Assigned With A Wheel Trade & The Market Tanks

In this article, I want to talk about what to do when you get assigned with a Wheel trade.

Previously, I have shown you the Wheel strategy. It’s a strategy that I’ve been trading for several months.

So I received a lot of comments on my videos asking,

“Yeah. That’s all good. But what do you do when you get assigned with a Wheel trade and the market crashes?”

And that’s exactly what we are going to talk about today.

What To Do When You Get Assigned With A Wheel Trade

I want to show you how to handle getting assigned when the market crashes by using a real trade as an example. This happened to me, and I couldn’t have timed it more perfectly because a little over a month ago, on October 28th, I was recently in such a trade.

The market was down more than 3% and it was a bloodbath. Luckily, this scenario provides me with an opportunity to use it as a template to show you what to do when this happens.

The TQQQ trade I was in at the time works as a perfect example, so let me just show you how things panned out.

At this time I had three Wheel trades in my account. Something to note, this week I trading a little bit lighter than usual because the elections were coming up in just a few days and there was a lot of uncertainty in the markets.

TQQQPL - Assigned With A Wheel Trade & The Market Tanks

So with this TQQQ trade, you see right now the open P&L is -$2,667. So what does this mean? Does it mean that we do have a big loss here? No. This is only an unrealized loss, and this is how I handled it.

I simply followed the 5 steps of The Wheel strategy, and the 5 steps are as follows:

  1. Pick a stock that’s going sideways or slightly moving up.
  2. Sell a Put Option, i.e. you have to buy the stock at the strike price.
  3. Collect Premium and buy the Put back when we see 90% of the profits.
  4. If we get assigned, i.e. have to buy the stock, we will sell Covered Calls against these shares to try and sell the shares at the strike price.
  5. Collect premium and buy the Call back when we see 90% of the profits.

Selling Puts

The trade initially started on September 3rd, so let’s backtrack a little bit to really dissect it step by step. TQQQ met all my criteria, and September 3rd is when I first started trading this.

TQQQchart 1 - Assigned With A Wheel Trade & The Market Tanks

On September 3rd I sold 150 put for $0.66, which is $66 because I traded one contract, and one contract represents 100 shares.

The next day I got assigned. I got assigned because when you’re selling puts it means that if the stock goes below the strike price at expiration, 150 in this case, I would get assigned. This is exactly what happened a day later when the option expired.

So I made $66 by collecting premium, even though I got assigned 100 shares at $150/share. But here’s the deal. Since I sold the put for $0.66 this means that my cost basis, since I keep that premium regardless of whether I am assigned or not, gets lower.

So this means that the $150 a share I paid minus the $0.66 I collected per share brings my cost basis down to $149.34.

Now doesn’t sound like a lot, but it basically means that the stock now does not have to go above $150 anymore. As soon as TQQQ goes up to $149.34 I’m breaking even. Now if it goes above this, I’m making money. Simple right?

Selling Covered Calls

Now that we have been assigned with a Wheel trade, this is where we start selling Covered Calls.

When you sell Covered Calls against these shares, the goal is to try and sell them at that strike price of that Call, while collecting more premium.

TQQQchart2 1 - Assigned With A Wheel Trade & The Market Tanks

Here’s the trade that I did. I sold a 155 Call for $2.10 on the 10th after realizing 90% of the profits. I bought it back for $0.37 the next day, so $2.10 minus $0.37 means I made $173. And now my cost basis gets reduced by another $1.73.

By the way, if you’re not familiar with The Wheel Strategy, you can watch a playlist with videos explaining it in greater detail HERE.

Well, now our cost basis is going lower. Our cost basis of $149.34 drops by $1.73, so our new cost basis is now $147.61. This means that if the stock goes back to $147.61 we break even, and if it goes above we are making money. Easy right?

TQQQchart3 - Assigned With A Wheel Trade & The Market Tanks

Next, I sold the September 80 Call, the September 18 150 Call, for $0.45, then bought it back for $0.05. So this means at this point we made another $40, bringing our cost basis down by another $0.40 to $147.21.

The stock kept going against us. It was going down and this is what many of you are concerned about.

“What do I do if the stock keeps going down?”

Well, you keep selling premium. By doing so, you’re lowering the cost basis. And what I did next was really cool.

Selling More Puts?

So next, I sold two puts for $110 and $118. That averages out to $114. Then I bought them back at $0.06. This means $114 minus $0.06, so we made another $108 here.

