Many investors believe that using stops are a viable way to prevent large draw downs on their account. However here at tastylive, we believe in managing our winning trades as opposed to managing our losing trades. Due to this methodology, we will rarely ever use stops and are out to prove why not. Today, Tom Sosnoff and Tony Battista look at a 5 year study based on SPY. The guys place an at the money (ATM) Straddle and look to manage the trade at 25% of max profit. Next, they look at the effect a stop has when placed at 25% of the credit received. This means that if the strangle was sold for $4, it was closed when it was trading for $3 (managing a winner) or if it was stopped at when it was trading for $5 (managing a loser). They also look at these two management levels combined, meaning what was the results when seeing what came first. Tom and Tony confirm what they already knew: stops are not as effective as managing your winning trades. By just managing the straddle, your total profit/loss (P/L) would have been $5,611, with a win rate of 88%. If you were using a stop, your P/L would have only been $1,670 with a win rate of 46%. When looking at both of the management styles together, you still have a lower P/L of $4,221 and a win rate of 59%. After looking at all these results, it proves that managing a winning trade is more effective than managing a losing trade.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.