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How It Works
The Wheel Strategy is a systematic way to sell option cash-secured puts and covered calls as part of a long-term trading methodology.
In essence, you keep selling options on stocks that you are bullish on, to generate monthly income.
The basic methodology is very straight forward:
- you sell cash-secured put options on a stock until you get assigned and receive the stock shares
- you sell covered call options on the assigned stock until it is called away and you have to sell the shares
- you start again and repeat the cycle
Basically, you repeatedly sell cash-secured puts (CSP) to collect option premium. Should you ever get assigned you have to buy the stock at the agreed price. Then while holding the stock you sell covered calls (CC) on it to receive more premium. Once eventually your stock gets called away, you have to sell the shares and can start again going back to sell more cash-secured puts on the same or another stock.
The Wheel Strategy will pay you to open a long position, allow you to collect dividends and benefit from the stock price appreciation while holding the stock shares, and finally pay you again to close out the position.
The overall process starts selling a cash-secured put option on a stock and collecting the related premium. You should select stocks that you are confident to buy at a specific price, and eventually hold over the long term. For each option contract sold you need to be willing and have the funds available to purchase 100 shares of the stock at the agreed strike price.
If you are assigned on a stock then you will look to sell an OTM (out-of-the-money) covered call with a strike price higher than its cost basis. If the stock that you now own goes higher in price but the covered call is not ITM (in-the-money) at expiration then you profit from the premium collected and capital gains over the entry price.
So while holding the stock shares you can generate a new source of income by selling covered calls multiple times for more premium, which will also lower the cost basis of the stock in case all these call options expire worthless. You keep doing it until the call option stock goes ITM before expiration, and eventually, the shares get called away from you.
Normally you want to avoid selling a covered call with a strike price lower than its cost basis, as that will bring a loss in the overall wheel trade. To ascertain that you need to keep track of all the premiums received plus the stock appreciation.
The Wheel Strategy is great for generating semi-passive steady income consistently throughout the year, with lower risk than many other option strategies, and usually widely exceeding the results of a simple Buy&Hold strategy.
On top of stock appreciation it looks to reduce the cost basis of your favorite stocks by collecting option premiums from the sale of cash-secured puts and covered calls, and when possible also dividend payments.
The Wheel Strategy will require proper stock selection and a lot of patience, but if done right will generate regular and consistent returns, month after month.
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#TradingOptions #SellingOptions #WheelStrategy
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.