29 Things to Know About The Wheel Strategy

   

29 Things to Know About The Wheel Strategy: For those of you who have been following me, you already know I love to use the Wheel Strategy when I trade. 

How much confidence do I have in the Wheel Strategy? Well, in my $500,000 trading account I was able to make $50,000 of REALIZED profits in only three months. 

This is the power of the Wheel Options Trading strategy. Not only is the strategy only three simple steps, but there is a high percentage chance of making real gains IF you know what you are doing. 

This article is one I have been meaning to write for a long time. I want to give all of you a complete rundown of the tactics I use when I trade with the Wheel Strategy. 

I have gathered all of the most commonly asked questions and comments from my YouTube videos and live streams. 

So here it is, the 29 most important things you need to know when trading with the Wheel Options Strategy!

The Wheel Options Strategy Overview

Before we get started let’s review the basic process of the Wheel Strategy.

The process itself is simple and effective. Remember, there are only three steps you need to know to start generating options premium using the Wheel Strategy:

  1. First, we sell put options to collect premiums.
  2. Then, we wait to see if we get assigned or not. 
  3. Finally, if we do get assigned we sell call options, but if we don’t, then we go back to Step 1 again. 

We just rinse and repeat these three steps to make easy premiums. Now you know why it is called the Wheel Strategy! Once you can master these three steps, you can start generating real income and cash flow. 

So let’s get on to the 29 most important things to know about mastering the Wheel Strategy! I have divided this article into four sections:

  1. The Basics
  2. Picking the Right Stocks
  3. Selling Calls After We Get Assigned (Step 3 of the Wheel Strategy)
  4. What To Do When a Trade is in Trouble

What are we waiting for? Let’s get to it!

The Basics

1)  I have around $30,000 in my Interactive Brokers account. Is it enough to start trading the Wheel?

The first question is one I get all the time. People asking me about how much is enough to start trading the Wheel Strategy. 

Here is my recommendation: I want to have at least $10,000 in cash so you can get $20,000 in margin. I also recommend you access a margin trading account to increase your total buying power. 

If you have less than $10,000 in your account then I wouldn’t recommend the Wheel Strategy. For smaller accounts, I recommend trading a maximum of three positions and then increasing that as your account size grows.

2) What is the best expiration date for selling an options contract?

This is another common question! For those who aren’t familiar with trading options, every contract you buy or sell has an expiration date. This is the date at which the options contract will expire. 

Personally, I like to look at weekly options contracts. 

I prefer the shorter-time frame because I believe this is where you have the most control over the price movement. Unless something catastrophic happens, the price of the underlying stock should stay within a certain range. 

The basic idea of the Wheel Strategy is to collect what I refer to as ‘weekly paychecks’. This is the continuous premium you can collect from selling options using the Wheel Strategy. 

3) Should I use margin to increase my buying power?

My answer: absolutely. I highly recommend getting access to a margin account to increase your buying power. 

But keep in mind that trading on margin is a double-edged sword. When trades work for you they work well, but when they work against you it can escalate your losses.  

If you have any other questions about trading on margin I’ve made a dedicated video on the type of margin you should use. Watch the video here before you begin trading with a margin account.

All it takes is some simple math, so let’s look at an example. 

Let’s say we are selling a put option on a stock with the strike price of $100. 

For you to get assigned, the underlying stock price must be below $100 at the time the contract expires. 

So we know that one option contract equals 100 shares. We would need to have enough capital to cover:

100 shares x $100 = $10,000

That was a very simplified scenario so let’s take a look at a real life example from my own trading account. 

Recently I sold 8 put option contracts for Apple (AAPL) at a strike price of $133. So let’s plug these numbers into that calculation. 

100 shares x 8 contracts x $133 = $106,400

That’s a pretty sizable amount if you were to get those shares assigned to you. 

So always remember, before you begin to sell your options contracts, make sure you have enough capital to cover a share assignment.  

Now if you use the PowerX Optimizer tool like I do, all of this is calculated for you directly in the platform.  Here’s what that looks like: 

Wheel options strategy

Once you fill in your buying power, specify your positions, and enter the options contracts, the PowerX Optimizer will tell you exactly how much buying power is required in case you get assigned.

