When to Brake When You Are On A Roll

Stop Losses for your Barbell on Wheels Strategy

The best traders aren’t the ones who never lose. They’re the ones who lose small but win big.

black and yellow car wheel

Who says stopping can’t be sexy?

From previous posts, we have layered in the different aspects of constructing an anti-fragile portfolio. You’ve built the barbell: steady Wheel income 1 on one side, asymmetric LEAPS on the other 2. The strategy is sound. Right? Your position sizing is disciplined. You’ve chosen quality stocks you’d genuinely hold long-term.

Then the market does what markets do—it moves violently in a direction you didn’t expect:

Your cash-secured put gets assigned. The stock drops another 15%. Then another 10%. Your premium cushion evaporates. You’re now holding a position underwater, selling covered calls for pennies, wondering if you should “just hold” because “it’s a quality company” and “it’ll come back eventually.”

This is where most Wheel traders fail—not from bad stock selection, but from getting caught by surprise. Remember, process over prediction is what we are going for.

Enter the Stop Loss.

red and white stop signage

Definition: A stop loss is a predefined exit level that automatically closes a position to cap losses.

Stop losses aren’t about being right or wrong. They’re about staying solvent long enough to be right later. And when paired with LEAPS on the conviction layer, they create something powerful: a portfolio that’s protected on both sides—downside stops cut losses, upside convexity captures explosions.

You need both.

The Assignment Scenario: What Actually Happens

Let’s walk through the mechanics with a real example:

Setup:

Stock: Exxon (XOM) trading at $115
Action: Sell cash-secured put at $110 strike, collect $1.15 premium (1% weekly return)
Simultaneously: Own or prepare to own 100 shares, sell $120 covered call for $1.05

Scenario 1: Stock stays above $110

Put expires worthless
Keep $115 premium
Repeat next week
This is the Corolla—steady, boring, profitable

Scenario 2: Stock drops to $108

You’re assigned 100 shares at $110
Effective cost basis: $110 - $1.15 = $108.85
Current price: $108
Paper loss: $85 (less than 1%)
Your premium collected cushioned a $2 drop

Now you’re holding shares. You sell a covered call at $115 for $0.90. If called away, you profit. If not, you collect more premium and lower your cost basis further to $107.95.

This is the Wheel working as designed.

Scenario 3: Stock gaps down to $95. Yikes.

You’re assigned at $110
Effective cost basis: $108.85
Current price: $95
Loss: $1,385 per contract
Premium collected reduced your loss by ~$115 (about 1% cushion on the assigned value)

Here’s the question: do you hold and “wheel your way out,” or do you cut the position?

blue throw pillow

The Cushion Effect: Premium as Your Safety Margin

One of the Wheel’s under appreciated benefits is that premium collection reduces your effective loss on any drawdown.

Without premium collection:

Buy XOM at $115
Stock drops to $95
Loss: $2,000 (17.4%)

With Wheel strategy:

Sell put at $110, collect $1.15
Assigned at $110, effective basis $108.85
Stock drops to $95
Loss: $1,385 (12.7% on assigned value, 12.0% on original capital at risk)
Premium reduced loss by 4.8 percentage points

If you had been running the Wheel for 4 weeks before assignment:

Collected $1.15 × 4 = $4.60 in premium
Effective cost basis: $110 - $4.60 = $105.40
Loss at $95: $1,040 (9.5% vs 17.4% for buy-and-hold)
Premium collection cut your loss nearly in half

This cushion is real, but it’s not infinite. The longer you collect premium before assignment, the bigger your buffer. But once assigned and falling, that cushion erodes quickly.

This is why stop losses matter—premium can’t save you from structural collapse.

black android smartphone on brown wooden table

The Critical Question: When to Stop Out

Most Wheel traders make one of two mistakes:

Mistake 1: No stops at all “I chose quality stocks. I’ll just hold and wheel my way back.”

