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.
Right now, I already own two stocks, and I might get assigned another two stocks tomorrow (At the time of this writing on June 17th, 2021).
So what now? Am I in trouble? Well, I’ll show you what I’m doing so that you know what to do if this ever happens to you.
What Is The Wheel Strategy?
Let’s talk about The Wheel Strategy, just very briefly in a nutshell. What we do is three easy steps.
Step number 1. We are selling put options, and by doing so we are collecting premium.
Step number 2. I a stock dips below the strike price that we sold, we might get assigned. Sometimes this happens, sometimes it doesn’t.
Step number 3. When we get assigned we will sell calls and collect more premium.
All of this sounds good, and “it’s all fun and games until somebody loses.” I believe this is what my head coach, Mark Hodge, said this morning when we were trading with our Mastermind.
My Current Positions
If you look at my account right now, you will see there are six positions. A little bit more than normal, usually I like to trade up to five positions. I already own shares in LVS, and I own shares in RIDE.
These two are already assigned, and right now you see that AA is ITM, in the money, and CWH is in the money, and everything looks red.
So what do we do in this case? Tomorrow I might get assigned, and then I’ll have four positions in my account. Is this something I should panic about?
I want to show you exactly what I’m doing, what I’m thinking, and what I’m trading going into the next week.
My Current Positions
Let’s go through this step by step. Let’s start with the first one.
The first stock here is AA. Earlier this week, I sold AA puts with a strike price of 35. Now, again, they expire tomorrow (on June 18th, 2021). A lot can happen between today and tomorrow, but right now they are trading below my strike price, meaning that it is very likely that I get assigned on this one.
Let’s take a look at the other one that we have which is CWH, Camping World. I sold the strike price of 37.50 expiring tomorrow. If CWH is below $37.50 tomorrow, I will also get assigned here.
Just to give you an idea, for CWH I have 27 options, so this would be $2,700. With AA I have 29 options, so this would be 2,900 shares.
Another is JWN, Nordström. I sold the strike price of 32.50. Right now, Nordström, JWN is still hanging in there. is The current price is $33.44 so I might not get assigned there tomorrow. But hey, I might get assigned if JWN keeps moving lower.
LVS is a stock where I have been assigned at 58, so I own 1,700 shares at this strike price. As you can see, today it is trading at $54.29.
What do I do here? Losing money, right? So we need to see what exactly is the plan.
Then we also have PENN, this is another one that we traded this week with our Mastermind. For PENN, we sold the strike price of 79. Right now it is trading at $76.58, but earlier today it was trading at $75.43. So maybe I even get assigned there. What then? Then I am in six positions.
Last but not least let’s talk about RIDE. RIDE is definitely taking us for a wild “ride.”
Originally I was assigned at 21.50, and I flew a couple of rescue missions. My cost basis is now $15.79, and right now the break-even is at $14.37. The current price is $10.33, so I’m also losing money here.
How I’m Handling These Trades
Let’s talk about what to do. We’ll start in alphabetical order, so we’ll start with AA.
Again, between today and tomorrow, a lot of things can happen, but I just want to show you why I am not panicking just yet. Well, I rarely panic.
I mean you know me. If you have been following me, you know I always have a plan and I want to show you right now what that plan is. And again, my hope is that this will help you if you are in a similar position.
AA, the strike price is 35 and I might get assigned here, but let’s take a look and see what would happen when I do, because this is when we move onto step number 2 of The Wheel Strategy, which is selling calls.
See, we have step number 1, which is selling puts, and then we have step number 2, which is selling calls.
This is where I’m using the PowerX calculator to see exactly what I want to do. The stock purchase price, if I’m getting assigned, will be $35. So I will get assigned at $35.
I want to look at next week’s expiration, since tomorrow on June 18th, and since I might get assigned, I just want to see how much premium I’m getting.
In terms of shares, AA was trading 29 options, so this would be 2,900 share.
For AA I see that right now, with a strike price of 35 for next week, I could sell calls and would get anywhere between 50 and 56 cents.
We could do this, and again, since I cannot do it before I’m getting assigned, it might be a few days later. So let’s say that by Monday, some time decay has kicked in, and instead of 50 and 56 cents, I might only get 40 cents. Do you think that’s reasonable, 40 cents?
If I’m getting 40 cents next week, in this case, I would actually make 46 percent annualized. You see, the total premium for the number of shares that I’m trading here would be $1,160 in one week. That is not bad at all.
