We use the terms “growth” and ” cash flow” extensively here at Tackle Trading. They take on different meanings and are sometimes misunderstood. Today’s blog should help clarify.

Strategy Types

There are dozens of strategies in the stock and options market. To help organize them, we sort them into three buckets: growth, cash flow, and speculation. In this context, here is how I would define each:

Growth: Generally, a play on long-term price appreciation. You’re trying to buy low and sell high but using time to your advantage. Instead of speculating on short-term movements, you’re gaming the long-run advance that quality assets should see. Examples include buying and holding gold, individual stocks, or broad-market ETFs.

Cash Flow: These strategies all share one common trait: Positive theta. They profit from the passage of time. Examples include naked puts, covered calls, credit spreads, and iron condors.

Speculation: These are usually lower probability directional-based bets. They offer the potential for higher returns but require greater skill to create consistent profits. Examples include buying bitcoin, swing trading, and day trading.

I use all three but will admit that as I’ve aged and my account value has grown, I do a lot more growth and cash flow strategies than speculation. There are two primary reasons. First, I don’t need sky-high returns to reach my goals. And that largely makes the outsized risks associated with low probability bets unnecessary. Second, I have more success with long-term growth strategies and cash flow trades. They are thus more deserving of my time and dollars.

Now, there is another important distinction that must be made about these terms. There’s a difference between how you make money and what you do with your gains. The definitions of the terms above all refer to how you make money. They don’t refer to what you do with your gains.

What You Do With Your Gains

Fundamentally, you have two choices when it comes to your gains.

One: reinvest the gains to harness the magic of compounding.

Two: take the gains out of the account to pay your bills and/or buy stuff.

Those who make the first choice are trying to GROW their account.

Those who make the second choice are trying to CASH FLOW their account.

Ironically, you can use cash flow strategies to grow your account and growth strategies to cash flow your account. In this context, “cash flow” is synonymous with “generate income.” To a certain extent, reinvesting gains is a form of delayed gratification. In contrast, removing your gains to create cash flow is a form of instant gratification.

Why is understanding this important?

Because I see too many traders pigeonhole themselves into certain strategies because they think they’re supposed to.

“I’m trying to generate income from my account, so I do covered calls and naked puts. No growth strategies for me!”

Or

“I’m trying to grow my account, so I stick with swing trading and buying stocks that I think will rise over time. No positive theta trades for me!”

Both of the above sentiments are silly.

Say you have a $10k account that grows to $11k over the next two months because you made swing trades, a so-called growth strategy. Then, you take $1k out of the account to pay a bill. You used a GROWTH strategy to CASH FLOW your account.

Say you have a $10k account that grows to $11k over the next year because you did covered calls. And you keep all gains in the account to reinvest and compound. You used a CASH FLOW strategy to GROW your account.

So, if you can use growth strategies to cash flow and cash flow strategies to grow, then which strategies should you focus on and allocate money to?

The one(s) you know how to make money with.

It’s as simple as that.

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