Trailing Stops and Covered Calls | Podcast Episode #271

0:07
Hey, I’m Ryan Mallory, and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey, everybody. This is Ryan Mallory with Swing Trading the stock market. And today’s podcast episode, we’re gonna be talking about trailing stops. We’re gonna be talking about covered calls and selling puts on stocks that you’d like to own in the future.

0:44
So, pretty full show today and And today’s email comes from a guy we’re gonna call him Rufus for the Florida redneck name. And for those who wonder why I give Florida redneck names to people, it’s just essentially to conceal their identity. So, Rufus writes, Ryan, I love the podcast. You’ve really upped my game with these very useful tips.

1:02
Feel free to call me Rufus, which I have. I have a large portfolio and have been swing trading successfully, mostly in 2020 through 2021 and unsuccessfully in 2022. Haven’t blown up my account yet because I manage risk for your instructions.

1:18
I’m net positive, actually very positive, but have had a string of losers in 2022. 3 questions for you. What’s your opinion on utilizing trailing stops during our recent volatile down trending market to hold small gains and prevent larger losses?

1:34
2. Recently, I added option trading after studying how Warren Buffett uses covered calls to generate cash flow. What’s your opinion on covered calls and cash secured out of the money puts to generate additional cash flow on the account? I have a large enough bucket of shares of large caps to play covered calls and keep the gains long term instead of short.

1:56
My technique to date has been to sell well out of the money cover calls on stocks I can rotate at a profit and buy back with cash secured puts if assigned. Haven’t been assigned yet though. I’ve also sold puts on stocks that I’d like to own that have good fundamentals and technicals that make sense that position size is similar to what I would swing trade, selecting a strike price well below current levels of support.

2:18
With more support below those strike prices working so far, but I do value your opinion. I don’t like trading options. I just using them for extra additional streams of income on the account. Appreciate your thoughts. Thanks, Rufus. So a good email, and we’re going to tackle all these questions, but first, what am I drinking?

2:38
I was able to come across unexpectedly so. A bottle of Old Forester single barrel barrel strength. It’s this blue label that you can get. I got it at total why I spent about $90 on it and not overly crazy about spending that much on a bottle of bourbon, but I did because I love the old Forester products.

2:58
I love the 1870, the 1897, the 1910, the 1920, the birthday bourbons, if you can actually find them, but this one here comes in at 64.1%, remember, it’s single barrel barrel strength. And the proof is 128.2, so it’s uncut, unfiltered, it’s gonna come in hot.

3:17
Now, to the nose, nose is a bit of a burner, man, it definitely waken you up, but the smell is actually pretty cool. There’s this like creme brulee smell to it, really nice. Now, on the taste side, you get this like, Liquorice type flavor, it’s like minty, but uh, oh, the heat though.

3:36
Boy, it gives you, it gives you some like serious pepper. It’ll definitely make you cough a little bit and it’s a straight up throat chaser, man. This thing will burn you right down the throat. It’s not like it goes down into the intestines and just Set your whole body on fire like some of these barrel proof bourbons will do, but this one gets kind of close to it.

3:56
Overall, not bad. I don’t think it was as good as I was hoping for it to be. I have high expectations when it’s Old Forester. It kills me, but I can’t give it over an 8. I think I got to just give it a 7.8, 72. corn. I like that aspect of it. I like the mash bills that are, you know, high on the corn side, but I just can’t give it over an 8.

4:15
I think 7.8 is pretty respectable, but it’s definitely not as good as some of their other product lines. So, Old Forester, single barrel barrel proof, 7.8. Now, back to Rufus. So, a couple of things that I pick up on right out of the gate, and I’ve seen this with a lot of emails, and that’s where people will tell me they started trading in 2020 and they did really good for a couple of years right after the COVID crash and then 2022 hits and they lose all their profits and they don’t know what to do now.

4:43
Now, this guy at least hasn’t lost all his profits, but he does have a string of losers that he’s alluding to here and he’s not sure what to do about it. So many of the traders out there have never experienced a bear market. And so, if you’ve been trading even since 2010, you really haven’t seen a nasty bear market.

5:00
The one that we saw in 2018, it lasted about two months, I mean, two out of the three months it was. Significantly down, and then it eventually saw where the feds stopped raising rates and tightening and reversed their policy. The market went soaring back up and then you had the COVID sell-off where they did emergency rate hikes when things started getting really bad and the market reversed and put the bottom in right there that day.

