I want to talk about some real trading tips and take a look at a few possible Wheel trades. The Option Wheel Strategy is a really fascinating strategy, and as some of you know, I love it. I’ve been using this strategy to generate more than $150,000 in REALIZED profits this year.
However, I do have this one pesky position that is putting a damper on all this happiness and is currently down $65,000 in UNREALIZED profits.
That is why, in this article, we’re going to talk about what to look out for when you’re trading The Wheel, what stocks should you trade, what stocks should you avoid by all means, what is important in terms of strike price and expiration, and all the good stuff.
The Wheel Strategy In A Nutshell
Let’s get started and take a look at a few examples here. In order to do this, I’m using the PowerX Optimizer, which is the scanner that I personally use to find the very best opportunities according to The Wheel.
We see that right now there are four stocks that came up on the scanner.
Now, let me explain why I like certain stocks and why I don’t like certain stocks.
First of all, if you’re absolutely new to The Wheel Trading Strategy, let me just explain to you The Wheel Trading Strategy in a nutshell. It’s basically only three steps.
Step number one: we are selling put options and collecting premium.
Step number two: when selling put options, we might or might not get assigned. Because when you are selling put options, it means that you are selling it at a strike price. If the stock stays above the strike price we’re good. If it dips below the strike price you’re getting assigned these shares. Now you own the stock and you get to step number three.
Step number three: selling calls.
Sounds easy enough, right?
By the way, if if you’re new to The Wheel Trading Strategy, take a look at this playlist containing videos I’ve made explaining the strategy in detail. You can check it out HERE.
But now that we know the basic rules here, let’s talk about the first share that popped up on the scanner.
Wheel Trade Examples – DKNG
So DKNG, Draft Kings.
Here a strike price of 48 is suggested. So we would sell a put with the strike price of 48, and for this, we are collecting premium.
Right now we would collect 41 cents per option, so that’s $41 per option. Then you’ll use your calculator to see how many of these options you should sell.
$41 is not bad, especially since we only have 8 days to expiration, and this allows us a drop of 8%. This means that DraftKings can plummet another 8% and we are still fine. Just looking at the numbers, it does look pretty good.
But the key question here is, do you want to own DKNG at $48?
There are some important things to consider here. The first is, do you want to own the stock? What do you know about Draft Kings? Do you like their business model?
A few things that I like to see is, first of all, are they profitable? Are they a growth stock, or are they a value stock?
This is where we can quickly look at the earnings, and we can also look at the income statement. You can see only 2 income statements because they haven’t been traded at an exchange for that long. Don’t really care about this at this point.
But I just want to look at a weekly chart so that you get the idea.
Looking at the weekly chart, you see that they started trading in 2019, around 4/2019.
Now as you can see, in 2019 they reported a little bit of revenue, and they reported a loss. This is what this means here. This is below the zero line. So this means in 2019 they reported a loss.
Now as you can see for 2020, their revenue looks like it doubled to me. However, what do you think about this loss? It looks like it got ten times worse.
What does this mean? The company is slightly growing, but posting a huge, big loss.
If we look now at the quarterly, their revenue is pretty stable. They’re not growing. The loss is getting better, but they’re still posting a loss. Now the question is, do you want to own draft kings?
Do you like this company? A company that came from basically around $10, went all the way up to $70, and it’s now trading at around $51. Do you want to own this company, and do you want to own it at a level of $48?
So for me, and every trader is different, this would be a no, I don’t want to own this company. It’s not yet profitable. This is the so-called growth stock.
It’s very typical for growth stocks to not be profitable just yet. However, usually, growth stocks are growing explosively and we see that the stock prices here grow dramatically. However, the profits are still not there. In fact, they were posting a loss. So for me, this would be a no.
If you’re going back to The Wheel Scanner, this is where I would mark this as a no with a little flag.
Wheel Trade Examples – JNUG
The next one is JNUG.
Again, if you’re just looking at the chart, we see this is all over the place. The first question is, do you want to own JNUG?
This is a gold miner index, and as you can see here, it’s a so-called 2x. What does this mean? This means that it moves with an accelerator of two times.
So if the regular gold miners index, which is GDX, goes up by 1%, JNUG, will move 2%. If GDX goes down by 1%, then this will go down by 2%. Everything is amplified.
You need to know this because whenever you see something here on the scanner or when you’re looking at stocks, whenever it says 2X, or sometimes 3X, I personally like to stay away from this.
This is where the name kind of already gives it away, and I say this would be a no for me. In fact, I never trade these.
Wheel Trade Examples – NEGG
Let’s take a look at the next one, Newegg. Newegg is a computer company, NEGG. We can quickly look at the financials to get a better idea of how this company is doing.
If you look at the financials here, you see they have been around for a few more years. We have four years of data, and that’s the max that we are getting. In 2017 we see they had a little bit of revenue and they made a small profit.
Then they decided to expand like crazy, it looks like they went public in 2017. So as they went public they got an influx of cash and it seems that they used this cash to dramatically to grow their revenue by about 2 billion dollars. While they were doing it they posted a small loss.
