The Wheel Strategy

The Wheel Options Strategy

14 min read

The Wheel Strategy for options trading is one of the more consistent ways to make income through collecting premiums. 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 tell you that it is possible. However, you are going to have to work a little for it. In this post, I will 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 or trending market.

When executed correctly, it can reduce your cost basis while your equity trends are somewhat bearish. We assume you have been keeping up with our blog and know all about buying and selling options. If so, you are ready for something more complex but rewarding.

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

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

Also, selling an out-of-the-money cash-covered put with the same expiration date would be best. It would be best to 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 Wheel Options Strategy

Joining the Theta Gang

The strategy I will explain is 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 with the 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.

Wheel Strategy Expiration Date

The expiration date of the options contract is the date at which the contract must be exercised.

The contract holder can exercise the contract anytime before the expiration date if it falls on the right side of the strike price.

At the expiration date, the owner must either let the contract expire worthless, exercise the contract, or get assigned the underlying shares. 

As a general rule of thumb, the further out an expiration date is, the higher the premium. The closer the expiration date is, the lower the premium. 

Swing Trading the Short Option

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, preferably, sell your cash covered while the price action is also on support.

Implied volatility is almost always highest within the first hour after the opening bell or during power hour. If you choose an even slightly more exciting equity, 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 the 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 throughout 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 daily if possible. Sometimes, you can even swing both options in a day.

COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

Let the Good Times Roll

The first week in a monthly option will often produce the biggest IV swings, but by the end of 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 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.

Avoiding assignments is key, so be mindful of assignment risk. When you’re ready to roll out, it’s helpful to look at the daily highs and lows of the next month and try to sell at or near the highs. The daily options income will greatly increase, especially when there is volatility. You aim 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 trade the wheel options strategy on Robinhood or Webull and. 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 must sell your options, which strikes pretty close to the money, and the assignment must be avoided.

You generally want to maintain this position long enough to offset your cost basis. Blue chip and growth stocks are best because you can sell your options a few strikes out without worrying 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 Options Wheel Strategy Process

The Wheel Strategy for options trading is a cyclical process providing consistent income by collecting premiums.

There are three specific steps to the Wheel Strategy, but staying in Step 1 is optimal for the most part.

As with most options strategies, choosing the right stocks is the key to executing the Wheel Strategy.

You don’t want stocks with too much volatility that can fall below the strike price during a bad session.

Let’s look at the three steps in the Wheel Strategy.

Step 1: Selling Put Option Contracts

Regarding options, I find most traders are confused about put options. Call options are easier to understand. Instinctively, we always think stocks will rise in the future, so the mechanism behind calls is fairly simple.

Most people think that option contracts are bearish. While this is true when you buy or sell a contract, it can be bullish. 

Remember, when you sell an option, you collect a premium. Another trader is buying that contract from you and paying the premium. When you sell a put option contract, you believe the stock price will stay above the strike price.

This means that until the contract expires, you are betting that the stock will perform well. Rinse and repeat this step for as long as possible to continue to collect premiums. But you will likely come to Step 2 in the Wheel Strategy sooner or later.

Step 2: Get Assigned Shares

What does it mean to get assigned shares? It means when you were selling put contracts in Step 1, the stock price dipped below the strike price at the expiration date.

This means you are on the hook for buying the shares of the underlying stock. Remember, each option contract is a block of 100 shares. So, if you sold five put options contracts, you’d have to buy 500 shares. 

This is why you should always ensure you have enough buying power when selling puts. If you do get assigned, you will want to be able to afford to buy those shares. It might seem like a major blow to be assigned shares, but there is a silver lining. This brings us to Step 3 of the Wheel Strategy.

Step 3: Sell Covered Calls on Your Assigned Shares

That’s right! It’s time to make more premium on the shares you were assigned! Selling covered calls means selling call options on a position you hold. The goal for selling covered calls is that the stock price does not rise above the strike price.

Either way, covered calls are a desirable outcome. You can either continue to sell covered calls for a premium or sell the shares back at some point to recuperate your money.

What happens if you get assigned when selling covered calls? In this scenario, you sell off your shares. This is why it is a ‘covered’ call.

Once you’ve assigned or sold your shares to the market, you can head back to Step 1 again. Now you can see why this is called the Wheel Strategy. 

Does the Wheel Strategy Work?

The Wheel Strategy is one of the more sound and consistent options strategies to use. Since each step has a positive outcome, no matter what happens, many options traders like to use it to stabilize their portfolios.

Traders can stay at Step 1 of the Wheel Strategy for years if they choose to. The key is not to be greedy and focus on choosing a lower strike price rather than aiming for a higher premium. If you continue to choose higher premium contracts, your chances of getting assigned become more likely.

The one thing about the Wheel Strategy you should note is that it does need a fairly sizable account balance to start using it. In addition, since you are always at risk of being assigned shares, you must ensure adequate buying power.

It also helps to use a margin account to increase your total buying power. I don’t normally suggest you trade on margin, but for a solid options strategy like the Wheel Strategy, it comes with a bit of a safer floor. 

The Wheel Strategy isn’t the fastest way to make money, but it is consistent. For example, Warren Buffett has been known to sell put options on his held positions to increase income flow. Buffett then reinvests this into the positions he holds.

Selling put options isn’t normally what new options traders go for, but I can assure you it is an excellent way to make a steady income. Moreover, in market volatility, like we are currently experiencing, this additional cash flow can go a long way in stabilizing your account. 

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. 

Wheel Options Strategy Twist Caveats 

The guy writing this trades the wheel options strategy in a small account. The goal is to build his working capital to return to the blue chips.

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

Once you have mastered this strategy, you can have that kind of confidence, too, but it will 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. Note: This strategy isn’t for just anyone.

It will take work and due diligence to do properly and requires you to develop your skills. This strategy will test your patience, and you may barely break even after pushing for months.

It will either click or you will excel at it. Or it will confuse you and drive you into FOMO

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

Other times, even those who get it will have trouble when things go wrong, mostly because they fall 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 wheel options strategy being 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 a pretty low-stress position that doesn’t always have to 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 strategies. I aim to give 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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