I highly recommend using the PowerX Optimizer, especially if you hate doing math like I do. If you decide to do this math in your head, things can go terribly wrong. 

5) Is there a certain percentage of gains before you decide to buy to close your trade?

I’ve heard some people say 50% profit is statistically best to close. This will always depend on your own personal risk tolerance and trading goals.

Personally, I aim for close to 90% of the maximum profits I can make on a trade. Let’s read that again: 90% of the maximum profits I can make on a trade. Here’s what I mean:

In this example I sold the $66 puts on Dick’s Sporting Goods (DKS) for a premium of $0.75 per contract. 

29 things you must know

Now I input a working order in here to buy this back at $0.07, which is 90% of that $0.75 that I sold them for. This is what I mean by aiming for 90% of the maximum profit in a trade. 

6) Is there a rule of thumb for what percentage of your account is tied up with your trading strategy?

So this depends on how many trading strategies you use. As you know, I like to use both the PowerX Strategy and the Wheel Strategy. 

The PowerX Strategy is ideal for a trending market, but as you all know, this market is anything but trending. It’s choppy and difficult to predict. 

In this type of market environment, I dedicate all my money exclusively to the Wheel Strategy. 

29 things you must know

Once things in the market settle down and I feel like I can use the PowerX Strategy again, I would just reallocate my buying power.

So instead of $500,000 for the Wheel Strategy, I might break it down to $400,000 in the PowerX Strategy and $100,000 for the Wheel Strategy. 

7) What screening criteria does the PowerX Optimizer use for the Wheel Strategy?

The PowerX Optimizer has a built-in scanner that helps you find the best stock candidates for the Wheel Strategy. 

As you can see in the image below, you can toggle between a conservative scanner and an aggressive scanner. 

29 things you must know

In the bottom right corner of the screen, you can see all of the stock symbols that appear in the scanner. Here’s what criteria the PowerX scanner uses:

First, the scanner is looking for stocks with prices between $5.00 and $300.00. 

Next, the PowerX also scans for stocks that are in the red that day. When we sell put options to collect premium, you always want to make sure to sell when the market is having a down day. 

Another thing we want to check for is the implied volatility of the contract. This ensures that we make enough premiums from the trade. 

Finally, and most importantly, we want to be sure that the annualized premium rate is above 30%. 

Of course, you can add your own criteria into the PowerX search and adjust it to your own risk tolerance. These are the settings I use when I trade the PowerX Strategy. 

8)  What can I expect? Markus, what exactly do you mean by 30% annualized returns? What capital is this based on?

When I talk about 30% annualized returns, this is on your total buying power. 

If I have $500,000 in buying power in my account, this would equate to a 60% yield based on the cash I initially put into my account, which is $250,000. 

So when I talk about a 30% annualized return, this is always based on your buying power. If you are not trading on margin, then this return would obviously be on your initial cash investment. 

Picking The Right Stocks

9) Do you have a defined universe of stocks that are on your “good list?” 

First of all, this is where I rely on the PowerX Optimizer scanner to provide me with a list of stocks

From here I can find stocks that I have found success with in the past and new stocks that fit the criteria of my scanner. 

29 things you must know

Here is a short list of some of the stocks I’ve traded so far this year with some success: DBX, DKS, GDXJ, HAL, HAS, IBM, JWM, LL, MARA, MNST, NIO, RIOT, and SNAP, amongst many others. 

These are some of the stocks I have enjoyed trading this year. You will probably recognize most of them. I like to trade well-known names that don’t often show a lot of volatility. 

Let’s just say you won’t find me trading exotic names or any meme stocks like GameStop (GME) or AMC (AMC). 

10) Is there a certain level of IV, implied volatility, on a stock that you won’t trade? I’ve traded some contracts with an implied volatility of more than 200%, is that too high?

We know that by definition, the higher the implied volatility, the higher the risk in the trade. This is based on how volatile the price of the underlying stock is. 

My sweet spot for trading options is an implied volatility between 40% and 100%. If you want to get even more specific, my preferred sweet spot is between 60% and 80% implied volatility. 