This works until it doesn’t. Ask anyone who wheeled their way through:

BP after Deepwater Horizon (dropped 55%, took years to recover)
Banks in 2008 (many never recovered)
Energy stocks in 2020 (XOM dropped from $71 to $31 in weeks)
Any company whose business model breaks (Kodak, Blockbuster, etc.)

Premium collection on the way down feels productive, but you’re collecting nickels while the elevator drops floors.

Mistake 2: Stops too tight “I’ll stop out at -5% to protect capital.”

This turns you into a perpetual loss-taker. Quality stocks that have higher IV routinely pull back 10-15% in normal volatility. You’ll stop out, watch it recover, re-enter higher, stop out again on the next dip. Death by a thousand cuts.

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The Solution: Conviction-Based Stops

selective focus photography of clear light bulb

Here’s my framework:

Rule 1: Set stops at the point where your thesis breaks, not arbitrary percentages

For XOM at $115:

Technical stop: $110 (4.3% below entry)
- This is meaningful support
- Below this, the next support is much lower
- If I’m running the Wheel selling $110 puts, I’ve already said “I’m happy to own at $110”
Fundamental stop: Depends on why you hold it
- Is XOM’s value proposition intact at $110? At $95? At $80?
- If oil stays above $70/barrel, XOM generates massive free cash flow even at $95
- If oil collapses to $40 and stays there, the business model changes

The stop should reflect: “Below this price, either my thesis is wrong or the market is offering me a better opportunity elsewhere.”

Rule 2: Coordinate stops with your covered call strikes

If you’re assigned XOM at $110 and you immediately sell a $120 covered call:

Your upside is capped at $120 (9.1% gain from assignment)
Your stop should be roughly symmetric: $100-105 (4.5-9.1% loss from assignment)
You’re defining a range: collect premium between $100 and $120

This creates a bounded position: limited upside (by design), limited downside (by discipline).

a close up of a line with a blue background

Volatility is part of the game. How do we take the hits?

Practical implementation:

Stock assigned at $110
Sell $120 covered call (8.7% OTM) for $0.90-1.20
Set stop loss at $105-107 (2.7-4.5% below assignment)
If stopped out: Loss = $300-500 per contract
If called away: Gain = $1,000-1,200 per contract

You’re risking $300-500 to make $1,000-1,200. That’s asymmetry in your favor.

Rule 3: Widen stops for higher conviction positions

Not all stocks deserve the same stop discipline.

High conviction positions (your edge):

Stocks in sectors you know intimately
Companies where you understand competitive moats

→ Wider stops: -10 to -15%

You have edge. You know the business. You can tolerate more volatility because your information advantage gives you conviction through drawdowns.

Standard Wheel positions:

Quality names you’re happy to own
No particular edge, just sound fundamentals
Diversified across 8-10 positions

→ Tighter stops: -5 to -8%

You’re running a mechanical strategy. No heroics. If it drops meaningfully, exit and redeploy to the next setup.

man in red and black jacket standing on snow covered ground during daytime

Everyone wants to be a hero. Try to fight the urge :)

Example:

I worked in solar for 10 years. I know (better than most) about the supply chains, the bottlenecks, the CTOs, the technology roadmaps. If I’m wheeling First Solar (FSLR) and it drops 12% on macro fear while the fundamentals are intact according to my understanding, I hold—I have an edge.

If I’m wheeling Procter & Gamble (PG) and it drops 8% on consumer weakness, I stop out—I have no edge, and there are always other opportunities.

The Coordination: Running Stops While Calls Are Active

Here’s where it gets slightly complex: you’re holding shares with a stop loss AND you’ve sold a covered call against them.

Scenario: XOM assigned at $110, sold $120 call

If stock rises to $120:

Shares called away
You exit at max profit
No stop needed—the call is your automatic exit

If stock drops to your stop at $105:

You need to close both positions simultaneously or you end up swimming naked.
Sell shares at $105 (trigger stop)
Buy back the $120 call (now cheaper since stock dropped). If this is not closed, you risk unlimited downside if the stock moons.
Net result: Small loss on shares, small gain on call buyback

man bathing on calm water

Do not ever swim in these markets naked. Never ever.