This is very, very cool. I like that idea. See, even if next week I’m only getting 30 cents, I’m making $870 in just one week. Overall, the premium annualized is still 35 percent.
Even though today it might look like “Ahh, I’m getting assigned,” you know what they say, “if you don’t want to own the stock, don’t sell puts.” And when I say “what they say,” it’s my head coach, Mark Hodge, and I.
Rule number 1 of the Wheel Club: Don’t sell puts on stocks that you don’t want to own.
Honestly, if on AA next week I can make $1,000 in the week, you want to know what my reaction is to getting assigned? “Yay, I want to be assigned!” and this is the reaction that you should have instead of, “Ahh, I might get assigned.”
If I can sell premium and I can make $1,000 in a week that’s not bad at all.
OK, let’s take a look at CWH and just start anticipating. Again, of course, I don’t know where premiums will be on Monday, and I don’t know if the stock is bouncing back or if it will keep dropping.
Do you need to fly a rescue mission? Of course not. Not at all.
So for CWH. The assigned price is $37.50 if it stays below this price tomorrow. If I get assigned, I would own 2,700 shares.
The strike price that I want to sell calls at is at the assigned price or higher. But here I want to do it at the assigned price, and let’s see what we could possibly get next week.
If we would sell shares at 37.50 right now, we would get 60 to 75 cents. Shall we be conservative? Let’s be conservative, and let’s say on Monday when we are selling calls we only get 40 cents.
With 40 cents, I would make another $1,000. Then there’s another $870 for AA, and another $1,020 for LVS too.
Just between two of these, I can collect around $2,000 in premium in one week. This is where I say, “Yes, I hope that I get assigned in CWH” because I like to collect $1,000.
Here’s the deal. When you’re trading the Wheel, you have to look for stocks that are worth selling puts on. This is where we have the scanner, and on the scanner, you will see that, yeah, something popped up.
So, for example, the one that I liked today was PENN, and PENN is a good stock. And then also X is another good one. These are two that we could possibly trade.
For the rest, I flagged them either with the red flag or with an orange flag. Wasn’t the biggest fan, some of them I didn’t flag at all because I was only trading this morning with our Mastermind members.
After this, I stepped away from the computer. I’m not hypnotizing the market all day long. I don’t know about you, the market seems to be pretty unimpressed by my hypnotizing skills. It doesn’t do what I want it to do. You have to constantly look for it.
The cool thing is, when you’re assigned you don’t have to worry about this. When you’re assigned you’re just selling calls, and usually, you can sell calls more aggressively and therefore you’re making more premium.
Is this helpful that I’m telling you why I’m so excited about getting assigned, and what I’m planning to do next week if I get assigned?
And again, tomorrow we might have a rally on both stocks, might be out of the money again, so they might rally up and I will never get assigned. This is the right attitude when trading the Wheel.
Let’s talk about the next one, JWN. Well, JWN that’s probably not going to happen that I’m getting assigned here. Right now we are still trading a dollar above our strike price of 32.50, but even if I get assigned I can collect premium.
This is the beautiful thing about The Wheel Strategy.
Step number 1 is you sell puts and you’re collecting premium. Number 2, you might or might not get assigned. Number 3, you’re selling calls, and when you’re selling calls, this is when you’re collecting money.
This is the important thing that most beginner traders don’t understand. For me as a professional trader, as I make a living trading, it doesn’t matter whether I collect these dollars or I collect these dollars. As long as I collect dollars, I don’t care which way it goes.
Let’s take a look at the other one, LVS. LVS is interesting because I do own 1,700 shares at $5,800.
Now, first of all, over the past few weeks I have been able to sell calls several times. By selling called several times on LVS I have collected about $5,300 in premium. That’s not bad at all.
So this is why we go back to the PowerX Optimizer, we enter LVS for next week’s expiration. For next week’s expiration, I have 1,700 shares at a strike price of 58.
Now let’s see how much premium we can get right now for this and whether it makes sense to sell calls against this existing position. So we go to LVS and we look at next week’s calls at the 58.
For these, we are getting 14 over 16 cents. So let’s say we would get 15 cents, and this is where we are going back and plugging this in, and this is where the cool thing is, right now, the PowerX Optimizer tells us that we would only make 10 percent annualized.
So I would only make $255. Now you might say, “$255 is better than nothing.” But here is what I think.