So here the revenue grew explosively, and they were investing that in marketing, infrastructure, hiring more people and things like this. This obviously would be cool. However, then when they went a little bit down, 2019, 2020 they were posting nice gains. Not bad.
So this is not a growth company. It was a growth company in 2017, right now it is more of a value stock. Now let’s take a look at the chart.
Looking at a weekly chart, you see that they started trading at around $5. Then they jumped up to $25. Recently, something happened that they went from $5 to $80, but then came plummeting down to around $15.
So according to the scanner, we see that it comes up with a strike price of 13. Do you want to own this stock? I mean, just looking at the financials it seems pretty solid, but I don’t know what the heck happened that drove it up from $8 to $80.
As quickly as it went up, it came all the way crashing down. So I do not want to own the stock, and I don’t think that I would ever trade it. This is just too crazy for me.
Wheel Trade Examples – SONO
Let’s take a look at the last one, which is SONO, Sonos Technology. We can take a quick look here to see what they do, and you might be familiar with the company. They have home sound systems, loudspeakers, surround systems, the sound bars, this is what they do.
Overall it does sound like a reasonable company, now let’s take a look at the financials.
We already see this is a super solid growth stock here. They’re actually posting nice growth year over year. They’re even posting some profits.
So they are profitable. They’re not growing like crazy, they’re growing slow and steady, and they’ve probably been around for many, many years so this is not too bad.
When I’m trading stocks according to The Wheel, I like to look back for the last eight weeks and see if I can identify some levels of support.
So first of all, do I want to own SONO? I wouldn’t mind owning Sonos. They are a solid growth stock, making profits, growing slow but steady, we are good here.
If we’re looking back over the last eight weeks, we look to see if we see solid support somewhere. We see a solid support at 32. Now, we could be a little bit more aggressive and say, “you know what, they dipped below 32 a few times and right now, even at 33, this would be good support.”
Wouldn’t you agree? I mean, just looking here at the chart, you get a better idea of what is happening.
So let’s take a look at the PowerX Optimizer and let’s see if we have some good premium.
We see that it says a strike price of 34. For me, 34, this is a little bit risky. It’s a little bit risky because this here is not really solid support. Just looking at the chart, I told you you’d be very happy at the 32 level.
But the two main parts of the question is first of all, do you want to own the stock SONO? Yeah, I want to own the stock, I wouldn’t mind owning Sonos. Number two, at the strike price where currently you see premium?
And for me looking at this, I do not want to own Sonos at 34. However, if this dips a little bit more and I have an opportunity to sell the 32 put, then yes, I would be very interested. Right now I’d mark this as a maybe.
Why is it a maybe? Well, I’m already OK with criteria number one, I want to own the stock.
Criteria number two, at this level, no. But you see, since I already have one of the two criteria that is met here, this helps me dramatically.
What Went Wrong With RIDE
Now, let’s talk about RIDE and what went wrong there.
Because this is where I violated my rule of looking for growth stocks. I got a little bit greedy, I must admit, I was bored out of my mind. I was stuck in Florida during the ice storm that we had in Texas, and there was not much to trade and I got a little bit impatient.
And you see, today (September 23, 2021) I mean, there were several opportunities today, but overall we had an up day.
What does that mean? Markets were up between 1-1.5%. When this is happening, there’s not a lot of premium in puts.
And this is what we see that today (September 23, 2021). We had a bunch of “no’s” or even “never’s.” Three days ago, on Monday, when the markets plummeted 2%, there were plenty of opportunities. I traded JPM, JPMorgan. I traded X, US Steel, & Boeing.
Anyway, I was stuck there in Florida, unable to drive my RV back to Texas, and I was bored, and I was looking for a trading opportunity.
Now I don’t make mistakes very often, but this was a big one.
But looking at RIDE, just going through the usual due diligence and looking here at the financials, RIDE has actually no income at all.
There’s no income, but a lot of losses. So no income is already something. It’s a big no. No income means for me no trade, but I told you I violated this rule. Knowing what you know now, you quickly see why I made a mistake there.
Now, in terms of do I want to own the stock at the strike price, this is where if you go back to the levels that we had, I think it was trading around $25-$27. The strike price was 21.5.
At that point, just looking at the chart, it looked like we were in a solid uptrend. I mean here’s an up channel, we broke out of this one. So technically the price was OK. But I violated the first out of the two criteria, this is not a stock that I should have traded.
We’ll see how this ends. Right now I have an unrealized loss. I know that some of you like to argue of how I should trade this unrealized loss, but for me an unrealized loss is subject to change.
In my account it’s subject to change a few $10,000 a day because I’m trading $250,000 in cash with $500,000 in buying power.
And even this is a little bit smaller account than I usually trade. Right now I have stacked away some money out of the account for a possible real estate transaction. I’ll tell you more about this another day.
The two most important things when you are looking at potential Wheel candidates are:
Number one, do you want to own the stock? And then number two, do you want to own it at the strike price?
And this is where I showed you the example of Sonos that in general, I would like to own the stock, but not at this strike price.
I hope that you found this helpful. If you would like to know how I personally trade these crazy markets, then 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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