Of course I’ve traded with an implied volatility of over 100%, but generally I like to stay within that safety zone.

11) Markus, have you changed from your “When I started I just wanted to know the symbol. I did not want to know anything about the company, as it might cloud my view. Trade what you see, not what you think” mentality? 

A great question! To be honest, my answer is no when I am using the PowerX Strategy, and Yes when I trade using the Wheel Strategy. 

When I use the PowerX Strategy, I don’t need to know about the company, just the data like the implied volatility of the contract. 

But when I use the Wheel Strategy to trade, I want to know that the stock is for a solid company that won’t have a lot of volatility in the underlying stock price. 

12) I have noticed that some of the stocks on your list for the Wheel Strategy have very illiquid weekly options. Do you watch for options liquidity or just the credit limit and hope to get filled?

Actually, this might surprise you but I don’t usually care about open interest or trading volume. Here’s why.

I am trading to sell premium in the Wheel Strategy and I am fine letting these options expire worthless. I don’t necessarily need to buy them back. 

If I can buy it back, I will, but otherwise, I don’t see it as a necessity. That’s why I don’t care about open interest for the contract. 

Again this all comes back to your trading strategy. Open interest and trading volume might be important for you, but when I am trading the Wheel Strategy, it’s not. 

13) Besides technical support/resistance levels, how do you objectively decide which are the best stocks to trade? Do you take into account any fundamental analysis to filter out which underlying stocks to trade?

Actually, no. This is a subjective area because some traders swear by technical or fundamental analysis but personally, I don’t. Here’s what I do.

One of the only criteria I use is that I want to like the company and be okay owning the stock. This goes back to choosing solid stocks and companies that don’t see a lot of volatility. For example, no meme stocks!

I also like to use Peloton (PTON) as an example. As I predicted when I first saw the company, the long-term thesis isn’t great. 

During the pandemic it was a popular stock to trade because it allowed people to exercise from home. But in my eyes, Peloton was a company that had no competitive advantage and at some point, another company could even acquire it outright. 

My point is, I need to believe in the company over the long-term. I also have to be okay with owning the stock at the strike price I traded the option contract at. 

But remember, you don’t have to feel the same way. Like I said, this is subjective and might not apply to your trading strategy. 

14) Since you are suggesting not to sell puts on leveraged ETFs, why are they then included in the Wheel Scanner?

This is another great question. We’ve discussed this at Rockwell and we might end up excluding leveraged ETFs from the scanner in a future version of the PowerX Optimizer. 

Here’s why we are thinking of excluding them. As you probably know, leveraged ETFs trade with a built-in multiple. 

For example, a 2X S&P 500 leveraged ETF will gain 4.0% if the S&P 500 gains 2.0%. It works the other way too, it will drop by 4.0% if the S&P 500 drops by 4.0%.

Some traders get blinded by the juicy premiums for leveraged ETF options contracts. In my mind, it’s not worth the risk. I don’t personally trade leveraged ETFs. The return can be great but the losses can really add up after a few bad days of trading.  

15) Why do you select growth stocks only instead of a mix of value and growth stocks? Seems that growth is in trouble due to rising interest rates over the next year.

This is very true. Growth stocks suffer more in a high-interest rate environment because forward-looking revenue multiples are reduced. 

Growth stocks also offer more attractive premiums on options than value stocks do. Of course, that doesn’t always mean they are better to trade. Here’s a specific trade I made with IBM which I consider a value stock. 

29 things you must know

In the screenshot above, I traded IBM after a massive drop. Here I sold the $117 strike price. 

Usually, with a stock like IBM, you won’t find much premium. The implied volatility is usually pretty low, maybe around 30-35%. 

Quite simply, I am looking for a 30% annualized return in premiums so that’s why I prefer growth stocks to value. 

Selling Calls After Getting Assigned

16) If you sell a call option contract lower than your original put strike price can you still make money?

In my opinion, this is a risky move and I don’t recommend using this strategy. Let me provide an example so you can see why I think this is so dangerous.

Let’s say you sold a put and were assigned so you had to buy those shares at the strike price. I’m going to use Apple (AAPL) as an example here. So I was assigned AAPL shares at the $133 strike price. When we use the Wheel Strategy, we know that the next step is to sell call options on these AAPL shares. 

