you fall in love with the markets and begin to
stare endlessly at a trading screen, you’re exercising your brain more than your muscles.
And maybe you begin to notice some, well,
“accumulations” and decide to hit the gym.
What’s the first thing your new trainer says?
You’ve gotta work your core! You know, abs,
back, middle. Without a strong core, the rest
of you can’t do much.
In market-speak, an investor might have
a core portfolio composed of stocks that
compel a long-term outlook. Investors
passively hold on, enjoying the good times
and riding out the bad. The research is
done, and decisions are made. Investors
hang in there, and believe returns will
come eventually. Hopefully.
CONSIDER THE POSSIBILITIES
For a trader, core positions can also do other
things. Much like your body’s core provides
support for strong arms and legs, a trader’s
core position might be a single longer-term
position based on a bullish or bearish bias
that can support other positions and shape
return and risk. In effect, a trader uses the
core position as a tool to store capital, and
trades around it.
What does that mean?
The core position is a lon-
ger-term speculation that
hopefully makes money
in its own right, but it also
supports other, short-term
positions that may generate
cash flow and cre-
ate returns on the
Basically, a trader
tries to squeeze returns out of a core
position by finding
potential opportunities in varying market conditions.
Trading around core positions adds work,
and often adds commissions. But even if
you don’t go all the way and treat your core
positions like a trader might, there are things
you can do that don’t deviate too far from a
THE BENEFITS OF STAYING ACTIVE
For example, some traders may view a stock
or future core position that lacks an option
“overlay” as sitting idle. And they may look
for ways to increase short-term returns on it.
Let’s consider a bullish speculation in
crude oil. A trader may put on crude oil
futures in expectation of rising prices. The
futures expire, so the trader may roll them
from one month to the next to maintain this
long-term, core bullish strategy. Does the
trader know oil is going higher? Of course
not, which is why the core position is speculative. But the trader also knows that adding
certain option overlays, like a short call on a
crude oil future, brings no additional margin requirement or risk to the core portfolio.
In fact, the short call can add positive theta,
which benefits the trader’s daily profit/loss.
The short call also reduces the breakeven
point of the long future. In exchange, the
trader gives up some of the core position’s
In this scenario, the trader is often more
confident in the option overlay than on the
speculative bullish oil trade. She knows the
theta of the short call is positive, and when
the future’s breakeven price is lower, the risk
is lower, too.
Another trader might have a bearish core
position and sell puts against it, with the
same rationale as selling calls against a long
future. The option overlays can get complex
in response to different market scenarios,
like hedging across markets and balancing
INVESTING LIKE A TRADER
In some cases, an investor can use a trader’s tricks. Of course, you know to sell calls
against a long stock core portfolio. Say you’re
long shares of XYZ, ABCD, and GVRC, and
you choose to sell calls in all three against
their respective shares. Simple. But what if
your core portfolio isn’t so tidy? What if it
has shares in a company that doesn’t have
FIGURE 1A: What stocks to trade? Narrow down your choices. Look for stocks
within specific industry groups. Source: thinkorswim from TD Ameritrade. For illustrative purposes only.
FIGURE 1B: What stocks to trade? Use the scanning feature to help find
optionable stocks that are highly correlated to the one you own. Source: thinkorswim
from TD Ameritrade. For illustrative purposes only.
results W H E N