5:23
So, there’s been some sell-offs, but there haven’t been prolonged sales. The market has always forgiven them for their errors. Nothing like what we saw in 2007, 2008, nothing like what we saw in 2000 through 2003. In fact, I would say, OK, if you became an adult around 2008, you’re what, 32 years old now, you’d be 32 years old and never lived through a recession.

5:43
And I’m not trying to say I’m built different or anything like that, but I did come from a different. Time where when I came out of college, I was in the dot-com bubble 5 years later, I’m going through the great recession. So, two recessions before I was even 27 years old, whereas there’s 32, 33, maybe even like 35 year olds that whether they, it was coming out of high school, coming out of college, they haven’t experienced a recession yet.

6:06
And it’s kind of crazy to think that. So when you’re getting something like what we’re getting right now, where you have a high inflationary environment where you have the stock market selling off significantly, and yes, we’ve had a nice bounce with the NASDAQ and the S&P 500 and the Russell 2000 over the past month, but overall this year, the market’s down significantly.

6:24
And there’s a lot of traders too that whether it was crypto, a lot of people made good money on crypto when it went from like $2000 from what was. Like 2017, 2018, and then went soaring up to $69,000 this past year, topped out and now we’re back down to like 18 $19,000 at one point.

6:43
And I think as of this podcast, we’re sitting around $23,000. There were some good gains made and I think I read even one story about a guy who made enough money to owe the IRS $500,000. But then 2022 hit and the big sell-off in crypto hit. And now he’s lost all of it.

6:59
And then when April rolled around, he owed the IRS money, he didn’t have the money. He owed the IRS $500,000 and while at one point he had that money, he lost it all in the market. So, moral of the story, and I don’t want to get too sidetracked here is one, make sure if you have a huge year, you’re setting some money aside to be able to pay the IRS.

7:15
The other thing is, is to make sure that you have a market strategy or a trading strategy that takes a bear market into account because The strategy isn’t good if you’re going to make all your money during a bull market, give it all back and even more during a bear market. So you have to take that into account. It doesn’t necessarily mean you have to short the market.

7:32
I mean, I’ve been shorting the market more times than not this year, and I’ve done pretty good as a result of it, but that’s not the only strategy. You could have a strategy where it’s basically sit and wait, take advantage of some of the dead cat bounces that you get along the way, like the one we had in. March off of the mid-March lows, the one that we had in late May and the one that we had in late June.

7:52
You play those dead cat bounces, and then while it’s not bouncing, when it’s selling off, you’re just on the sidelines waiting for it. It takes a lot of patience, and yes, sometimes you’re gonna play the bounce and the bounce doesn’t actually materialize, that’s fine. But at least you’re sitting out the majority of those days where the market is just selling off really hard.

8:08
So a strategy that you have, it’s great if it works in a bull market, but how does it work in a bear market? Does it? Function well enough to where you can keep the majority of your profits. Now, Rufus here, he says that he’s still very positive on the year, and that’s good.

8:23
That means he is taking into account the bear market so far, but he really needs to think about it a little bit more if it’s causing him to have a little bit of heartburn over the string of losses that he’s had in 2022. He needs. Just look at how is my trading strategy taking into account a bear market because you will have more bear markets in the future.

8:40
It’s a given. This run that we had from 2008 to 2022, that is not normal. That has been a very accommodating fit. No other way around it, extremely accommodating. And trust me, when I first started trading in the early 90s, when I was investing my money, I thought the market went up forever.

8:58
I never thought there would be a bear market. I didn’t even know what a bear market was. And then 2000 hit, I saw the large chunk of my portfolio go down to nothing. Guess what? I learned that as a teenager there, hey, you might want to start taking into account the fact that the market has bearish moments in it.

9:15
So perpetually, yes, it does go up higher, but that doesn’t mean that all the stocks are gonna go perpetually. Some of them don’t come back. Now, another question, he asks himself about the trailing stops. What are my thoughts on trailing stops? I’m not a huge fan of them. I think they’re better than nothing. I feel like if you’re not going to set stop losses for yourself using support and resistance or trend lines, trailing stop isn’t the worst thing in the world.

9:37
It’s definitely a lot better than not using any kind of stop loss at all or any risk management at all. So what happens with trailing stop losses is the higher the stock goes, you can set it from a dollar amount or a percentage amount. You can essentially say, I always want the trailing stock to be 5% below the highest point that the stock reached.

9:54
So if you bought it at $90 And it goes up to $100 that stop loss is now going to be at $95. So trailing stops do help you to avoid taking big losses, but they’re not the best. I’m a huge fan and a believer in setting stop losses below key support levels.

