I’ve noticed an uptick in Wheel Strategy videos posted on YouTube, so I decided to cover my simple strategy. I want to show how simple I keep it and why I use this strategy. Not financial advice, just sharing my strategy.
I work full-time, have long shifts, and am an active family man. If my wheel options strategy is too simple for you, please feel free to use whatever you use, and please share your advice with us. I appreciate the feedback.
Now My Wheel Options Strategy:
— First step: identify securities I don’t mind holding long-term.
I got burned with the Wheel Strategy in the past since I focused on premium, which led me down the road to using very volatile, newer companies with no track record.
I also needed to research how the company made money. One stock I had been bag-holding for a long time was in crypto, and it only earned cash by issuing new stocks, diluting my ownership in the stocks I was stuck with.
No more, so at this time, I work with highly diversified securities, which means I use ETFs mostly. Sometimes, stocks from good diversified services/product-oriented companies like PEP and PLTR are also used.
— Next: Sell Cash Secured Puts For These ETFs( And Stocks).
Important Factors About Selling Cash Secured Puts:
1.- Higher The Delta, Higher The Premiums, So Delta 0.3 Is OK.
I don’t mind owning the stocks or ETFs I sell PUT options against, so the risk of a higher Delta is tolerable.
This means that almost a third of the time, based on Delta, I will be assigned the stock, in this case, ETFs. A higher Delta also usually means higher premiums.
2.- Being a premium-focused, I sell weekly options.
I found slightly higher returns on weeklies than monthly(or out to 45 days).
Example: I found a monthly program that yielded about $400 in monthly premiums and usually yielded about $105-110 per week. This is a significant increase in income over time, so I sell weekly premiums.
3.- I Try To Avoid Weekends.
Usually, when people sell options, they avoid significant events like earnings reports. Using a highly diversified ETF to sell options against, I am not so scared about earning reports. But I am weary about weekends.
Holding options across weekends creates too much uncertainty about events that can affect the market as a whole. So, for the weekly options I sell, I try to sell them on Monday morning and let them expire on Friday.
4.- If not assigned, I rinse and repeat.
Yes. My cash collateral is released if my options expire ‘worthless,’ out-of-the-money, or security price above my PUT strike price.
On Monday morning, I will start selling PUT options until assigned.
— Next: Sell Covered-Calls For These ETFs.
Once assigned, I start selling Covered-Calls against those securities.
I sell weekly CALL options at the strike price I was assigned.
As a suitable ETF, even with market fluctuations, market corrections, or negative news, the ETF shouldn’t stay too low for too long.
Markets are often overbought for long periods but only oversold for a short time. As mentioned before, they go up long-term.
I mentioned earlier the benefits of selling weekly options instead of monthly or longer options. Still, the market can undergo a severe downturn within the first couple of weeks of being assigned stocks/ETFs. In that case, the market might be low enough to attract a tiny premium.
Selling at your assignment price(the strike price of your PUT options) ensures you will not lose money on this trade.
The disadvantage is you might be holding the ETF longer than expected, which is OK in reality; I got to buy an ETF I like at a cheaper price—and got paid(premium) to do it.
In the meantime, I sell weekly covered calls till my ETFs are called away.
Once called way, I go to start my Wheel strategy and start selling PUT options.
Is This Wheel Strategy Profitable?
Well, yes. If I stick to my plan, I shouldn’t lose money in the long run and come ahead.
How Do You Choose A Stock For A Wheel Strategy?
I only do the Wheel Strategy on Stocks and ETFs, which I am OK with holding long-term if the market declines.
I value diversity in services and products, so ETFs generally meet this need. High-quality companies like Pepsi(PEP) are a great example.
As for ETFs, I mainly focus on SPY. If I need more money, IWM is my next option.
The goal of using IWM is to collect enough premium to grab another SPY contract later to do the Wheel on.
What Are The Downsides Of This Wheel Strategy?
The real downside is initial capital. SPY has been trading for about $500 now. Selling one Cash-Secured-Put contract involves having enough money for 100 shares.
1 Options Contract = 100 shares.
So, 100 x $500 is $50,000! That’s not chump change, and I only have a little money in some of my accounts.
For clarity, I have a pre-tax retirement account(old IRAs, 401k’s, etc.), a post-tax retirement account(ROTH), and a Non-retirement account. Since I don’t commit these monies, I don’t have a large single pool against which to sell options.
Many of us don’t have options with our retirement accounts; until I did, my total money pool was even smaller.
Let’s go with the lower-priced IWM, which is about $200. This means that to sell a PUT option, I need $20,000 (100 x $200).
So, the immediate disadvantage is needing more upfront cash.
The next disadvantage you might have noticed using “high” quality security is low Implied Volatility, which equals lower premiums. So, I trade away the premium for security. I’m OK with this.
How Much Money Do I Need For This Wheel Strategy?
This is just a recap since I covered much of the cost, but a PUT contract controls 100 shares of securities. So, a Cash-Secured-PUT needs to have enough cash to cover 100 times the option’s strike price.
I’ve been playing with the SPY ETF lately, so at a strike price of $500, I need $50,000 in cash to cover selling a PUT and starting the Wheel Strategy.
Why Not Just Buy And Hold, Like The Normies?
In the long term, buying and holding good stocks always wins.
So why not use the buy-and-hold strategy?
The Wheel strategy generally has a Bullish to Neutral attitude toward the stock or the stock market, just like the buy-and-hold strategy.
Why I use the Wheel strategy: Although I can buy and hold, this strategy forces me to take profits frequently and capitalize on the natural movements of stocks, whereas holding yields almost nothing.
Simply put, this Wheel strategy with Options incentivizes me to buy low and sell high, which is something we all should focus on.
What Wheel Strategy In Options Do You Use?
Do you opt for a different Delta?
Do you focus on Meme stocks from r/WallStreetBets?
Love to hear from you.
 Myself with an interesting Bull Sculpture. Notice: No Lambo’s. :/ | Hi I’m Tom, A Blogger And A PIG Farmer. PIG Farmer as in I grow Passive Income Generators(PIG’s). I’ve been playing with stocks, mutual funds, and options for decades, as well as always working on my side hustle stacks. Unlike what you read online, I’ve yet to find a way to get rich quickly. Get Rich Quick isn’t happening for me. My journey has been long and continues. I hope to have so many PIGs I can stop working at my current job and volunteer as a medical worker overseas. Still waiting, but getting there. I still am a family man, and while on this Journey of Growing PIGs. I wanted to share my adventures(ups and downs), hoping you will contribute with your feedback and comments. Fun Fact: In my spare time, I am a Band-Dad! |