Wheel Strategy Tips: When To Exit Trades

   

Deciding when to exit trades is a common theme among traders. Do you know when to exit trades for a profit? Find out the crucial steps I go through below.

When To Exit Trades

Let’s talk about The Wheel Strategy and specifically when to exit trades. This is a question that I often receive, “Should we roll our positions, should we close our options early, or should we just wait until expiration?”

First, What Is The Wheel Strategy?

Let’s very quickly review The Wheel Strategy. As you know, it’s just 3 simple steps.

Step number one, you sell puts and collect premium.

Step number two, you may or may not get assigned. If you’re not getting assigned, you start over and go to step number one. If you do get assigned, you move on to step number three.

And step number three is, that we sell calls and collect premiums.

If you’re new to The Wheel Strategy, I did a video for you HERE where I explain the strategy in 15 minutes. Check that out quickly before coming back to this page.

Second, Does It Ever Make Sense To Close A Trade Before Expiration?

The key question right now is, does it make sense to close a trade before expiration? In order to answer this effectively, I want to show you a very specific example of a trade that I have going on right now.

On April 1st, 2022, I sold AMD, the 98 put expiring on April 8th. And I did that for 75 cents.

When To Exit Trades
AMD on April 1st, 2022

Next, if we hop over here to PowerX Optimizer and look at the trade, this is what I saw on April 1st. By the way, today, as I’m writing this, it is April 4th. So I did this on Friday and today is Monday.

When To Exit Trades
The Wheel Calculator

I did this for $75 per contract. If you look at the calculator here, based on my account size, I should sell 10 contracts. This gives me $750 in premium.

Now here is the important thing. It’s a concept that I’ve been mentioning in my book, The Wheel Strategy, and this is the concept of the premium per day.

But What Is Premium Per Day?

As we entered this trade, we basically had 7 days to expiration. We’re taking the total premium of $750, and dividing it by 7 days that we had on expiration when we entered it on April 1st.

When we do this, we arrive at $170.14. Let’s keep it easy and do this at $170.

So what does all of this have to do with closing the trade before expiration? Well, let’s take a look at today. Again, today is April 4th. It is Monday and we entered this trade on Friday.

Next: AMD Options Chain

When To Exit Trades
AMD Options Chain

Here is the the options chain of AMD. We see that from Friday on, we actually moved higher.

Today, we opened higher, then we moved to a bit lower, but now it seems that we are closing higher. As you can see, AMD is up 2.2 percent from Friday.

Looking at the 98 put that I sold, we see that right now, the last traded price is 12 cents. So let’s talk about this.

When to Exit Trades: Buying Back The Put

Let’s say if I’m buying back this put that I sold for 75 cents today for 12 cents, what does this mean?

This means that our profit would be 63 cents, or times 10 contracts, this would be $630.

Also, right now, the trade has been only open for 3 days. I established it on Friday, and then we have Saturday, Sunday, and Monday.

AMD PPD

This is where we go back to the idea of the premium per day, PPD. So here the PPD would be $630, divided by 3 days that I had it open, as planned.

And this is what I’ve realized right now after 3 days. So we take the $630, divided by 3, and that’s $210, almost twice as much!

The Pros And Cons Of Exiting Today

Let’s just see. 12 cents, divided by the original 75 cents that received, that’s actually a healthy 84 percent. So that’s 84 percent of the max profit.

The Pros Of Closing Today

Now let’s talk about the pros of closing today. First, I’m actually collecting much more per day than I have anticipated. So I’m collecting $210 per day instead of the $170 that was planned.

Number two, I’m freeing up buying power. Why? Well, because when I’m trading 10 contracts here at a strike price of 98, this would be $98,000 that I’m tying up in this trade in buying power right now.

Therefore, I would have this free, and also, I’m freeing up one position in my account.

For me personally, I like to trade up to 5 different positions in my account. And right now I have three positions in this Tradier account, I have AMD, DB, and TPR.

In the tastyworks account, I have LVS, RIDE and ARKF.

The Cons Of Closing Today

Well, I’m basically I’m missing out on some premium. I have received $750, and now I’m giving back 12 cents, so I’m giving back $120, right?

This means that I’m missing out on $120. This is for the next 4 days, so the PPD here is actually only $30.

But here’s the deal. If the market keep going up, I might not find another trade tomorrow. Therefore it would be better if I kept this one because then I’m at least making another $30 instead of nothing.

Because if I’m closing the trade today, there’s no way that I can get any more premium here on this trade by taking advantage of the theta decay.

So…What Is The Solution With All The Pros And Cons?

What do we do? Well, for me personally, my rule is that I will close a trade early if I can close it at 90 percent of my profits.

In this particular example, I sold it for 75 cents. The idea here is if I can buy it back at 7 cents, this is when I’m keeping 90 percent of that max premium. And I will do that until the expiration date.

If on the expiration date I have not been filled, then I usually let it go. Because on that day, I usually don’t enter another position, and therefore I might as well keep the remaining premium.

Seven cents here means that it’s 7 times 10 contracts, so this would be $7 if I keep it another day. And of course, if I see a trade I would close this and enter the other trade. But you get the idea.

When to Exit Trades Summary

Does it make sense to close a trade early? Yes! But you need to look at the premium per day to decide if it is worth it for you.

And this is why: As soon as I get filled on my sell order, and it doesn’t matter whether I’m selling puts or I’m selling calls, I put in a GTC order, which is good till canceled for 90 percent of my profits.

This way, the whole thing is on autopilot, and I don’t have to worry about a thing.

If you don’t yet know about The Wheel Strategy, I have created a playlist that you can check out HERE.

And also, I have a video that shows you how to pick the best stocks for The Wheel Strategy, you can check it out HERE.

Read Next: Trading The Wheel – How To Find The Best Stocks In 4 Simple Steps



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