Wheel Options Strategy - A Simple Income Strategy for Options Traders

The Premium Wheel Options Strategy – A Conservative Options Strategy for Consistent Income

selling-puts-arkk

The wheel options strategy is an inherently bullish, mechanical, options income strategy known by various names. The covered call wheel strategy, the income cycle, and the options wheel strategy are just a few of the many names that investors use. But one thing is certain, the systematic approach remains the same.

More and more investors are choosing to use the wheel options strategy over a buy and hold approach because of the ability to create a steady stream of income on stocks you want to or already own.

Realistic Strategies, Realistic Returns

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Andy Crowder quit a lucrative job on Wall Street so that he could share his expertise with regular investors – instead of super-rich investment banks and hedge funds.

Today, he publishes four different specialized options services for Cabot Wealth Network.

When you join Cabot Options Institute Masters Club, you get all four, at half the price of each separately!

These services each offer a safe way to generate reliable returns – based on statistical likelihoods that give you an 80% chance of success.

Make Money in This Market

The mechanics are simple.

  • Sell Cash-Secured Puts on a stock until you are assigned shares (100 shares for every put sold)
  • Sell Covered Calls on the assigned stock until the shares are called away
  • Repeat the Process!

 Basically, find a highly liquid stock that you are bullish on and have no problem holding over the long term. Once you find a stock that you’re comfortable holding, sell out-of-the-money puts at the price where you don’t mind owning the stock.

Keep selling puts, collecting even more premium, until eventually you are assigned shares of the stock, again, at the strike price of your choice. Once you have shares of the stock in your possession begin the process of selling calls against your newly issued shares. Basically, you are just following a covered call strategy, collecting more and more premium, until the stock pushes above your call strike at expiration. Once that occurs, your stock will be called away, thereby, locking in any capital gains, plus the credit you’ve collected.

Let’s go through an example to show you exactly how the wheel options strategy works.

My preference is to look for low-beta high-quality stocks, household names, that I feel comfortable holding over the long term. I’ve found that dividend aristocrat stocks work well with the wheel options strategy because they have a history of stability, strength and a proven ability to weather market turbulence.

Walmart (WMT)

Wheel Options Strategy – Step One

The retail behemoth is currently trading for 142.64.

walmart-WMT-stock-chart-july-2021

Let’s say we decide to go with the 138 put strike.

We can sell to open the 138 puts for roughly $1.77.

But before I go any further, I want to point out an important aspect of placing a trade. Never sell at the bid price and never use a market order. Always use a limit order. All research shows that taking this approach will tack on a significant percentage to your account over the long haul. Basically, be efficient and don’t give up easy returns … work your orders!

By selling the 138 puts for $1.77 our return is 1.2% cash-secured, or 6.9% on margin over 31 days.

If WMT stays above our 138 put strike at expiration we begin the process of selling puts again, thereby creating more premium to use as income or to lower the cost basis of our position. So, if we bring in a conservative 1.2% every 31 days, and we can sell puts roughly 11 times over the course of a year (if the stock stays above our chosen short put strike) our annual return is 13.2% on a cash-secured basis … or 75.9% on margin. Again, it bears repeating, we can use that capital to either produce a steady stream of income or to lower the cost basis of our position.

But what if WMT closes below our short put strike?

No biggie. We are issued or assigned shares at the price where we wanted to buy the stock. Think about it for a sec. We collect a premium to wait for a stock to hit our chosen price.

Wheel Options Strategy – Step Two

So, let’s say WMT closes below our 138 put strike at expiration. If so, we are issued 100 shares at $138 for every put contract we’ve sold.

Once we have shares in our possession, we begin the process of selling out-of-the-money calls against our shares, which begins the covered call portion of the wheel options strategy on WMT.

Now the question is which strike to choose. Again, ultimately it just comes down to preference. My preference is focusing on call strikes that have a probability of success ranging from 68% to 85%.

wheel-options-strategy-covered-calls-WMT-August 2021

Let’s say we decide on the selling the 147 calls against our newly issued WMT shares for roughly $1.40 per call contract. Our probability of success on the 147 calls stands at 72.50%

Our static return or return on capital is 1.0% over 31 days.

If WMT stays below our 147 call strike at expiration we begin the process of selling calls again, thereby creating more premium to use as income or to lower the cost basis of our position. So, if we bring in a conservative 1.0% every 31 days, and we can sell calls roughly 11 times over the course of a year (if the stock stays below our chosen short call strike) our annual return is 11.0%. Again, it bears repeating, we can use that capital to either produce a steady stream of income or to lower the cost basis of our position.

But what if WMT closes above our short call strike?

Again, no big deal. Our shares are called away, so of course, we keep our $140 per call contract, plus we are able to reap any capital gains from our stock. In this case, we would keep the $140 plus an additional $9 per share or $900 per 100 shares for a 7.5% gain.

Once our shares are called away, the wheel options strategy cycle ends, and the decision has to be made whether or not to continue using the strategy with the same stock.

The wheel options strategy is a wonderful strategy for those wanting to generate steady income, with lower risk compared to most options strategies. It also gives the investor an opportunity to lower the overall cost basis of a position.

The strategy isn’t a get rich quick strategy, rather a methodical, systematic approach to trading options that generates consistent returns, month after month, on stocks that you want to hold in your portfolio over the long term.

As always, if you have any questions, please do not hesitate to email me.

Comments

  • There is a scenerio rarely talked about in the wheel strategy.i,ll exagerate.You are assigned your puts at 138,but the stock continues down to 110 flatlines and ceases to pay dividends.Your covered calls at break even are next to zero if they exist.You are in fact left with a lemon thats just eaten up a chunk of your capital.Yes i know,only pick the right stocks,but it can still happen.

    • Roberto,

      Thanks for the comment. Yes, losing trades can always happen and they will happen. It’s a guarantee. But, if you are prepared from a risk management standpoint (proper position-size, stop-loss, etc.) enduring losses should never be an issue. It’s a part of trading. Also, I would say your example is a bit extreme, because let’s say you go with a Dividend Aristocrat type of stock that has been paying dividends for over 10 years, if not more, the chances of them not paying a dividend any longer, is well, slim. Anyway, thanks again for the comments. Greatly appreciated. Love the engagement. Hope this helps.

    • Roberto, simple solution: sell calls that are atill at the 20 delta or so. If price moves up to challenge the strike, roll up (and out, if necessary)

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