So the question was about selling the call options for lower than $133. If you choose the $125 call strike price to sell, and it gets assigned, you’re out $8.00 per share. But we know in options, this is actually $800 per contract since they trade in blocks of 100 shares. 

If you want to use this strategy, make sure it is above your cost basis price. Otherwise, this could potentially result in a major loss. 

17) Why are covered calls more profitable in your experience than cash-secured puts? Are you targeting a different percentage return?

To answer the second part of that question: no, I do not. Here’s a general rule of thumb that I follow when trading. Let’s jump to PowerX Optimizer and go to the Wheel Income Calculator. 

29 things you must know

This is an example from a trade I made for the Lordstown (RIDE) stock recently. I was assigned the shares so I moved on to selling calls for the stock. 

I sold the call options with an expiry date of March 19th for a premium of $0.35 for a strike price of $23.00. As you can see, this provided me with an annualized return. 

My strategy here is to stay within a few strikes on the options chain because all I need is a rise of 7.0%. According to the PowerX Optimizer Calculator, a gain of 7.0% means I make money on the premium I collect which is $1,645 annually, as well as an additional $7,000 on the stock. This comes to a total gain of about $8,500. 

This just comes with the territory of selling call options. Normally, when you sell calls, the underlying price is closer to the strike price, and therefore, we usually see a higher premium and a higher ROI. 

That’s why getting assigned shares isn’t always a bad thing. Selling covered calls can actually be more profitable than selling puts. Just make sure you have the buying power available in your account in case you do get assigned!

18) When you sell calls to reduce the cost basis, do you also include the premium received from selling the first put to reduce the cost basis?

A great question with an easy answer: yes, I include the premium!

19) Is there a risk of the portfolio becoming nothing but stocks and not being able to sell covered calls out of the money (OTM) to hit your targets?

Absolutely! There is always an outside chance of this happening to your account. Remember, there is always risk when trading and while it is rare, you might just end up with a bunch of stocks you cannot sell calls against. 

Recently I was assigned shares of AAPL and I’ve had to hold onto the shares because I just haven’t been able to sell calls on them. This is why I stress having multiple positions in your account. Even if this one trade becomes a dud for a few weeks or even a few months, the rest of your positions should be able to balance things out. 

For my account, I still managed to make almost $50,000 in the last eight or nine weeks, even as I held these AAPL shares. 

So the point here is there is always a risk with trading. If you are not willing to accept the risk, then my advice is to not trade. 

20) Markus, if you haven’t sold a call against the Apple (AAPL) $103 strike price haven’t you been missing out on money?

I can see why you would think that, but let me explain why this isn’t the case. 

Right now if I were to try and sell a call on AAPL at $133 that expires this week, I would receive $0.01 in premium. I’m not missing out on any money, right? In options, we know that $0.01 really means $1.00 because you multiply the premium by 100 shares. 

Even if I were to look further out to next week’s expiration date and at the $133 strike price, the premium would only be $0.14 or $14.00 per contract. In my eyes, that’s not worth it but again everyone’s views are different. In my opinion, it’s just not worth my time and effort.

21) When running a rescue mission on margin, how does one sell a covered call? My broker requires cash for any call that I sell.

I have some simple advice if this is in fact true: change your broker immediately. If I own AAPL shares and I want to sell 8 call contracts on the stock, then this would have no effect on my buying power. In fact, it should be the opposite.

If this is the case, then I suggest finding a broker that reduces your margin requirements when you sell a covered call. 

22) Why not still sell calls at your cost basis after the price of the stock drops?

The simplest reason is because there is often not enough premium to collect while using this strategy. There are times when the premium is worth it, but if not, then I don’t see much of a point if I can be perfectly honest.  

That’s why I mentioned in question 19 that I am holding this position in AAPL and it’s currently a dud. But as long as everything else is making me money then I am okay with that.

I am still selling calls against GDXJ and RIDE after I was assigned these shares. On stocks like DKS, MARA, and SNAP, I am still selling puts. Everything is making money, even if they are at different stages of the Wheel Strategy. 

