The Wheel Options Strategy for Beginners
- Pick a Stock. The stock you pick for your wheel is extremely correlated to the performance of your account. ...
- Sell a Cash Covered Put. Getting into the wording for all strategies can get confusing, so lets break it down into digestible chunks.
- Repeat until assigned. Did the put that you sold expire worthless? ...
- Sell a Covered Call. ...
- “Turn the Wheel!”. ...
What does it mean to wheel a stock?
By “wheeling a stock,” or using the wheel strategy with a specific stock, you are placing a bet on the future of the company. While selling options and calls allows you to collect premium, you do not have to own stock.
What types of stocks work best when using the Wheel Strategy?
Blue chips companies, high dividend stocks, REITs, and low beta ETFs work well when employing the wheel strategy. These are large, often multi-national companies that have been in business for years and have large market capitalization.
Do you want to own the stock in wheel options trading?
One of the common misconceptions that I see when it comes to finding stocks for executing the Wheel options trading strategy is “I want to own the stock”. People who jump into the Wheel strategy with this thinking will likely get low ROI (Return of Investment) unless they are really good at fundamental analysis or technical analysis.
Can you run the Wheel Strategy on penny stocks?
In order to successfully execute the wheel strategy, you have to be able to trade stocks that are liquid and have an active options market. While some prefer the lower risk of penny stocks, you will likely not be able to run the wheel strategy on penny stocks because they may not have active options.
Is the wheel strategy profitable?
The wheel trading strategy approach may generally be successful, however, many experts think that it is not the most effective trading technique. Still, the average return wheel strategy is somewhere around 28%.
How much money do you need for wheel strategy?
Cash Secured Put In order to sell this put to begin with, you will need to have at least $14,000 in cash in your account just incase the option is executed. This is why it is called “cash-secured”.
How do you implement a wheel strategy?
Without further delay, let's jump right into the Wheel Strategy and how to implement it effectively in 2021.Step 1: Stock Selection. ... Step 2: Sell Cash Secured Puts (CSPs) ... Step 3: If CSPs Assigned, Sell Covered Calls (CCs) ... Step 4: If CCs Assigned, Repeat Step #1. ... Who Should Use This Strategy? ... Potential Risks.More items...•
Is the wheel strategy bullish or bearish?
The Wheel Strategy is an options-trading strategy which consists of selling options on stocks that you are bullish on, in order to generate monthly income.
Can you lose money with wheel strategy?
The Wheel Strategy is a great options trading strategy, but there's one major risk. This is when you get assigned a stock, and the stock keeps falling. In this case, you would make a big loss.
What is the wheel strategy options?
The basic option wheel strategy in brief is to sell puts that you hope will expire worthless. If the puts should expire in the money, and you are forced to buy the stock, you then sell a profitable call to get rid of the stock. Then repeat the process.
What stocks are good for wheel strategy?
Today, we will give you the best stocks for wheel strategy trades. Blue chips companies, high dividend stocks, REITs, and low beta ETFs work well when employing the wheel strategy....ContentsBlue Chip Companies.High Dividends.Check The Trend.Low Beta.ETFs.Real Estate.What About BioTech Stocks?Conclusion.
Does the wheel outperform buy and hold?
The right selection of stock (one with low downside risk) for the options wheel strategy will allow you to outperform the typical buy and hold strategy.
What is a poor man's covered call?
What is a poor man's covered call? A poor man's covered call (PMCC) entails buying a longer-dated, in-the-money call option and writing a shorter-dated, out-of-the-money call option against it. It's technically a spread, which can be more capital-efficient than a true covered call, but also riskier and more complex.
Does the wheel strategy work?
Combining both Cash Secured Puts and Covered Calls is a great way for investors to buy low (using cash-secured puts) and sell high (using covered calls) and maximizing the income and capital appreciation of the stock or ETF. This is sometimes referred to as the Wheel Strategy.
What is the safest option strategy?
Covered calls are the safest options strategy. These allow you to sell a call and buy the underlying stock to reduce risks.
What is the most profitable option strategy?
At fixed 12-month or longer expirations, buying call options is the most profitable, which makes sense since long-term call options benefit from unlimited upside and slow time decay.
1. Account Capacity
Before getting into the interesting stuff, we have to take into account the constraints that both our account and our risk tolerance have. These constraints restrict many good stocks from the candidates list, but we must be aware of these limitations in order to avoid undesirable scenarios.
1.1. Price Range
This one might seem a little obvious, but is extremely important. When wheeling a stock, keep always in mind that if the contract sold expires in the money YOU HAVE TO ACQUIRE 100 SHARES of the underlying, so if the total value of the position you are assigned is larger than the value of your account, you are in trouble.
1.2. Volatility
Maybe you have heard that volatile stocks are good for the wheel strategy… Well, it might be true in some cases, but it can absolutely destroy your account in others. Let us explain this fact with more detail:
1.3. Diversification
Finally, the last thing you have to consider before wheeling a stock is the amount of diversification you desire for your account.
2. Understanding the company: a fundamental analysis
Now that you are aware of the very basic requirements that you must know before wheeling any stock, let’s dive into how to properly pick the most suitable stocks to sustainably grow your account.
2.2. Cash Flows Statements
Cash Flow Statements let us understand how the amount of cash that the company holds has varied from one year to another.
2.3. Balance Sheet
It is a picture of what the company owns (assets and equity) and its obligations (liabilities). It must be the case that all the assets that the company owns are equal to the equity with which it has paid for them and the debt that it has used for buying the rest of their assets (assets = liabilities + equity).
Why Focus on Selling Put Options?