I think I just look at it and say, you know what, if this just has a little pop, and today it did have a little pop as high as $55.60. I was a little bit aggressive, and I wanted to sell this week’s premium. Should have gone to next week because then I would have been able to do this on the pop.
As you know, yesterday we had the Fed meeting. So right now there’s a lot of confusion in the market. If you look at overall what the markets are doing right now, we see that here the Dow is slightly down for the day. The S&P is pretty much flat, and the Nasdaq is actually gaining 1.5 percent.
So growth stocks are right now outperforming value stocks, which is fine. The sentiment can change again next week. Right now with this one, I’m waiting to get more premium.
What other positions do we have here? PENN, we already talked about this. So PENN, the strike price is 75. I can cancel this order right now and just let it expire worthless this way I’m making a little bit more money.
Then of course we have RIDE, and we’ve talked about RIDE several times. My break-even right now is $14.37. So this means that I probably shouldn’t sell calls that are way below my break even. It might make sense to sell calls at a strike price of 14 or 14.50.
And again, this is where we are going back to the calculator. So for RIDE, the stock purchase price was originally $21.50, then I lowered my cost basis to $15.79. Right now I could say it’s $14.39 which is my break-even price.
If you go to next week, and I have 10,000 shares here of RIDE, if you go to a strike price of 14, this means I would lose $3,900 because I’m getting called away at 14 and my break-even is at $14.39. So I lose $13,900.
However, as you recall, if you have been watching me, you know that I already made $15,284 in premium. So even if I did that right now, if I’m losing around $4,000, and I already made $15,284, this means it leaves me with a profit of $11,284, even if I’m selling the 14 call.
What if we sell for a strike price of 15? If my break-even is at $14.39, with an expiration of the 25th, already having 10,000 shares, and a strike price of 15. The premium here would be ten cents. That’s not bad at all for next week.
In this case, if I would sell the 15 strike price, which I could easily get 10 cents, I would make $6,100 on the shares, plus an additional $1,000 in premium. That’s not bad.
Here’s Why I’m Holding Onto RIDE
Here’s one of the reasons why today I’m holding out on RIDE. Since I own this stock I’ve become an expert on RIDE. I don’t want to be an expert on Lordstown Motors, but you see, when you own the stock, you want to make sure that you know what’s going on with the company.
You know a lot of things have been going on, the Hindenburg Report was accusing them of fake orders. Then it seemed that they were running out of cash. They had to restate something in the filing, they said that they had an ongoing concern, all of these things.
So it all was really, really bad news and this is what was driving Lordstown lower. Then on Monday, the CEO and the CFO resigned. This is why on Monday we had this down.
Then the interim CEO, Angela Strand, and I believe it was the president, gave an interview on Tuesday. They said, “You know what, we’re actually doing good. We have enough orders so that we can go through twenty, twenty-one easily, and twenty twenty-two as well. So we have plenty of orders.”
This is why the stock went higher and went as high as $11.
Then this morning they actually announced that they’re bringing on a new vice president, and the vice president is coming from GM, so lots of experience in the automotive industry, and that was actually good news, but it also turned out that they had to do another filing today where they said,
“You know what? On Tuesday when we said that we have enough orders, let’s rephrase this. All of these orders are not binding orders.”
Anyhow, this is why there’s lots of confusion. And if you look at RIDE today, this puppy has a wild swing. Today we went from $10.03 to $11.07. A one-dollar swing on a ten-dollar stock is 10 percent, and that’s a lot.
Especially if you look at the ADR, the average daily range of the last seven days. So on average, Lordstown Motors is moving a $1.50 per day. That is a lot, and it is reflected in the premiums.
The premiums are 185 percent here, implied volatility. So it’s a lot. Why am I not selling today? Because I do believe that there is a possibility, a very strong possibility that maybe tomorrow or on Monday it is quickly jumping up to either $11.00 again, or even to $12.00.
When this happens, instead of collecting $1,000 in premium, I’m pretty sure that I can collect $2,000 in premium.
Long story short, here with the “one bird in the hand and two birds in the bush,” right now I’m going with two birds in the bush. This stock is so volatile, I believe that there’s a good chance that it might pop up here.
I just wanted to show you today what I’m doing right now if I would get assigned with these two stocks. And what I would do is, yes, sell call premiums.
My goal is to make around $3,000-$3,5000 every week. If I can already collect $2,000 on these two stocks that I’m getting assigned to, I’ll take it. I’m already halfway there, I don’t have to do much. That’s the cool thing.