

Most traders hate this conversation. I get it. Cash feels like wasted opportunity. It's not working for you. It's not compounding. It's just...there.

But here's what 24 years trading options has taught me: that "dead" cash might be the most valuable position in your portfolio.

The Fully Deployed Trap

Let me paint you a picture.

It's October 2023. Your portfolio is humming. You're running Wheel trades on five solid names. You've got a few credit spreads collecting premium. Maybe a PMCC or two on stocks you're bullish on. Every dollar is working.

You're 100% deployed. Maximum efficiency. You feel smart.

Then November hits. The market drops 5% in three days. Suddenly, those stocks you were running the Wheel on? They've blown through your strike prices. Your credit spreads are getting tested. And here's the kicker, you've got no cash to do anything about it.

No cash to roll positions. No cash to take advantage of the elevated IV. No cash to grab those juicy put premiums that just showed up.

You're not managing your portfolio anymore. Your portfolio is managing you.

This is the fully deployed trap. And it's more common than most traders want to admit.

Why Cash Isn't Dead Weight

Let's reframe how we think about cash allocation.

That 15 to 25% sitting in your account? It's not lazy capital. It's strategic positioning. It's your buffer. Your safety net. Your opportunity fund.

Think of it like this: A professional poker player doesn't go all-in on every hand just because they have chips. They keep reserves because they know the next hand might be the one where they can make their move.

Options trading works the same way.

When you maintain a cash buffer, you're buying yourself three things:

Flexibility. When a position moves against you, you've got capital to adjust. Roll that tested put. Add a protective leg to your credit spread. Turn a challenged position into a winners without scrambling.

Opportunity. Markets panic. Stocks gap down on earnings misses that don't change the fundamental story. When everyone else is frozen because they're fully deployed, you're collecting premium at elevated prices.

Sleep. This one matters more than people think. When you know you've got reserves, you trade differently. You're not desperate. You're not forced into poor decisions because you need to deploy capital. You can be patient. Selective.

The Math Nobody Shows You

Here's the thing about that "wasted" 15 to 25% cash allocation, it's not actually wasted when you run the real numbers.

Let's say you've got a $100,000 portfolio. You keep $20,000 in cash (20% buffer) and actively trade with $80,000.

Your buddy keeps $5,000 in cash (5% buffer) and trades with $95,000.

On paper, your buddy should outperform you, right? He's got 18.75% more capital working.

Except that's not how it plays out in practice.

Because when opportunity strikes, and it always does, you've got dry powder. You can sell cash-secured puts when IV spikes. You can average into positions that got hammered unfairly. You can take the other side of panic.

Your buddy? He's watching from the sidelines. Or worse, he's closing positions at a loss to free up capital.

Over time, those opportunities add up. They add up significantly.

I've seen it play out hundreds of times. The trader who maintains proper cash allocation consistently outperforms the trader who's always fully deployed. Not because they're smarter. Not because they have better strategies. But because they're positioned to act when others can't.

How Much Is Right?

The 15 to 25% range isn't arbitrary. It's based on probability and practical experience.

Here's how I think about it:

15% minimum. This is your baseline. Enough to roll a couple positions if needed. Enough to grab one good opportunity when it shows up. Less than this and you're cutting it too close.

20% sweet spot. For most options traders running systematic strategies, this is the number. It gives you enough flexibility to manage your current positions and enough opportunity capital to act when something attractive appears.

25% maximum. Beyond this, you're probably being too conservative. Yes, you've got plenty of dry powder, but you're potentially leaving too much on the table during normal market conditions.

Your exact number depends on your strategy and risk tolerance. If you're running high-probability strategies like the Wheel or selling credit spreads, 20% makes sense. If you're more aggressive or trading shorter-term positions, maybe you lean toward 15%. If you're anticipating volatility or want more opportunity capital, you might go to 25%.

The key is picking your number and sticking to it. Don't let FOMO push you to 5%. Don't let fear push you to 40%.

When Cash Becomes Powerful

Let me tell you about February 2020.

COVID hits. The market drops 34% in 23 days. Implied volatility explodes. Everyone's panicking.

Traders who were fully deployed? They're underwater on multiple positions. They're making forced decisions. They're closing positions at the worst possible time to free up capital.

Traders who maintained a cash buffer? They're selling puts at premiums they hadn't seen in a decade. They're collecting 5 to 7% monthly premium on solid names that got caught in the panic. They're building positions at prices they'd been waiting months to see.

Same market. Completely different experiences.

That's the power of strategic cash allocation. It's not about what you do in normal markets. It's about what you CAN do when markets get interesting.

And markets always get interesting eventually.

The Psychology Problem

The hardest part about maintaining a cash buffer isn't the math. It's the psychology.

You'll watch opportunities pass by. You'll see trades you could have made. You'll feel that itch to deploy "just a little more" capital.

This is normal. It's also wrong.

Because what you're feeling is recency bias. You're focused on the last few opportunities you missed, not the next few opportunities you'll catch. You're thinking about efficiency in calm markets, not capability in volatile ones.

Professional traders, the ones who survive multiple market cycles, think differently. They view cash allocation as part of their edge. They know that having capital when others don't is worth more than squeezing out an extra percentage point by being fully deployed.

The amateur wants to use everything they have. The professional wants to have something left when opportunity strikes.

How to Actually Do This

Here's the practical part.

First, decide your cash allocation percentage. Pick a number between 15-25% based on your strategy and risk tolerance. Write it down. This is your rule.

Second, check your allocation weekly. Not daily, that's too reactive. Not monthly, that's too slow. Weekly gives you enough data without making you obsessive.

Third, let your buffer breathe. If you're at 18% cash and your rule is 20%, you don't need to rush out and deploy capital. If you're at 23% cash, you don't need to immediately find a trade. You've got a range, not a precise target.

Fourth, and this is important, don't deploy buffer cash unless you're getting paid properly for it. Your dry powder should only go to work for opportunities that meet your criteria. Don't lower your standards just because you've got cash sitting there.

Fifth, replenish your buffer. When positions close profitably, don't immediately roll all that capital into new trades. Bring your cash allocation back to your target first. Then deploy excess capital.

What This Looks Like in Practice

Let's make this concrete with a real example.

You've got a $100,000 portfolio. Your rule is 20% cash, so you maintain $20,000 in reserves.

You're actively trading with $80,000. Maybe you've got:

• Three Wheel positions using $45,000

• Two credit spreads using $15,000

• One PMCC using $10,000

• Leftover cash of $10,000 ($20,000 buffer minus the $10,000 deployed above)

One of your Wheel positions closes for a nice profit. You collect $3,000. Your portfolio is now $103,000.

Here's what most traders do: They immediately look for a new trade to deploy that $3,000.

Here's what you should do: Your new cash target is $20,600 (20% of $103,000). You've got $13,000 in cash now. You're still below target, so the entire $3,000 stays in cash until you get to $20,600. Then you can deploy excess capital beyond that.

This is how you maintain discipline. This is how you ensure you always have dry powder.

The Bottom Line

Cash allocation isn't sexy. It's not going to make you feel like a trading genius. It's not going to impress your friends at the bar.

But it works.

The traders who survive and thrive over decades, not months, are the ones who understand that portfolio management isn't just about what you do with capital. It's about when you choose not to use it.

That 15 to 25% buffer isn't dead weight. It's strategic positioning. It's your ability to act when others can't. It's your edge.

The market will give you opportunities. It always does. The question is: will you have the capital to take advantage of them?

Keep your powder dry. You'll be glad you did.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment, tax, or legal advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.