The mechanical process:

Set stop loss as GTC (Good Till Canceled) order at your predetermined level
If stop triggers:
- Shares sell automatically at stop price
- Immediately buy back the short call (market order)
- Net P&L = (Stop price - Assignment price) + (Call premium collected - Call buyback cost)

Example math:

Assigned at $110, sold $120 call for $1.20
Stop triggers at $105
Buy back $120 call for $0.30 (stock dropped, call is now worth much less)

P&L:

Share loss: -$500
Call gain: +$90 (collected $120, bought back for $30)
Net loss: -$410 per contract

Without the stop, if the stock continued to $95, your loss would be $1,500 minus whatever call premium you could collect on the way down at lower strikes. The stop saved you ~$1,000+ per contract.

When NOT to Stop Out: The Conviction Override

There’s a critical exception to stop-loss discipline: when you have edge and the thesis is intact.

man standing while wearing black jacket

Not every pullback deserves to be stopped out

Signs your stop should be overridden:

Business fundamentals haven’t changed
- Earnings solid, free cash flow intact
- Competitive position unchanged
- Management executing well
The drop is macro/sentiment driven
- Sector rotation
- Fed policy fears
- Short-term headline risk
You have domain expertise
- You understand the industry better than the market
- You’ve done primary research (factory visits, channel checks, supplier calls)
- You see what others don’t
The price makes the company MORE attractive
- If you liked XOM at $115, do you love it at $95?
- Are you buying more, or are you scared?
- Fear = exit. Excitement = hold and possibly add.
yellow-and-blue oil barrel lot

My Exxon example:

XOM drops from $115 to $95 because oil pulls back from $85 to $70.

What I check:

Is oil collapse temporary or structural?
Is XOM’s breakeven still around $40/barrel? (Yes)
Is the dividend safe? (Yes at $70 oil)
Am I getting better value at $95 than $115? (Obviously)

Decision: Hold, possibly add at $95 with new CSPs.

But if oil collapses to $40 and stays there, or if renewable transition accelerates and oil demand is structurally impaired, or if XOM’s reserves are being written down—then the thesis is broken. Stop out and move on.

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Part 2: The Asymmetry: LEAPS as Upside Stop Loss

Here’s where the barbell structure reveals its genius: stop losses protect your downside, but what protects your upside?

a man jumping in the air on top of a mountain

The problem with covered calls:

You’re assigned XOM at $110. You sell the $120 call. Stock explodes to $140 on geopolitical oil shock.

Without LEAPS:

You’re called away at $120
You made $10 per share ($1,000 per contract)
You missed the move from $120 to $140 ($2,000 per contract)
Capped upside feels like a loss when you’re right

With LEAPS in the portfolio:

Remember, you’re also holding:

1-2% of portfolio in XOM or energy sector LEAPS (maybe XLE or OXY calls)
Strikes at 20-30% OTM
18-24 months to expiration

When XOM gaps from $115 to $140 (22% move):

Your Wheel position: Called away at $120, profit capped

Made $1,000 per contract on assigned shares

Your LEAPS position: (Let’s say 1% of portfolio = $1,000 in XLE $50 calls when XLE was at $42)

XLE moves to $55 (31% move, tracking oil spike)
$50 calls now worth ~$6-7 (from ~$2.50)
Your $1,000 LEAPS position → $2,400-2,800 (140-180% gain)

Net result:

Wheel profit: $1,000 (capped but collected)
LEAPS profit: $1,400-1,800 (uncapped, explosive)
Total: $2,400-2,800 vs the $3,000 you’d have made holding shares uncovered

You didn’t get 100% of the move, but you got 80-93% of it while having:

Collected premium the whole way
Limited downside with stops
Defined risk in LEAPS (could only lose the $1,000 allocated)

This is the upside gap protection.

The LEAPS act as an inverse stop loss—instead of preventing losses below a price, they capture explosive gains above a price. Your Wheel position can be capped at $120, but your LEAPS keep running to $140, $160, $200.

woman balancing on board

A fine balance. Protection both on the long and short side.

