# Wheel Strategy Risks: What To Do If The Market Crashes

When trading The Wheel strategy there are, of course, tremendous gains and there are some risks.

For example, what do you do if a stock that you own tanks and you can’t sell cards against it?

Number two, what do you do if the overall market crashes and now you’re stuck in 5 positions and you can’t sell calls against it?

This is what we’re going to talk about today, and I will show you three very specific examples of trades that I’m in right now. I’ll also show you how to avoid getting in trouble if you can.

First, let’s talk about The Wheel Strategy.

## The Wheel Strategy In A Nutshell

Number one, you are selling put options and you’re collecting premium.

Number two, if the stock dips below the strike price of the option that you have sold, then you might get assigned. What does this mean? It means that you have to buy shares at a certain price.

Number three, the idea here is that you are selling call options, collecting more premium until you are getting called away. This is how The Wheel is turning around.

Now let me give you a very specific example. We are looking at JWN.

When JWN was going sideways like this, I sold puts with a strike price of 30.

After that, this stock has been dropping. And I got assigned at a strike price of 30.

At some point, we were trading at around \$26.

Now let’s talk about three scenarios.

## Scenario 1: What If The Stock Drops Around 20 Percent?

When I entered this trade we were trading somewhere around \$31. From the \$31 we went as low as \$26. Here we are talking about an 18.6% drop. So let’s talk about what to do at a 20% drop.

This is something that can happen after you get assigned. And at this point, there’s two things you can do. If you can sell calls above the assigned price, then you should do this.

So the assigned price was \$30. And the idea is to sell calls at a level of 30 or, if you can, 31, 32, 33, and so on.

Here’s what I did as we were dipping down.

At first, we were only dipping to around \$29, and this is where there was enough premium to sell 30 calls. This is where you’re collecting more premium.

At some point, you might be at a level where you cannot get enough premium for 30 calls. What do I mean by getting enough premium?

Well, for me personally, I have a criteria that I want to make at least 30% annualized on the calls that I’m selling.

On any premium that I sell, I want to make 30% annualized. If it is less, I’m not willing to sell calls, and this is what can happen. Now for you, it might be different.

There are many variations of the strategy, and for you, your plan might be different. I’m just telling you my plan, and for my plan, I will not sell any calls or puts if I’m not getting at least 30% annualized.

## Scenario 2: What If I Can’t Get At Least 30%?

What do I do if the stock price is hovering at a level where I cannot get 30% annualized? At this moment you have to SIT ON YOUR HANDS.

There’s nothing for me to do until I see that the stock is coming back and moving towards my strike price and I can get enough premium again. And this is exactly what I did here with JWN Nordstrom.

Looking at my account, I want to look at the annual activity.

We started looking here at Nordstrom. And as you can see, right now on the stock I’m down around \$1,800 and I have been able, by selling puts and calls, to collect a total of \$10,000 in premium.

If I would close the trade right now I would have \$8,500. This here is still a good scenario because on the stock, after I got assigned and it was tanking, I have been able to sell calls multiple times.

In fact, today (at the time of writing this) I was able to sell a \$30 call and I collected another \$990 in premium. This contributed to the overall more than \$10,000 that I’ve collected in premium on JWN.

## What If The Stock I Sold Puts On Tanks?

First case scenario. If it tanks around 15-20%, you should be able to sell calls, and you’ve got to wait until it comes back to the strike price.

Now let’s talk about scenario number two. What happens if the stock dips more than this 20%? What if the stock tanks by 30%?

For this scenario, I want to show you another specific example. Here I want to show you LVS.

Let’s take a look at the the weekly chart.

As you can see, Las Vegas Sands has been trading below between \$50 to \$70. I believe this was back in May when I saw that we were in a range trading here, and I sold puts.

I sold puts with a strike price of 58. After I did this, LVS kept dropping. We sold at a strike price of \$58, then LVS dropped as low as \$36.

Now let’s get an idea of how much this drop is. So we’re talking about \$22 that this stock dropped, and we divide it by 58 (our strike price), which means a drop of 38%. What do we do then?

Well, it’s different for everybody. I urge you to follow your plan. If I see a stock dropping by at least 30% from the assigned strike price, so in this case 38%, I like to “fly a rescue mission.”

## Flying Rescue Missions

Flying a rescue mission is just a fancier name of the so-called DCA, the dollar-cost averaging.

Once it drops 30% and it’s around \$40, this is when I will fly these so-called “rescue missions.”

If you want to watch a video I did where I explain in detail how to fly a rescue mission, check it out HERE.

When flying a rescue mission I do not simply buy more shares, but I keep selling puts at a lower level. The idea here is that I want to collect more premium. If the stock keeps dropping, I will get assigned more shares.