10:10
Trilling stops don’t always do that, because you could have a major support level at $100 and your stop loss is set at $100.50 just because the highest price. Hit was 5% higher than that and it’s not taken into account that there’s a key support level just below it.

10:26
So the risk or potential is, is that price pulls back, takes you out at 150, hits support, and bounces immediately back up to the highs of that trade. It happens all the time off a key technical support level. So you have to be aware of that. And trailing stops are not my favorite option. They’re better than nothing, but realize this, that they don’t take into account trailing stops and trend lines.

10:46
I want to know when I get out of a trade, but my stop is that, I don’t want to be in it anymore. And another way to, to help manage the risk is taking just partial profits along the way, taking some at 13, taking another 3, taking a final third and getting out of the trade completely, but that also helps to mitigate risk.

11:03
For instance, CPI reports coming out tomorrow. I was in QID today. I took a chunk of profits out of QID. Knowing that the CPI report was tomorrow, I don’t know how it’s gonna turn out. So I wanted to decrease my risk, book some of the profits, and make the trade a little bit more manageable for myself.

11:20
Now, Rufus gets in the covered calls and cash secured puts. If you don’t know what cash secured puts are, first of all, I’m not necessarily an expert at options trading. I don’t hold myself out to be that. I don’t really consider it my bread and butter at all. Have I used options before? Yes, I’ve used it a number of times, but I don’t necessarily consider myself good at it.

11:39
The other thing I would probably say about options, I do like covered calls. I think that’s probably one of the safest routes to take because If you buy a stock at 100 and you sell a cover call at 110, it goes up to 110. OK, you lose your shares and you collect the premium, but you at least you were able to collect the money from where it went from 100 to 110.

12:01
And so when you’re using cover calls, you’re essentially collecting the premium regardless if it goes above or closes below the strike price, but you lose the shares if it closes above the strike price. And I’m hoping I’m actually explaining this good because I don’t really get into options too much, but I do think that they can be pretty good, but you have to realize too, in a bull market, sometimes a good news piece can come out and even the most docile stocks don’t have a lot of movement to them or even if the market’s trading in a sideways range for like the past month or two, it can break out and then all of a sudden you’re out of those shares.

12:33
But at least you collected some premium off of it. Now, cash secured puts, you’re essentially writing a put and If the stock price goes below the strike, you’re essentially buying it at the strike price. Even if the stock price goes down to zero, you’re buying it at the strike price. So that’s the risk there with cash secure put.

12:49
You also have to have the money aside to be able to buy it at any point in time that you’re holding that put. So, I get it. Some people say, well, I’d love to own Apple at 140, right? So you write a put for it and it goes all the way down to 125. Well, you’re still having to buy it at 140 and you have to have that cash set aside to be able to do that.

13:08
But if it doesn’t hit it, you collect the premiums. You, well, you collect the premiums either way, but at least you’re not taking a loss on that put if it doesn’t hit that price. So a lot of people will do that and if there’s a stock that they would really like to own at a certain price, they will keep riding puts until it gets hit. Here’s another example.

13:24
Let’s say back in September last year, CVX Chevron, it’s trading at $90 a share. It hasn’t really been doing much at all. You’re like, OK, I’ll write a cover call at $110 for those shares. And it expires in October. October rolls around, it’s trading at over $110.

13:40
You just lost the shares, yes, you collect the premium too, but you also had to sell those shares at $110. Even though it might have gone up to 130, 135. So you’re capping your profits on the trade when you’re using cover calls again, it’s not a bad strategy because oftentimes, you will collect that premium without it hitting that strike price.

13:58
But in certain bull market runs or if there’s bad news and Something comes out to where a stock goes way down and you have cash secured puts on it, well, then all of a sudden you’re losing pretty big. That’s probably as far as I want to get into the options world because it’s not something I talked very fluidly about.

14:17
In some ways it kind of feels like a different language. Which to me at times, but both the cover calls and the cash secure puts, there’s strategies that you can make money off of, but you just want to always know about the risks as well. And there’s probably risks beyond that that I haven’t even explained yet. So definitely do your own due diligence on that stuff and see if that’s a strategy that’s right for you.

14:36
Also want to mention, one of the best strategies that you can do is taking the time to sign up for swingtradingthestockmarket.com. Guys, this is all my stock market research each and every day. It’s really, really good. You’re going to get Multiple videos each day, that’s going to include updates on all the big tech stocks, stocks that I’m watching, you’re going to get my watchlist, you’re going to get various charts that I find very intriguing, market updates, really, really good stuff.

15:01
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15:23
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15:42
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15:59
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.