Feeling the Balance: A Complete Example

Let me show you how this all works together in a realistic scenario:

Portfolio: $100,000

$95,000 in Wheel base (10 positions at ~$9,500 each)
$5,000 in LEAPS (5 positions at $1,000 each)

Position: Exxon Wheel

Entry: XOM at $115
Week 1-3: Sell $110 CSPs, collect $1.15/week × 3 = $3.45
Week 4: Assigned at $110, effective basis $106.55
Sell $120 covered call for $1.20
Stop loss set at $104 (worst case: -$255 loss from basis)

Position: Energy LEAPS

XLE at $42
Buy $50 calls (19% OTM) for $2.50, 18 months out
Position size: $2,500 (2.5% of portfolio. High conviction)
Max loss: $2,500

a close up of a table with a glass of water

Doing the numbers

Scenario A: Market sells off, XOM drops to $95

Wheel:

Stop triggers at $104
Net loss after buyback of call: ~$350
Loss: 0.35% of total portfolio

LEAPS:

XLE drops to $38 (10% drop)
Calls worth ~$1.20 (down 52%)
Paper loss: approx $1,300
Total portfolio loss: 1.3.%

You lost money, but you lived to fight another day. The combination of stops and defined-risk LEAPS kept damage minimal. To keep losses minimal, consider getting into LEAPS that are less than 1.5% of total portfolio value.

Scenario B: Oil spikes, XOM surges to $145

Wheel:

Called away at $120
Profit: $120 - $106.55 + $1.20 = $14.65 per share = $1,465
Return: 13.75% on capital deployed

LEAPS:

XLE surges to $58 (38% move)
$50 calls worth ~$9-10 (from $2.50)
Profit: $6,500-7,500 (650-750% return)

Total profit: $7,965-8,965 (7.97-8.97% of total portfolio)

You captured the move despite being capped on the Wheel position.

Scenario C: Slow grind up, XOM moves from $110 to $125 over 6 months

Wheel:

Called away at $120 in month 3
Profit: $1,465
Repeat with new CSPs at higher strikes
Collect another 12 weeks of premium = ~$1,200-1,500
Total: $2,665-2,965

LEAPS:

XLE grinds to $53
Calls reach breakeven, slight profit
Roll out and up to $55 strikes to extend runway
Small gain or scratch, but preserved capital

Total: ~$2,700-3,000 (2.7-3% portfolio gain over 6 months)

The Wheel did its job: consistent premium in a grinding market. Corolla. Do this often enough and you might get a Land Cruiser :)

green and black jeep wrangler

Business Model Risk: When to Exit Permanently

Stop losses handle price volatility. But some drops aren’t volatility—they’re permanent capital destruction.

black and silver stereo component

I shoot film still, but I am glad I did not own Kodak :)

Red flags for permanent exit:

Competitive moat eroded
- Blockbuster vs Netflix
- Kodak vs digital cameras
- Traditional auto vs Tesla/Chinese EVs
Structural demand collapse
- Coal in renewable transition
- Traditional retail vs e-commerce
- Legacy media vs streaming
Management/governance breakdown
- Serial earnings misses
- Executive departures
- Accounting irregularities

r/wallstreetbets is a godsend

Example: Energy transition risk

I’m bullish on oil in the 2020s due to underinvestment and geopolitical shifts. But I’m watching for:

Faster-than-expected EV adoption
Battery technology breakthroughs
Policy changes that strand oil assets

If those materialize, I don’t care what XOM trades at. I exit the thesis entirely and redeploy to where secular winds are favorable.

The mental model: Stop losses protect you from being wrong on price. Thesis exits protect you from being wrong on fundamentals.

Position Management Rules: Your Checklist

Here’s the systematic approach:

Someone is writing in a notebook with checkboxes.

Weekly:

Review assigned positions against stop levels
Check if covered call strikes need adjustment
Confirm thesis hasn’t changed (earnings, news, sector developments)

Monthly:

Evaluate if premiums collected justify holding assigned positions
Consider taking profits on winning LEAPS (50% off at 2x gains or roll them out)
Rebalance if LEAPS have grown beyond 25% of portfolio. For example, I bought gold physical ETFs when my GLD LEAPS went vertical.

