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Tackle Today: Stop Losses with Cash Flow Strategies

May 18, 2021

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Keep it Loose


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.


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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