Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How to Trade Around a Core Position
04/08/2011 3:00 pm EST
Establishing a position and then trading intraday around it is a good way to earn cash flow and maximize profits from a security’s movement, explains Hubert Senters, using his current core position in gold as an example.
Many traders start the day out flat and end the day flat, but there’s another strategy to trade around a core position of securities you already own. Our guest today is Hubert Senters of TradeTheMarkets.com. So, Hubert, what do you mean about trading around a core position?
So let’s take an actual trade that I’m in right now. Right now, I’m long actual gold, so I’m long gold, and I’m actually trading around a core position because I think gold is going to get up around $1500.
So, I’m long that, but let’s say that gold sells off 20 points today. Well, if I’m long gold, I just lost 20 points in my account even if I’m long substantially lower. So, the way that you do that is you trade around the core position, so basically you’ve got one position here and you’re just going intraday around that trade depending on whichever way gold is actually moving.
So a good rule of thumb that I like to use on gold is if it’s moving and I’ve got my core long and it’s making money, I just leave that alone, and then if gold is up three points on the day, I will go intraday long on that. If gold is down more than three points on the day, I will go short that.
Now, how you calculate that is you calculate that from the Comex close, the pit-traded session, the settlement at 1:30.
All right, so are you holding these positions overnight or are you building the core position intraday?
I start out overnight and put the gold trade on at about 11:30 east coast time at night. I use a six-point stop loss and an open target to see if it will actually run for me.
And then on the intraday stuff, I start trading the next day and I trade until the pit session closes, and that way, those trades are actually flat but the core position is still there.
So, Hubert what’s the benefit of trading around a core position? Why not just go long or short?
Well one of the advantages of trading the core position is you’re always in the position, so if we believe that gold is going to $1500 an ounce, but you’re not going to get every single wiggle move, so the core trade is I think it’s going to $1500 an ounce, but let’s say gold drops $200 an ounce in two weeks, well there’s just an opportunity cost that I’ve missed the entire time.
So the core is long, but the intraday strategy is that you get in and out at the end of the day. So the core position is not really income generation, it’s more of positive cash flow and then the income generation trade is just the intraday trading; the in and out moves of gold because it moves about 20 points a day. So you actually still want to take advantage of that average true range that gold has given you.
And I imagine you could also do this around a core position of stocks and trade around that the same way?
Sure, the only thing you have to be careful with is you’re going to have to have two accounts because if you’re long in something and then you go short something, that’s going to liquidate the position.So you may have to have more than one account. So let’s say you’re long gold and then in another subaccount, you’d be short gold intraday.
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