Quarterly:

Deep review of each Wheel position thesis
Ask: “If I didn’t own this, would I buy it today at this price?”
If answer is no, exit regardless of stop level
Review correlation between Wheel positions and LEAPS to ensure balance

Annually:

Audit full portfolio for concentration risk
Review which stops were hit and why (learn from patterns)
Adjust stop-loss percentages based on market regime (tighter in high volatility, wider in low volatility)

person holding barbell

I am running out of barbell imagery. You get the picture.

Putting It All Together: The Balanced Portfolio

The beauty of the complete strategy is how each piece protects against the failure mode of the others:

Wheel income: Protects against LEAPS going to zero LEAPS convexity: Protects against Wheel capping gains Stop losses: Protect against thesis-breaking drawdowns Premium cushion: Protects against normal volatility Position sizing: Protects against single-position blowup

When XOM drops 15%, your stops cut the loss and premium softened the fall. When XOM surges 30%, your LEAPS capture it even though shares were called away. When XOM grinds sideways, your Wheel collects 1-2% weekly like clockwork.

You’re not trying to predict which scenario happens. You’re positioned for all three.

Conclusion: The Art of Losing Small

Risk management isn’t sexy. Stop losses don’t make for exciting dinner party stories. Nobody brags about the trade they cut at -5%.

But the traders still standing after 20 years? They all have stop-loss discipline.

The Wheel strategy generates income. LEAPS provide convexity. But stops—stops keep you alive when you’re wrong. And in markets, being wrong is inevitable. Being catastrophically wrong is optional.

Your edge isn’t in never getting assigned. It’s in knowing exactly what to do when you are.

blue and white exit signage mounted on brown brick wall

Think of your exits as preserving seeds for the next move up.

Your action steps:

For every current Wheel position, define your stop level today
- Write it down
- Set the GTC order
- Don’t adjust it emotionally
For every new CSP you sell, decide before entry:
- What’s the stop level if assigned?
- What’s the call strike you’ll sell?
- What’s the thesis that would make you exit entirely?
Review your LEAPS positions:
- Are they sized to lose without destroying your base?
- Do they correlate with Wheel positions to capture upside gaps?
- Do you have a plan to take profits at 2x, 3x gains?
Backtest your emotions:
- If XOM drops to $95 tomorrow, will you actually follow your stop?
- If it surges to $140, will you be okay being capped?
- If your LEAPS expire worthless, can you still sleep?

If the answer to any of these is no, your position size is too large.

Remember: The Corolla gets you there safely. The Lotus adds speed when conditions are right. But the brakes—the brakes keep you from driving off a cliff.

Use them.

Here is a beginner rider (yours truly) practicing emergency braking in an empty carpark. Stopping well reduces the chance of catastrophic losses :)

Conclusion

The 8 Commandments of the Wheel-with-LEAPS Barbell

Premium cushions but doesn’t protect you. Stops do.
Stops should reflect thesis breaks, not percentages.
Stops must coordinate with covered call strikes.
You must close the short call if the stop hits.
Conviction earns wider stops; normal names earn tight ones.
LEAPS capture upside your covered calls cap.
LEAPS must be sized small (≤1.5–2%) so a wipeout doesn’t hurt you.
Your job isn’t avoiding losses — it’s avoiding large losses.

Disclaimer

This publication is for educational purposes only and does not constitute financial, investment, or trading advice. Views are personal and may change without notice. Options and derivatives involve substantial risk and are not suitable for all investors; you can lose the entire amount invested. Past performance is not indicative of future results. Conduct your own research and consider consulting a licensed financial professional before making decisions. I may hold positions in securities mentioned.

Want to practice stop-loss scenarios before real capital is at risk? Subscribe to the course for interactive simulations of assignment, stops, and portfolio management under stress. The goal isn’t theory—it’s muscle memory for when markets move against you.

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