Now, when I’m flying the rescue missions I do it in one-third. What does this mean? Well, if, for example, in LVS originally I would have sold 60 contracts, so then I would do the rescue mission in another 20, 20, and 20 contracts.

Here in this particular example, I was actually looking for LVS to make a temporary bottom, which it did at around \$38.

When this happened, I sold more puts at a level of 37, and again, only for one-third of my original size.

It kept dropping below \$37, and therefore I did get assigned additional shares.

This is where the magic of dollar-cost averaging comes in. I have been able to lower my cost basis from originally \$58, to \$51.42. Now, it is not enough to sell calls, I have also been able to sell more puts at these levels.

As I saw more support at \$36 and \$35, I have been selling more puts for another third of my position, and have not yet gotten assigned. This is where I want to show you what exactly this looks like if you are looking at the P&L.

Here is LVS. You can see I collected a total of \$7,175 in premium. For the stock right now, I’m down \$29,611. If I would close this position right now, I would realize a loss of \$22,486, this is a drop of 38%. That, of course, is not good.

As the stock has dropped here, the first scenario that we had with JWN, as long as we are dropping 15-20%, no problem.

When we are dropping 30-40%, this is when I fly a rescue mission and I can sell more puts, collect premium and then have to wait until it comes back up.

If I would realize this loss right now, I would be sitting at a loss of \$22,486.

Keep in mind that the account that I’m trading is a larger account. I know that recently there have been some discussions if I can call it a \$250,000 account or a \$500,000 account (because of margin), or a million account (because of portfolio margin).

Here is what happened.

On January 11th, I opened an account with \$250,000. I opened a margin account, so that gave me a buying power of \$500,000 which is why I’ve been calling it a \$500,000 trading account.

Is it a \$500,000 account right now? Well, I realize some profits, there are some unrealized profits in there, so you can call it whatever you want. I called it, lovingly, “The \$500,000 Account.”

You get the idea. I started with \$250.000 in cash, used the buying power here and this is what the account is. Just wanted to put this in perspective.

If I realized a loss of \$22,000 based on the original equity that I put in, that’s 8-9% of the original equity.

That’s two scenarios, and I promised you that I will talk about three, and then we’ll also talk about what happens if all of the positions are getting assigned.

So the first scenario was down 15-20%. The second scenario was down 30-40%. Now let’s talk about the third scenario, and the third scenario is if the stock keeps tanking.

Now let’s talk about the famous, or infamous RIDE trade. Let me show you what happened here. This is where I told you that I entered this trade in February 2021. I violated my rules and we’ll talk about this.

I sold puts with a strike price of 21.50. And as you can see, RIDE at this point was trading around \$24 and has been going down ever since.

Right now (as of this writing), it’s trading at around \$5. This means that right now the stock is down \$19, which is a whopping 80%.

## Scenario 3: What Do You Do When The Stock Is Down 80%

First of all, RIDE did not go down 80% right away. At first, we had scenario one where the stock went down 15-20%.

So what do you do there? Sell calls and this is what I’ve been doing. In the beginning, I was able to sell some calls on RIDE and collect more premium.

Then we had scenario two, where we were going down around 30-40%. This is where I’ve been flying rescue missions. While flying these rescue missions I have been able to lower my cost basis from originally \$21.50 to \$15.79. Currently my cost basis is at \$12.86.

So we were good, but RIDE kept going down. We are now down about 80% What can we do right now?

Again, everybody has a different plan, and you should follow your plan. In your plan, you might cut a trade loose if you are down a certain percentage.

Following my plan, I’m looking at the fundamentals, and I still believe that RIDE can sell trucks, and I believe it is a great truck for a fleet. However, right now the stock price is not reflecting it.

So let’s talk about this. This is where an original short-term investment became a long-term investment because I have been in this trade for quite a while.

## What Should I Do With RIDE Now?

Well, there are two possibilities. I could right now liquidate all this and take a loss, but let’s take a look at some numbers first.

If we’re looking at RIDE, right now on this stock I’m down \$119,300, and I’ve been able to collect \$17,184 of premium. This leaves me a net loss, if I would liquidate this trade right now, of \$102,116.

Number one, if the stock drops 15-20%, no big deal. For instance, if right now I would close JWN I would still make a profit.

Number two, if the stock drops 30-40%, as it happened with LVS, I would right now realize a loss of \$22,000, based on the original money that I put in would be around, 8.8%. So let’s just say this is where I would realize a loss of 9%.

Number three is when the stock is down 80%. If I would sell right now, I would realize a loss of \$102,116, and based on the original \$250,000 that I put in the account it’s 40.8%, about a 41% loss.

Obviously, this is kind of “ouch” if I would sell this right now, which I’m not planning to do.

## Where Does This Leave Us?

First of all, now you know that there are risks when you’re trading The Wheel Strategy, because the stock can go down.

