Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term

27. Managing the Cash in Your Portfolio

(Eddie Felson, Vincent Lauria, and Carmen enter a pool hall.)

Eddie: “Do you smell that?”

Vincent: “What? Smoke?”

Carmen: “No. Money.”

—From The Color of Money (1986)

Of course we cannot smell the money in our online brokerage accounts. But when your account has excess cash, you will tend to think about it a little more often—usually because you are trying to figure out something to do with it.

Many hedged portfolios maintain significant cash positions at all times. Chapter 11, “Know Your Risk Metrics,” described leverage—specifically, how Options create natural leverage. Options, by their very mechanics, create leverage. The investor can control many more shares in a bullish or bearish direction using ...