What To Do When A Trade Is In Trouble

23) What do you mean by “rescue mission” for those who have not heard it before?

Luckily, I did a video on this exact topic and you can watch it HERE.

When I say a “rescue mission,” it means you have been assigned shares and the trade is now going against you. You can sell more put options below the assigned strike price. 

In doing this, you are able to collect more premium. 

A “rescue mission” is where you have been assigned shares, and now the trade is going against you. You sell more put options below the assigned strike price.

By doing this, you collect more premium. If you do end up getting assigned from this trade, it lowers your cost basis.

You should only really consider flying a ‘rescue mission’ when the stock has fallen by 30% or more from your assigned price. 

24) Why should I not continue to sell calls after the stock price drops?

Again, this has to do with not having enough premium available from the trade to make this worth the risk. If there is enough premium, then sell the calls. If there isn’t, then it is what it is and we just sit on it until we are able to sell calls again. 

25) What happens when you run out of buying power and can’t sell calls at your target?

First of all, I want to make one thing clear: when you sell covered calls you should not be running out of buying power. 

What your broker probably meant is that you cannot sell naked puts. There are a couple of things we can do here:

First, you can simply add more money to your account. Of course, this isn’t always a feasible solution.

Second, you can simply close out some of your existing trade positions to free up some more buying power in your account. 

26) Is it possible to buy options rather than sell options because I’ve heard selling options is much riskier?

Sure, I understand. This would be a great example of the PowerX Strategy. With the PowerX Strategy, you are buying options if this is what you prefer to do. 

When you are selling options, you are most likely using the Wheel Strategy. 

Pick your poison here. You’re either buying or selling options, and luckily for you, there is a strategy for each of these.

27) Is there any point in waiting to make sure that the market has stopped dropping before flying a rescue mission?

Absolutely. Another great question here. You never want to be caught catching falling knives, so try and let those hit the ground before embarking on your rescue mission. It’s best to wait and see if the stock or the markets have stabilized. 

28) I understand the idea behind starting the rescue mission when the stock drops 30%, but how do you determine the new put strike price to enter? Do you use the next support level? 

Yes, absolutely. Always look for the next support level. This is why reading stock charts is such an important skill to learn when trading. Let me show you an example of this with Lordstown (RIDE).

29 things you must know

In the screenshot above I got assigned at $21.50. Let’s zoom out and take a long-term view here. We can see the next support levels are around $12.00 or $13.00 which I circled. This would be my target for the strike price. 

29 things you must know

Now, let me pull up AAPL which is another stock that I’m currently trading. I was assigned my shares at $133, so if we take a look at the chart, the next major level of support is around $108. This is the strike price I would be interested in when starting my rescue mission.

29) It’s hard to make money on a small account unless you get assigned.

Actually, it’s hard to make money with a small account, period. I get a lot of questions about starting a trading account with $500 or $1,000, but honestly, it is very difficult to make money this way. 

In order to make money with an account this size, you would have to be trading aggressively and making much riskier moves. If you want to double your account, the fastest way is to risk the entire $500 in one trade. Of course, this is also a great way to see your account fall to zero.

This is basically what Robinhood traders who YOLO their accounts do. In terms of capital requirements, I recommend having at least $5,000 to trade with the PowerX Strategy. For the Wheel Strategy, I recommend at least $10,000 which will provide you with $20,000 in buying power. You’ll need this in case you get assigned. 

Personally, I started with $8,000 in my account and at first, that fell down to $1,600. In my second account, I started with $16,000 and again, I lost half. When I put in an additional $12,000 to this account, everything finally clicked. 

So if you are sitting there with a small account right now, I promise you, if I knew a trading strategy to help I would tell you. 

My suggestion is to try and improve your earning power. I’d take a part-time job at DoorDash or UberEats or something like that. Save up until you have at least $5,000, then you can start using the PowerX Strategy. 

Closing 29 Things to Know About The Wheel Strategy

If I didn’t get to your question here, don’t worry because I promise I am reading through all of the comments and questions I get! I’ll likely do more of this kind of thing on an upcoming Coffee with Markus episode and put out another list of questions and answers in a future blog post.

Read Next: How To Start Trading With $500



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