Now I’ll explain in a moment why I sold a put here even though right now since we own stocks, and we should be selling calls. There’s a very specific reason for it, and I’ll explain it to you.

TQQQchart4 1 - Assigned With A Wheel Trade & The Market Tanks

Looking back at our trade, we are lowering our cost basis to $146.13. Next, after we sold the puts and they expired worthless I sold another 100 put for $2.40 and bought it back for $24. So we made another $216 here, bringing our cost basis down again from $146.13 minus $2.16 to now $143.97.

When To Sell Puts INSTEAD Of Calls

So if you are supposed to sell Covered Calls during this stage of The Wheel Strategy, why did I sell those Puts? I already owned 100 shares of TQQQ that were assigned to me, so why risk getting assigned more?

Well, I sold these Puts instead of Calls for a specific reason.  At this stage of The Wheel Strategy is where you normally would sell Calls, however, if you are on this part of this strategy and the market is tanking, you have to make an adjustment to this strategy if the price keeps dropping to help keep your cost basis as low as possible.

These were 100 Puts, meaning if the price would have dropped below $100 at expiration for either of them, and I would have been assigned the shares.

If that were to happen, I would now own 100 shares at $100 each, on top of the 100 shares I already own at $150 each. So now I own 200 shares that I paid a total of $250 for, bringing the average price per share to $125.

Getting assigned these shares would have lowered my cost basis tremendously. If you subtract the total Premium I received on all of these trades, which was $12.05 a share ($1,205 overall) from the average price per share, which in this case is now $125, this comes to a cost basis of $112.95.

This is what the cost basis would have been IF I was assigned these additional 100 shares at $100 each. I wasn’t assigned these shares, however, and my final cost basis was $137.95.

Do you see why getting assigned is a good thing? People are afraid of getting assigned, but as long as you have adequate buying power, and are following my methods for picking good stocks, assignment should be looked at as a good thing 🙂

Selling Premium

You see, this is what the Wheel does. You can sell premium while you own the stocks. Let’s take a look.

TQQQchart5 - Assigned With A Wheel Trade & The Market Tanks

So I then sold a $150 call for $1.57 and bought it back at 15. So this means that I made another $142 bringing down my cost basis again to $142.55.

Now, I don’t want to bore you and make this article too long here, but long story short, as you can see, I sold a few more of the calls and I bought them back.

Overall, by just selling premium, even though I still owned the stock, I was continuing to lower my cost basis. At this point, the stock was down $2,770.

However, by doing this, by selling more calls and puts here, I was able to make $1,748 in premium.

So this means I made $17.48 per share on these 100 shares. So if you take the $150 minus $17.48, right now my cost basis to break even on this trade is $132.52 as soon as TQQQ goes back to $132.

Now, what happens if TQQQ keeps going down? I will keep doing what I’ve been doing, following The Wheel Strategy.

I’ll keep collecting premium until at some point, I can sell these shares for a profit.

Recap

So now you know what to do when you get assigned with a Wheel trade, and hopefully, it becomes less scary for you.

I look forward to getting assigned with a Wheel trade because that allows me to sell calls and make even more money.

If the stock keeps going down, I’ll just keep selling, and I will continue to lower my break even more and more.

So, right now, TQQQ does no longer have to go all the way up to 150. It only needs to go up to $132.52.

I just wanted to address this process because I know that many people who are trading this strategy are concerned saying,

“Oh my gosh, what if I get assigned with a Wheel trade?”

It’s a good thing. It’s a good thing and now you know why.

Let me ask you this, was this helpful so that you know what to expect when you are getting assigned with a Wheel trade? If it was, do me a favor and leave a comment below.

Read Next: How To Place The Wheel Trade



Related Posts

My Personal Plan For 2021

Options Delta Explained

Paper Trading on TradingView: 3 Simple Steps

How To Manage A Trade That’s In Trouble – My Options Trade On TQQQ

Leave a Reply


Your email address will not be published. Required fields are marked

  1. Great article. You outline some different techniques to use to continue to lower your cost basis even if you can't sell covered calls when the price has tanked.

    The big thing is that you have to have enough buying power to do these things. So it's very important that you keep track of your buying power and choose your position sizes carefully to make sure that you have some "reserve" in case something like this happens.

    I frequently sell puts and run the wheel strategy on TQQQ. Since it's an index based upon the Nasdaq, it has little chance of going to zero. And if you look at the long term history of the Nasdaq index it has been in a long term up trend. Very often the Nasdaq is setting new record highs.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}