The Wheel Options Strategy

The Wheel Options Strategy

9 min read

Would you like to receive 100 free shares of your favorite stock without having to spam your Robinhood link? The wheel options strategy is a great way to accomplish just that. I’m going to have to tell you that it is possible. However, you are going to have to work a little for it. In this post I’m going to tell you how to make options premium and implied volatility swings pay for your position.

This strategy involves selling covered calls and cash covered puts in a way that allows you to swing trade a position in a sideways market or a trending market.

When executed correctly it can even reduce your cost basis while your equity is trending somewhat bearishly.We are assuming you have been keeping up with our blog, and know all about buying and selling options. If so you are ready for something a little more complex but a lot more rewarding.

Is the Options Wheel Strategy Profitable?

  • As with anything, ROI comes from correctly implementing a trading strategy and closing losers rather than averaging down. We’ll cover the best way to trade the wheel options strategy with a little modification to the standard practice that makes it better. 

Joining the Theta Gang

The strategy I’m going to explain is actually a modified combination of two different strategies. Like selling covered calls and cash covered puts, your objective is to use options income to offset your cost basis and thus lower your risk.

It is an inherently neutral position that has a primary purpose of generating income but a little more involved.

Think of it as joining the Theta gang but your role is the aggressive enforcer. You are a Theta Gangsta with the wheel options strategy.

Options Wheel Trading Strategy Explained

Let’s get to it. First we open with a wheel trade strategy. The wheel trade strategy is an option strategy that is typically applied to dividend stocks but for our purposes dividends are irrelevant.

The strategy is basically to sell a covered strangle by buying 100 shares of a stock that you expect to either trade sideways or slightly bullish. Then you immediately sell an out of the money covered call about a month or so out.

Also, you need to sell an out of the money cash covered put with the same expiration date. You MUST have enough buying power to sell the cash covered put. 

Here is where we modify things a bit. The wheel trade has you relax while Theta eats away at the premium. Then you are expected to close the options when the premium is $0.05 or you are assigned.

Regardless, we are ready to work a little bit to move things a little faster. Here is where the second strategy or twist comes in.

The Twist – Swing Trading the Short Option

The Wheel Options Strategy

Now we add the modification. It involves swing trading the short options.So here’s the part where we make good in telling you you would have to work a little. Get into your position by buying 100 shares at support if you can. Next, sell your cash covered put preferably while the price action is also on support.

Implied volatility is almost always highest either within the first hour after the opening bell or during power hour. If you choose an equity that is even slightly exciting it will have at least a little daily price action.

Hit up your one and five minute time frame charts to catch a pop  in price you can sell your covered call on for the most premium possible.You might be excited to watch what happens to your options during the first 5 minutes after the opening bell. DON’T LOOK. Wait at least 5 minutes.

You want to scalp premium whenever possible but you will want to do this by taking advantage of the implied volatility swings that play out through the day especially during the first week. 

IV is typically pretty low in the middle of the day. That is when you are looking to temporarily buy back at least one of your short options for a profit while intending to sell it for more than you bought it back for at a later time.

The idea is to try to trade in and out of at least one of your short options every day if you can. Sometimes you can even swing both options in a day.

Let the Good Times Roll

The first week in a monthly option will often produce the biggest IV swings but by the end the second week those swings will usually start to dry up a bit. This is when you will want to look into the next monthly to roll into.

You can either skip the last couple of weeks left in the monthly or wait until a few days before expiration and try to buy them back for $0.05 or so.

The key here is to avoid assignment so be mindful of assignment risk. When you’re ready to roll out it’s helpful to look at the daily high and low on the next monthly and try to sell at or near the high.The daily options income will very greatly, especially when there is volatility. Your goal is to try to capture at least $0.10 every time you swing trade the short options.

But you must keep in mind that you’ll still have to pay commissions on your trades when they’re applicable. That is why this strategy is perfect for commission free trading platforms. 

I myself trade the wheel options strategy on Robinhood or Webull and believe me I will scalp every nickel if push comes to shove.Choose a decent equity. This strategy can be used with a penny stock. However, be aware that you will have to sell your options strikes pretty close to the money and assignment must be avoided.

This is because you are generally looking to maintain this position long enough to offset your cost basis. Blue chip and or growth stocks are best because you can sell your options a few strikes out and not have to worry as much.

Dividend stocks are fine however one must always be aware of the higher profitability of early assignment.

Keep It Rolling

  • If you’re trading the wheel options strategy on a decent equity instead of a penny stock you can keep it going for as long as you want. If you’re persistent and skilled you’ll eventually offset your cost basis completely as long as you are never assigned on a cash covered put. I have held positions for more than a year that ended up with a negative cost basis. 

It can really happen.On the other side I’ve had times where the equity turned bearish and yet my cost basis stayed below the share price.

As always selling cash covered puts comes with downside risk from your strike less the premium received down to $0. This is why we want to chose a decent equity.

The truth is that not everyone has $50k of risk tolerance to throw around, especially when you are fairly new to trading options. Hypothetically one could choose $BAC as a good example of a low cost equity that shouldn’t be de-listed any time soon.

You would need a little over $5k to enter this position at current share prices which is 10% of a $50k account. Trading risk management is everything.

However, you can only get so far using this strategy on optionable penny stocks within your risk management plan if you are trading in a small account.

The Wheel Options Strategy Twist Caveats 

The guy writing this is trading the wheel options strategy in a small account. The goal is building his working capital to get back into the blue chips.

Life happened and he had to start over. He has mastered this strategy and is taking risks but he has experience. It helps to be trading with funds that you are not afraid of losing.

Once you have mastered this strategy you can have that kind of confidence too but it is going to take time. Please paper trade EVERY strategy first until you understand every part of it.

Set your buying power in your simulator to a realistic amount while you practice too. Note: This strategy isn’t for just anyone.

It is going to take work and due diligence to do properly, and requires you develop your skills. It will test your patience, and you may even end up barely breaking even after pushing for months.

Truth be told it will either click and you will excel at it. Or it will confuse you and drive you into FOMO. 

In case of the latter it is absolutely imperative to maintain a trading journal on each equity you are using this strategy on with a running record of cost basis after each transaction.

Other times even those who do get it will have trouble when things go wrong. Mostly because they are falling into emotional trading patterns.

This is the nature of trading.

Final Thoughts

Not every strategy will work for every trader. This is okay because you can take the time to become the kind of trader that this strategy demands. You have a trading journal and a chartered history to reflect on while fine tuning your skills. 

The fact that the wheel options strategy is a fairly neutral position means that your risk will be directly related to your ability to adjust or even close the position whenever necessary.

I work a full time job while managing this strategy. I may only get to check on it a few times a day. But I find it to be a pretty low stress position that doesn’t have to always be on my mind. I am an automotive mechanic so I must be able to work with a clear and focused mind.

Moving forward, it is in my best interest to take everything I have learned from The Bullish Bears Team to develop my own strategies. My aim is to give it back to the most honest and generous trading community I have ever known.

The Bullish Bears have changed my life from living paycheck to paycheck into living from paycheck to paycheck while supplementing my income with my trading accounts and contributing to my retirement assets. I really can not be more grateful for this service. 

(Jeremy V)

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