Wheel Options Strategy – Explained In 15 Minutes

   

Let’s talk about the Wheel Options Strategy. A fascinating strategy, very popular with many traders. Right now my goal is to explain this strategy to you in 15 minutes or less.

We will cover what is the Wheel Options Strategy? How do you choose the right stock? How do you choose the right option? When do you take profits? What do you do when the stock moves lower?

What Is The Wheel Options Strategy?

Let’s talk about the Wheel Options Strategy. What is the idea here? Well, number one, you are selling put options and for doing this, you’re collecting premium. I will talk to you about what stocks we will sell this put option on and what options we will sell, but this is the general idea.

Now, if on expiration date the stock is trading below the strike price that you have chosen then you might get assigned, meaning that you have to buy the stock. If assigned, then we move on to step number three. If you do not get assigned, we move on to step number one again.

What is step number three? This is where you sell call options and collect premium. As you can see, it’s pretty straightforward. I have a more comprehensive video on this that you can watch HERE.

Now let’s talk about when you do this. The real key is, step number two and step number three, choosing the right stock and choosing the right option.

How Do You Choose The Right Stock For The Wheel Options Strategy?

How do you choose the right stock? The idea here is to choose value stocks, not growth stocks. So how do you find value stocks for this particular strategy? Let me show you how I do it.

And again, I’m sharing my variation of The Wheel Options Strategy with you. As you know, there’s many, many variations out there, and I just want to share with you what works for me, what I am trading right now.

Value Stocks

One of the stocks that I traded today was BAC, Bank of America. This is where I like to go to Google.com/finance/, look at Bank of America, and there are a few things that I’m looking for.

The first thing I want to see is, do they pay a dividend? Because when they do, it is usually value stocks, growth stocks are keeping all of the money to reinvest in growth.

The next thing that I want to see is that the PE Ratio is relatively low, but most importantly, I want to see that the company is making money.

Wheel Options Strategy

What you see here in green is the revenue over the past five years, 2017, 18, 19, 20 and 21. As you can see, the revenue of Bank of America is steady at a high level here, around $90 million.

The Orange Column is showing the profits, and we see that BAC has been profitable year over year. Yes, we did have a dip in 2020, but hey, most companies, most value stocks did have a dip in 2020. Growth stocks were exploding. So this is what we are looking for here.

Growth Stocks

Now, let me show you another example of more of a growth stock. So we’re looking at a company like Peloton, for example. With Peloton, we’ll see they don’t pay a dividend, and they don’t have a PE ratio because they’re not making money just yet.

Wheel Options Strategy

And if you are looking here at the annual growth, you see that they have been exploding. Going from what, a few hundred million dollars to $5 billion dollars, $4 billion in sales, but never making a profit. In fact, in 2021, the profits have decreased, or the losses have been increasing.

The Three Criteria I Look For In Value Stocks

These are the three criteria that I look for in value stocks. First I want to see they make money, that they have moderate growth, not crazy growth like Peloton. Then I want to see that they typically pay a dividend, and that the PE Ratio, which is the price to earnings ratio, is rather low.

Now, one more thing that I want to see when picking the right stock is, that on a chart, a technical chart, the stock is in a sideways range. What does this mean?

What Is A Sideways Range?

Well, if you take a look here at Bank of America, you see that Bank of America kind of had been trading sideways over the past few months.

Sideways Range

So this here is October, right now (at the time of writing this article) it is February.

Here we see that the stock has been trading sideways between around $43 to $50. This is what I’m looking for.

Wheel Options Strategy

I don’t want to trade a stock, for example, like Zillow here that has been in a prolonged downtrend.

Wild Swings

Here, we have wild swings. I do not like these wild swings, but I definitely like a value stock that has recently been going sideways, in a sideways range.

Because as you’ll see here in a moment, we are benefiting if the stock either moves significantly higher, slightly higher, sideways, or slightly lower.

The only trouble that we have is when the stock moves significantly lower. And this is where we can talk about what to do when the stock moves lower in the last section here.

One final comment here regarding the right stocks, only choose stocks that you want to own. Why? Because step number two, you might get assigned. This means that you have to buy the stock.

An example here is Bank of America. I don’t have a problem owning this. Another example of a stock that I traded today and wouldn’t mind owning was BA, Boeing.

How Do You Choose The Right Option For The Wheel Options Strategy?

Now the question is, how do you choose the right option? Well, first of all, we already know that we want to trade a put option.

And when it comes to the right option, we need to look at the expiration date. So how many days to expiration (DTE)? And we also need to talk about the strike price.

Again, this is what is working for me personally. There are many variations of The Wheel Options Strategy, and everybody is trading it slightly differently.

