Reserved only Wheel Option & Related Strategies

[kcun333]

I've been reading on this forum and watching options trading videos for a few weeks to better understand the Wheel Strategy before I take the plunge. If someone can help answer my questions, it would be most appreciated:

1. Premium prices just seem very low now and it doesn't seem reasonable to sell a 30-45 day option for $15-$50 and tie up funds for such a low amount using SCC or SCCP strategies. Some investors say to only sell options with either weekly or no more than 30-day timeframes with a high Theta decay and with Delta no more than .30, allowing for a greater probability that options will expire worthless. Other use much longer timeframes with prices ITM and correspondingly higher premiums hoping that you can buy to close the SCC or SCCP at a profit before expiration. What is the better strategy?

2. I know we need to avoid IV Crush when buying calls, but isn't it to our advantage when utilizing the SCC and SCCP Wheel Strategy to sell the options when implied volatility is greatest, such as right before the earnings announcement?

3. I read one post, I think by SOL, that you sell covered calls on green days when the market goes up at least 500 points for the day or 700 points for the week, and I assume one would sell the cash covered puts on red days using the opposite of the SCC price moves, but is there a better method to do this? Is there a strategy such as determining the premium price you are asking for based on looking at the option chain prices when the stock in the at-the-money (ATM) and using that as the limit order for selling the option?

4. Since I'm trying to recover from a loss of about 20% of my portfolio and hope to use the Wheel to help with this, it would be wonderful to have a continuing thread on what other investors are doing with the wheel, what stocks and premium prices that are being targeted, are investors selling options during high volatility around earning announcements to increase the premiums, etc., and maybe even having the TI subscription folks provide actual entry recommendations for SCC and SCCP. Thanks.

[Eric]

I'll sort of address #1 and #2.

Just pulling a stock out of thin air... INTC has been CLOBBERED lately and is trading <14 forward P/E, price/tangible book value is 1.07, and is paying over 5.5% div yield right now.

With INTC closing today at $26.43 the bid/ask on January 13th $25 puts was 29¢/32¢. I'm going to assume you could've been filled at 30¢ and youd pay $0.65/contract in commissions (Schwab). A profit of $29.35 isn't much...it's a 1.174% gain on the $2,500 capital used as security...buuuutttt... That 1.174% is coming in 15 days (I count the day the put was sold as a full day). 29.35/2500=0.01174. 0.01174/15(days)*365(days)*100(convert to percent)=28.567% annualized rate of return... Pretty damn respectable.

#2 Selling covered calls in high IV times right before earnings will benefit you more often (assuming the strike price would get you out of the position at a profit), but selling a put expiring right after earnings is IMO excessive risk. What if the CEO "died suddenly" on the earnings call; or announces they've lost Dell (their biggest customer, 18% of revenue) to an exclusive deal Dell inked with AMD? The stock could drop 40% before the open and now you're stuck with a big loss... Was it worth it to make a few extra cents?

#3 If you fine-tune your entry and exit points using market swings you can make higher premiums and increase your odds of success by exiting the trade early if you've made most of your possible gains but there's still a significant amount of time till expiration.

[SOL]

#3 If you fine-tune your entry and exit points using market swings you can make higher premiums and increase your odds of success by exiting the trade early if you've made most of your possible gains but there's still a significant amount of time till expiration.

I will address point 3 for now. Eric brings up a good point, and I use this often. For example, when the Market is down by several hundred points or the stock is down a lot for no reason, I will sell puts with 30 to 90 days of time premium, and if the stock reverses, which it usually does, I will buy back the put wait for a similar setup and keep doing the same thing. I did very well on this, and I managed to get into CYBR for almost 20 lower than the asking price based on the money I had made using this strategy. When I got into CYBR, I started selling covered calls with the same goal. On up days I sold the calls, and if there was a chance to buy back at a profit, I bought them back and then sold the again on up days.

One thing to keep in mind is that I only sell puts on stocks I want to own, and more importantly, I don't sell too many puts on high-risk plays. I used the above for WOLF, CPB, etc.

Always start small and then build up.

[kcun333]

Thanks Eric and Sol.

Currently, I cannot SCC since the stocks I own are greatly out of the money and there are no premiums offered. I may be able to try SCCP, but I'm wary since we expect another (or continuing) market downturn and don't want to get stuck with more losses.

What stocks would you try for SCCP in this market? I see that AMD is listed as a potential at 57-60, but are there other candidates you would recommend whose stock price is less than $70 (I don't want to spend more than $7,000 to buy stocks in the event I am assigned as I would like to have cash in case of a FOAB or MOAB signal)?

There are many good candidates looking at the latest market updates and comments from the board on certain sectors, like semiconductors, that will probably do well even in a market downturn - INTC, WOLF, CPB, HL, HIMX, GMS, TGLS, LSCC, and maybe HIMX (although I don't know if I should buy a Taiwanese semiconductor company at the moment with the looming threat of China on the horizon)?

Maybe I shouldn't be so concerned about the stock price as much as ensuring I do the SCCP strategy in a market swing down with at least 90 days to option expiration giving me time to buy to close?

SOL, do you offer another service for option trading such as this?

Thanks, and wishing you a great New Year.

[Yodean]

INTC, TSM, Skynet, AMD, BITO, SLV, GLD, LABU, TMF, urnm ... so many candidates for Spinning the Wheel. Some tie up more collateral/cash, of course, and some aren't as liquid/high volume.