This is the part of the Wheel strategy that we have the most power of control because we get to decide which strike to jump in. Just like the real estate investment analogy “you make money when you buy a property”, for the Wheel strategy, “you make money when you sell Put”.
The Wheel Strategy Outline
2) Buyback when it hits your target or you can wait until it expires out of the money. Go back to step 1) and keep repeating it.
How to Find Underlying Stocks for The Wheel?
IV changes all the time based on what is going on in the market. News (good or bad) could change IV. IV also tends to spike before earning calls.
What Next?
As of now, I am still working on come up with a few scan setups because the setup I have right now doesn’t seem to do a very good job. As I discussed in one of my trading journals, I only have one stock right now that is generating a large portion of the PNL.
The Wheel Options Strategy for Beginners
This article serves to inform a beginner on how to run the options wheel strategy successfully with minimizing risk and maximizing profits.
Step 1: Pick a Stock
The stock you pick for your wheel is extremely correlated to the performance of your account.
Step 2: Sell a Cash Covered Put
Getting into the wording for all strategies can get confusing, so lets break it down into digestible chunks.
Step 3: Repeat until assigned
Did the put that you sold expire worthless? Great job, you just netted all the premium from that contract as profits. But what next? Although not as of an exciting answer, just sell another put, maybe upping your strike price, or lowering depending on how you felt about the last one.
Step 4: Sell a Covered Call
The put that you sold just expired ITM (in the money)! The person who bought your contract has decided to assign, and you are forced to buy 100 shares of that stock.
Blue Chip Companies
These are large, often multi-national companies that have been in business for years and have large market capitalization.
High Dividends
We like to pick stocks with high dividends (around 3% to 4% annual yield) because if we end up being assigned on our short put, we may need to hold the stock for a while, waiting for it to recover.
Check The Trend
If a stock has a high dividend yield (greater than 5%), you need to check the chart and the fundamentals.
ETFs
Because ETFs consist of many stocks, they have less individual stock risk. Consider the EFTs with low beta.
Real Estate
Real estate is a category that has good stability and low volatility in the long term.
What About BioTech Stocks?
For wheel trades, we want stocks that can recover whenever their price falls, and we get assigned on them.
What is wheeling a stock?
By “wheeling a stock,” or using the wheel strategy with a specific stock, you are placing a bet on the future of the company. While selling options and calls allows you to collect premium, you do not have to own stock.
How to implement the wheel strategy?
To implement the wheel strategy, start by selling out of the money puts. With a put option, the owner of the option has the right, but not the obligation, to own the underlying security at the strike price on or before the expiration date. When you sell a put option, you collect the premium, which you can keep regardless of the outcome ...
How much money do you need to start using the wheel strategy?
To start using the wheel strategy, you should probably have at least $2,500 to $3,000 in your trading account. You do not have to invest your entire account into the wheel strategy. It is important to keep in mind the risks associated with the wheel strategy and only invest what you can afford to lose.
How many shares of a stock do you buy when you sell a put option?
For each put that you sold, you will buy 100 shares of the stock.
Is buying stock a risk?
Purchasing stock comes with its own risks. The price of the stock could fall, leaving your stocks worth very little, or you could end up holding the shares for longer than anticipated. If you want a better and safer options trading strategy, consider selling option premium.
Can you trade penny stocks with the wheel?
While some prefer the lower risk of penny stocks, you will likely not be able to run the wheel strategy on penny stocks because they may not have active options.
Is the wheel strategy profitable?
While the wheel strategy can be profitable, it is important to recognize the risks associated with selling OTM puts and getting assigned stock. One possible outcome it that you're assigned stock and the stock continues to fall. If this occurs, you will have an unrealized loss.
Open interests (Option)
This is essentially equivalent to “volume” for options. If there are more open interests, likely less slippage and easier to buy and sell options.
Last (Option Last Traded Price)
This is set to 0.4 because I am looking for a very low strike price option with a high return.
Days to Expiration (Option)
Set to 69 days. Obviously longer the DTE, the higher the premium. This is why it’s set to about 2 months since we want to look for opportunities that would provide 10% per month ROI.
Strike (Option strike price)
Below 7. Could be a little higher but if it’s set too high, it will not give enough ROI.
Volume (Stock volume)
Set to 130,000. Underlying with high liquidity (popular stock) also likely means options with high open interests.
Last (Stock price)
At least $1. If you are a risk-taker, stock hovering around $1 tends to have a pretty high IV.
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Correlation Between Stocks
- One of the stocks that I recently traded was CLF, Cleveland Cliffs. They are in non-energy minerals, so basically steel. Is this a value company? Yes, I believe they are. When I traded it, I was selling the 20 puts so this had some solid support. We broke below, but we are trading right now (at the time of this writing) at $19.86, so that is okay. ...
Asset Correlation Tool
- This means, when you enter two or more tickers, for example, CLF and X, you can see how correlated these two are. And if you look back just over the last three months, we see that there’s a super high correlation. What does this mean and how do you use it in your trading, especially with The Wheel Strategy? We see the correlation is 0.88. This means, if there’s a correlation of o…
How to Use This with The Wheel Strategy
- Why is this important when you are trading The Wheel? Let me just show you a few of the positions that I’m in right now (at the time of this writing) and you can see how I use it for my options trading. A few stocks that I own are ADI, another one is CLF, and then DHI. If you look over the last three months, we see that DHI is somewhat correlated to ADI. It’s a little bit surprising be…
Summary
- I personally think that the last three months or six months are more important here than overall the last two or three years, right? You want to just see what is happening here right now. But I just wanted to share this stock correlation with you, so you can incorporate it into the Wheel Options strategy. If you are a serious options trader and would like to learn more about the two trading st…