This is what I really love about The Wheel Strategy – it’s a strategy that allows a lot of flexibility where you can tailor it to your needs.

Expiration Date

For me, the expiration date is a maximum of two weeks, and here is how I choose the expiration date.

On Monday and Tuesday, I’m choosing this week’s expiration. With this week’s expiration, I only have a few days, which is four to five DTE, days to expiration.

When I enter a trade on Wednesday, I’m looking at this week’s and next week’s expiration. This means that I have here anywhere between three to nine DTE.

But then on Thursday and Friday, I’m typically looking at next week’s expiration, which means that I’m typically looking at around eight days to expiration.

These are my rules of thumb. Will I trade a stock on Thursday that expires the next day? Maybe. So this is where I might consider taking a trade here, but these are in general my rules of what I’m doing, what expiration date I’m choosing.

Strike Price

The strike price will be the price at which you have to buy the stock. So you have to ask the question, do you want to own the stock at the strike price?

In order to do this, I want to look for a strike price at a support level. And I’m looking for a rather short term support level. So the support level that I’m looking for is the lowest low of the past eight weeks.

Why so short? Why do I only look back over the past eight weeks? Because my horizon for this trade is rather short term. It’s anywhere between three and nine days to expiration, therefore I don’t need to look back over the past few years.

Examples

Let’s take a look at a stock here, BAC.

Wheel Options Strategy

The blue line that you see here is the lowest low of the last few weeks. Here we see that the lowest low is $43. This means that for this particular example, I want to choose a strike price of $43 or below.

Let’s talk about Boeing, another example here.

Wheel Options Strategy

Boeing is a stock that I traded this morning (at the time of this writing). And as you can see, the lowest low of the last eight weeks was $190. I traded the $185 today.

So I want to choose a strike price that is at the lowest low of a stock that is moving either sideways over the last eight weeks, or below.

When Do You Take Profits?

When do you take profits? Do you take profits early at all?

I buy back the option, both calls and puts, when I see 90 percent of the max profits until the day before expiration. Let me give you a very specific example.

BAC, Bank of America. I sold the 41 put for a total of 23 cents, which is $23 per contract. The put expiration is on March 4th for 23 cents. So this means I would buy back the put for 2 cents on or before March 3rd.

I usually don’t like to do this on the last day of expiration, then you might as well let it expire worthless. So this is here’s an example for selling a put.

Let me give you an example for a call. So as an example, on ADI I sold the 162.50 call expiring March 4th for $2.71. This means that I would buy back the call for 27 cents on or before March 3rd.

Now we will move on to the question of all questions. What do you do when the stock moves lower?

What Do You Do When The Stock Moves Lower?

There are several ways, several ideas that you can do that others are doing, and then I’ll tell you what I’m doing.

Some of the ideas are, you could actually roll your put to avoid assignment. I don’t do that. I don’t like this idea. For me, that would be a no.

What I like to do, and again, it is up to you. I like to fly rescue missions. And I want to talk about those for a moment.

Flying A Rescue Mission

What does flying a rescue mission mean? This is where I sell more puts when the stock drops by around 30 percent. And what is the idea here? The idea is to get assigned, and therefore lower your cost basis.

What is the cost basis? Well, this is the price at which you’re selling the shares for. So basically the idea here is a cost averaging. You might agree with this concept, you might not, that’s up to you.

Especially when you chose the right stocks that are value stocks, I believe that you can average down your cost. However, if you are not comfortable with it, by all means, do not do this.

What I’m doing here is that I’m not rushing in with a full position. I’m flying these rescue missions in one thirds. What does this mean?

It means that if I committed $100,000 in buying power to the original position, in this case, Bank of America, I would commit around $33,000 to each rescue mission. And I would fly up to three rescue missions.

I know that I’m explaining this a little bit abbreviated here. If you do want to know more about rescue missions, I have another article HERE where I explain this in more detail.

Wheel Options Strategy Summary

My goal here for today was to show you the Wheel Options Strategy to give you a broad level overview in 15 minutes or less.

This way, you can decide whether this is a strategy that you want to learn more about, or if this a strategy where you say, “This is not for me.”

And I mean, this is absolutely your discretion. You are the trader, the captain of the ship, the pilot of this plane. You decide what you want to do with your money.

This is one of the strategies that I trade, and the way how I trade it. There’s many ways to trade The Wheel Options Strategy.

If you are intrigued by the way I trade it, I have a book for you called The Wheel Options Strategy, you can grab a copy HERE.

I also have a video around 45 minutes on The Wheel Strategy where I show you in detail, including many, many more examples of how I do it. You can check it out HERE.

Hope that this overview helps.

Read Next: Wheel Strategy Tips – Stock Correlation



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