Still, when picking candidiates for Spinning, I like to make sure these are huge companies/"command" assets/sectors with big mega-trends underneath (i.e. they won't go bankrupt) supporting them, so even if they suffer major drawdowns, they generally come back stronger in the years to come. The dividend yield (DRIP), if present, is a bonus.

My favourite for pure Spinning and swing-trading _atm_ is TSLA - it's a terrific FOMO and also FOGU (fear of going under) stock for the Herd, which is reflected in tremendous volatility, liquidity and crazy option premiums.

A "safer" one is BAC.

[kcun333]

Thanks, Yodean.

AT $123/share, TSLA may be too expensive for me to try in case I get assigned, but do you worry about that? Do you just use market downturns and 90-day option expiration dates so that you assume you will have time to buy to close before the option expires?

Have a great New Year.

[Yodean]

Thanks, Yodean.

AT $123/share, TSLA may be too expensive for me to try in case I get assigned, but do you worry about that? Do you just use market downturns and 90-day option expiration dates so that you assume you will have time to buy to close before the option expires?

Have a great New Year.

Generally, I like to strike at 25% to 30% delta in the 4 to 6 week expiration range, but I often modify this, depending on circumstances, for both Spins of the Wheel (SCC vs. SCP).

For example, my base case atm is a volatile but bullish Jan/Feb - so depending on the stock, I may strike at 15% to 20% delta or so, to lessen the potential of the stock being called away.

Also, I tend to strike at higher deltas and aim at slightly lower expiration periods when SCC'ing a stock at which the strike is higher than my cost basis (e.g. taking profits), and especially if I am planning to sell the stock in question anyways.

I bought some tsla shares recently and on up days, have been selling one or two calls on the position, and taking profits fairly quickly on down days (e.g. 40% to 60% profits on the calls).

I also sold a bunch of puts on tsla, but had to roll some of them over, as the price kept dropping below my strikes recently. A couple I rolled over to '25 to maintain a net credit.




I think it's good to start with Spinning the Wheel on one or two stocks/ETFs only, and really master the process.

TQQQ and SLV are decent Spin candidates, imo, if you're starting out. I Spin TQQQ a lot, and also accumulate shares in that one. I'm kinda in and out of SLV, but did recently take profits and sold.

[kcun333]

Great info. Thanks so much.

[Eric]

4. Since I'm trying to recover from a loss of about 20% of my portfolio and hope to use the Wheel to help with this, it would be wonderful to have a continuing thread on what other investors are doing with the wheel, what stocks and premium prices that are being targeted, are investors selling options during high volatility around earning announcements to increase the premiums, etc., and maybe even having the TI subscription folks provide actual entry recommendations for SCC and SCCP. Thanks.

A friend of mine is aggressively selling/swing trading weekly puts on levered ETFs and has made 15.4% in his taxable brokerage account in the first three weeks of 2023!

I sold a couple handfuls of $11.00 puts on SOXL today. If the puts expire worthless I'll make 2.4% on my capital in just 9 days. Rinse & repeat...

[SOL]

I have been playing CYBR which is a much more volatile stock, but with TA, it works pretty well. Been jumping in and out of the Feb 17 130 calls. The first time I was in for two days and closed the position for 17.2%. The second time I was in for one day and closed the position out for a gain of 27.5%. The call in question was the Feb 17, 130 call.

I am in it for the third time, so far, two days, and I am down 5%; as soon as it shows a decent gain, I am closing and repeating.

I sold the put late last year. It did not work out well, but that depends on how you view it. The stock was trading slightly above 150. I sold the put for 11 bucks. I was assigned the shares. My average entry price dropped to 139, allowing me to start selling covered calls. Before these shares were assigned to me, I was jumping in and out of cash-secured puts, so with the money I made, my average cost dropped to around 130 per share.

This is a very volatile stock, hence the higher premiums

I use a mix-and-match strategy. One strategy calls for buying, stocks that are somewhat stable and I would not mind owning. The other strategy calls for buying a more volatile stock that I don't mind owning also, but I take advantage of the volatility to jump in and out more often by selling cash-secured puts and covered calls

[kcun333]

Very good information. Thanks everyone.

[Eric]

I sold those puts for quarters (roughly), bought them back today for two pennies. I made 87-90% of the potential profit in less than half the expected time.

If SOXL retraces tomorrow I'll reopen the positions and make more than I originally projected.

[SOL]

I sold those puts for quarters (roughly), bought them back today for two pennies. I made 87-90% of the potential profit in less than half the expected time.

If SOXL retraces tomorrow I'll reopen the positions and make more than I originally projected.

Congrats. Selling puts is one of the most underrated and under studied areas. However, if one follows the simple rules then it can be a great way to generate income.

The simple rules are
1) Do not sell puts on a stock you don't want to own
2) Never use margin to sell puts
3) If you want to make extra money then use you can use daily or weekly charts to jump in and out of the puts. Sell the puts, buy them back when the low value. Rinse and repeat. If you are assigned the shares, sell covered calls

[Yodean]

https://youtu.be/7a0BRIAufBA

*****

This compares selling covered calls on shares vs. selling synthetic covered calls (on LEAPS). In his example, the latter performs considerably better, with less risk overall.

Not my cup of tea - I prefer having the shares when selling calls - but others may prefer his approach.

[DrSven]

Interesting approach. Is it really less risk owning leaps instead of shares, with leaps expiring some day while stocks do not?