Tackle Today: Portfolio Protection Principles | Tackle Trading
≈ Protection and Puts≈
We’ve looked at two situations where you don’t need portfolio protection. Now, let’s analyze one where you do.
Let’s say you own stock or ETF positions with the intent of holding them for multiple years. The only way it’s possible to keep something for that long is by not using a stop loss. Otherwise, you’ll get shaken out along the way.
Here’s a helpful exercise. Look at the ten-year history of whatever stock/ETF you’re going to buy. Count how many times it corrected more than 10% along the way. My bet is you had multiple drawdowns exceeding 30%. Some may have even fallen 50% at some point. Each one of those episodes knocked out all the trades who had stop losses.
On the one hand, the stops did their jobs by potentially preventing more significant drawdowns. But, on the other hand, they made it impossible to hold on for bigger gains that were had over the long run.
If I can’t use a stop loss when investing, but I don’t want to experience a decline greater than, say, -15% along the way, then what can I do?
Buy protective puts.
Minimizing how much downside you experience makes it easier to commit to your position and truly let it ride for the long run.
Next time, we’ll look at strike selection and cost considerations.
Chart of the Day
Canadian Solar (CSIQ)
CSIQ made it on last week’s Options Report list as a bullish breakout candidate. Now, we have a lovely bull retracement giving those who missed the breakout a chance to buy the dip. Watch for signs of a reversal to form in the coming days and confirm that a support pivot is forming.
Video of the day
Coach Tyler analyzes the bullish move in Canadian Solar this week $CSIQ, and examines two separate ways to trade it in the options market — the Bull Put Spread v. the Bull Call Spread — n this clip from Wednesday’s Halftime Report
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