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Tackle Today: Stop Losses with Cash Flow Strategies

May 18, 2021

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Keep it Loose

Traders,

Here’s a question we get a lot. “How should you handle stop losses on cash flow strategies like covered calls, naked puts, bull puts, and the like?”

The short answer is: keep it loose. Positive theta trades pay you over time. They incentivize you to remain in the position for as long as possible. Getting shaken out on noise is a rookie mistake. Instead of using daily support pivots and short-term moving averages (i.e., the 20-day) as stop zones, move to weekly support levels and long-term moving averages (such as the 50-day).

Pullbacks and pauses are fine. It’s the long-term trend changes that usually warrant exiting.

For naked puts and covered calls, I suggest deciding at the beginning of the trade if this is going to be a trade or a core investment. I define a “trade” as one where I’m only willing to ride the stock if its chart remains bullish. I bail on those if major support breaks.

A core investment is a stock/ETF that I’m willing to hold for the long run. I size small enough so I can withstand a bear market. That way, I don’t have to use a stop loss and can avoid getting whipped out of the position during the inevitable downturns that will crop up over the years.

#TeamTackle


Chart of the Day

GLD Weekly Chart

Gold continues its strong run lately and have produced many short-term bullish signals along the way. A traditional great cash flow vehicle has definitely produced some directional opportunity along the way.


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