Trading The Wheel Strategy
When trading the Wheel, it’s important that you pick the right stocks, the stocks that you want to own. In this article, I want to show you my four-step process of what I personally do to select the stocks that I am okay selling puts on and possibly getting assigned.
Step #1: PowerX Optimizer – Using The New Filters
First of all, I’m using the PowerX Optimizer and I’m using the new filters. So let’s talk about the filters that we have here. If you’re new to the software, I have a video for you HERE.
The Wheel scanner runs every two minutes. And here are the filters that I am using:
1. Strike Price & Expiration Date
In terms of a strike price, we are scanning for strike prices between $5 and $400. I believe that $5 is the minimum here.
Also, I want to collect at least 10 cents in premium when we’re selling puts.
For the expiration date, on Mondays and Tuesdays, I’m looking for this week’s expiration. On Wednesday, Thursday and Friday I’m looking for next week’s expiration.
Next, let’s discuss the new filters that we have just incorporated that I think will help you to find the right stocks, as well as how I’m using them.
Helpful tip: When you click on default in the PowerX Optimizer software, you will automatically see the defaults that I personally use.
2. Stocks That Are Paying A Dividend = Yes!
The first thing I look for is stocks that are paying dividends, and here’s why.
Stocks that are paying dividends are typically value stocks which are in contrast to steady, growth stocks.
By looking for stocks that pay a dividend, it will narrow down the selections from dozens and dozens of stocks to around 10. This is much, much more manageable.
Now we already have the ROI filter of 30%, so let’s talk about the market cap.
3. Market Cap
You want to make sure that you’re not trading any stocks that are only at a few hundred million dollar market cap. This is why the market cap that I look for is a minimum of $5 billion.
I will share with you some adjustments that I tend to make when I don’t find enough stocks. Moreover, when I use the PowerX Optimizer, all of the stocks I choose have a market cap of 50.
4. PE Ratio
I like to see a PE Ratio of 50 or below, this is the filter with which I’ll get started.
Hopefully from this process, we narrow down our list significantly to around only 10 stocks.
Now let’s talk about the next criteria.
Step #2: Check the Correlation Tool
For me, it is important that I’m checking the stock correlation tool. What does this mean?
This means that I don’t want to own another stock that I already have a position in that’s in related industries. Let me show you a few examples:
In the asset correlation, I’m currently in DXS, AMAT, M, and DB – Deutsche Bank. As you can see, the correlation here over the past 6, 9, and 12 months has been pretty minimal.
It’s all here in green, which means that there is a correlation of below 0.5. When it’s below 0, this means that there’s basically no correlation.
There will always be some correlation because the market moves up and down, and all stocks probably move with it. But when it is below 0.5, I’m not too concerned about this.
Let’s take a look at MU, Micron Technologies. If I were to put MU into my portfolio, do I have a high correlation with one of the stocks that I already have in there?
Here we see that this is highly correlated to AMAT. So therefore I say no, I don’t want to put this in there, it’s almost like doubling up on AMAT. It’s super important to use the correlation tool here.
If you’re not in AMAT, then MU is something that we could take a look at.
Now let’s talk about Qualcomm. Let us see if Qualcomm is related to any of the stocks that I already currently own or sell puts on.
And again, we see a super-high correlation with AMAT.
We want to stay away from stocks that are highly correlated here. This is my second criterion.
Step #3: Double Check Google Finance
Now for the third criteria, I want to double-check Google Finance.
And how do I do this? Well, when using the PowerX Optimizer, it’s super simple. You just click on the megaphone, and it opens Google Finance.
Now let’s talk about Deutsche Bank. Again running through the asset correlation here, you see that Deutsche Bank is not correlated to any of the symbols that I’ve sold puts on.
Also, there is no correlation here. That’s good, this already meets my filter criteria, and now I’m looking at Google Finance next.
Here’s what I’m looking for:
I want to double-check how much the PE Ratio is. It’s 12, so we already know it’s below 50.
The dividend yield is 1.74. That’s normal these days. And what I really want to see is, OK, how did Deutsche Bank do over the past few years in terms of revenue and profits?
We see in 2019 they were struggling. Moreover, even though 2020 was a difficult year, it seems that they hung in there. And right now, 2021 was pretty good for them.
So I believe that Deutsche Bank here is a good value stock that I wouldn’t mind owning.
Let’s discuss the next criteria.
Step Number 4: Check The Support Level
Let’s talk about the fourth criteria when trading The Wheel Strategy: The support level.
For the first three criteria, do I want to own the stock? This is what I’m checking with one, two, and three. And do I want to own the stock at that strike price?
This is where I’m looking at the chart and I’m looking at support levels. And this is where it helps to have the lowest closing price.
Lowest Closing Price
This is an indicator that we programmed into the PowerX Optimizer. This indicator shows you the lowest closing price over the last eight weeks.
As I’m writing this, we’re in a crisis with Russia and Ukraine, and the markets got really, really spooked. But if I’m looking back here over the past year, I see that oh my gosh. Deutsche Bank really had some solid support at 12.
Furthermore, during this crisis here, where there was a lot of uncertainty, it quickly dipped below the level but is right now up.
Support Over Previous Years
Moreover, if I look back over the last two years, we see that Deutsche Bank went from $6 to a total of $15 and then found a lot of support here around 12.
Again, every trader is different. For me, this is good enough. This is where I look at the lowest low of the past eight weeks. This is where I ask myself, am I okay owning Deutsche Bank right here at $12?
I am, and this is where I just clicked on “add.” I then added it to the calculator so that I see for Deutsche Bank, what is the minimum strike price? And I got exactly 12 cents.
That’s what I sold. And based on my account size, how many contracts should I trade?
For my account size, this would be 83 options. This gives me here a total premium of just shy of a thousand dollars, $996, which annualized is thirty-seven percent.
Let’s take a look at another example here. And this is the example of Macy’s, another stock that I traded earlier this week.
Macy’s already meets my criteria. So let’s go back and forth and say, OK, we are using the new filters. Macy’s pays a dividend, has a market cap of at least five billion dollars, and a PE ratio of 50 or below.
Now I want to look in the correlation tool to see if this is correlated to any of the stocks that I sold puts on or that I already own.
And we see that Macy’s is not. Therefore, in step number three, we double-check Google Finance for the PE Ratio, the dividend, as well as revenue, and profit.
Here we see that the PE Ratio is very low at 5.7 percent. The dividend yield is two point four-six percent.
Steady Growth or a Setback?
We also see that Macy’s, yes, took a hit in 2021. This is not too surprising, during the pandemic a lot of companies got hit. Macy’s probably had to shut a lot of its stores.
2022 is looking strong. And if you look at the quarterly trend, we see that right now Macy’s is going in the right direction.
The final criteria that I have here is to check the support level, and we’re at solid support at 23.50.
Summary: How To Choose The Best Stocks When Trading The Wheel
Now you know my four-step process that I use to find the best stocks when trading The Wheel Strategy. And again, your process might be different.
When trading The Wheel Strategy you should also be prepared to avoid certain pitfalls. I have a video for you HERE explaining this in more detail.
If this has been helpful, leave a comment below and feel free to share this article.