As long as the stock is just going down 15-20%, no big deal.

If it is going down 30-40%, I would even say not a big deal.

The “ouch” happens when the stock goes down 80%.

## Stock Selection Is Key

Now the key question is how can you avoid this? You might have heard me say it before, stock selection is key. And when it comes to stock selection, you want to go for value stocks.

Let’s bring up Google Finance and let’s take a look at JWN.

If we look at this stock, and we look at the annual financials here, obviously 2020 was kind of an “oops” for many, many companies, including JWN.

However, the financial performance, here we see the revenue before 2020 has been slightly increasing. Nothing crazy, and we see that the profits have also been increasing.

This is a sign for a value stock. You grow the top line, you grow the bottom line, and you do it slow and steadily.

Let’s take a look at LVS. If you just look at the annual data, this is looking better than JWN.

Do you see the financial performance? 2016-2019 has been slowly but steadily increasing, and so have the profits. Overall looking good. For me, this is a sign of a value stock.

Now let’s take a look at RIDE. This is where you see where I made the mistake. What happened here?

This is a spec company. And if you look at annual revenue, we see that there’s no revenue because it’s a startup. They have not yet produced the trucks and they have not sold any trucks.

Therefore, what do we see here? There is absolutely no revenue, none, and quite a big loss.

I should have never bought this company or traded it. I did, and so I’m showing you this so that you can learn from my mistake and make sure you’re not trading these stocks.

## Using The PowerX Optimizer To Find Great Value Stocks

Now, here’s the cool thing. As you know, I’m using our software, the PowerX Optimizer.

If we go to the PowerX Optimizer and look at the stocks that are popping up on the scanner, right now for example, we see Match Group (MTCH).

We built this in here so that you don’t have to just blindly say, “Oh okay, this is a good put to sell, so let’s just sell it.” No, no, no.

First of all, you want to always sell at a solid support number. The most important criteria are, number one, do you want to own this stock?

Since I believe that Google Finance is great, we built in this little megaphone right here. When you click on the megaphone, it brings you to this company. Let’s take a look at MTCH.

Here I picked a company that I believe is probably right in between value and growth stock.

They’re growing, but the growth is not crazy. We grow from one billion to two billion, doubling in four years. This is why I say it’s probably right between a value and a growth stock. Solid profits here.

Number one criteria, is this a company that I want to own? Yes. Do I want to own it at this price, \$152.50? No, I do not want to own it at this price.

The next stock popping up on the scanner is Luxury Goods. Let’s take a quick look.

Looking at annual revenue, it’s pretty good. Not bad. In 2020 the revenue was going down and they reported a loss. In 2020 that’s what happened to many companies.

But then 2021 seems that they’re right back on track. So do I want to own the company? Yeah, why not? I mean, this looks like a solid growth company.

Do I want to own it at this price, at \$37? Yeah, maybe. Recently it has been kind of in a downtrend, so it could break out to the upside, or it could continue to the downtrend.

## Summary

Before we get too carried away, let’s recap.

Number one, The Wheel Strategy is fascinating and you need to know the risk.

Number two, what do you do if a stock falls? Well, there are 3 scenarios here.

Scenario one, if it falls 15 to 20%, not a big deal. You should be able to get out of this with a profit.

Scenario two, what happens if it drops 30-40%? This is when you have to sit on your hands and wait to see if it comes back. If it doesn’t, you might have to realize a loss, which might be anywhere between 8%-10% of your account.

Scenario three, if you pick the wrong company and it goes down, you are stuck in this position and our short-term investment became a long-term investment.

And now you’ve got to see if the company still has solid fundamentals so that it can eventually turn around. With Lordstown Motors (RIDE), I believe it does. You might disagree, and that’s fine. This is where you follow your plan.

If you look at this company and say, “No, I don’t believe in it,” then you should get out of this stock. For me, if I’m looking at this stock and see that it’s trading at \$5, what is the upside potential and what is the downside potential?

Well, the downside potential is can go to zero. What is the upside potential? Can it go to \$10, \$12, \$15? I believe it is possible based on what I see. This is why I will keep holding on to RIDE for now. However, if it does dip below \$4, I have a very specific plan of what to do then.

I hope that this helps you understand the risk of The Wheel Strategy and that you also now understand how to minimize the risk.

Keep in mind, when trading there’s always a risk. You cannot eliminate the risk, but you can minimize the risk.

You should also now know whether The Wheel Strategy is something that you should be trading based on your risk tolerance, or if maybe a strategy where you have credit spreads, debit spreads, or something like this might be better suited for you.

I hope that you found this helpful, and If you would like to know how Mark and I personally trade these crazy markets, here are 2 videos for you:

One of them is explaining the “PowerX Strategy.“

The other one is explaining “The Wheel Strategy” in detail.

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