Options Trading, The Wheel Strategy and anything Options

[jlhooter]

I was hoping to start a conversation around options trading.
I have been read/watching a lot around Selling Cash Secured Puts (CSP) and Selling Covered Calls (CC) and stumbled upon The Wheel Strategy (TWS) which uses both.
Before you say it, I am not falling for any get rich quick schemes but wanted to know what your thoughts are on all the above (CSP, CC, TWS) and other options alphabet soup approaches (spreads, etc.).
Although I am a newbie, I don't fall (or at least try not to) for the easy way and I will spend a lot of time (maybe too much time) researching everything.
I want to take a portion of my investments and try new things related specifically to options.
Feel free to go as deep or light as you wish, but please don't go easy either. I am not looking for an easy way out and will dive in regardless; just looking for what you think and good and bad experiences.

Thanks for your time.

[nicolas]

About selling cash-secured puts, I know Sol already talked about how it's a smart way to get paid to place a limit order on a stock you want to get into.

Now for the Wheel Strategy, I'd want to look more carefully into what is their strategy for selling covered calls. It seems to me that if you're bullish on the stock, you're capping your upside by selling calls, and you'd be better off holding onto the stock as long as the pattern is good.

Lyn Alden wrote a comprehensive article about selling covered calls as a strategy to enhance yield (https://www.lynalden.com/covered-calls/), and she kind of says the same thing, calling these systems "gimmicky". Replace "overvalued" in her article with "overbought" and you see how it can be applied to TI. If we have a profit target to sell half or close a position, why not sell covered calls and get paid once more to place a limit order.

Personally, the biggest hurdle so far in selling puts or calls is the share price x 100 fitting my lot size. I had my first try only recently, using the pullback in uranium to sell puts on UROY and UUUU. With annualized yields of 45 and 70%, it's definitely something I'll look to do more often when conditions are right!

[Eric]

About selling cash-secured puts, I know Sol already talked about how it's a smart way to get paid to place a limit order on a stock you want to get into.

Now for the Wheel Strategy, I'd want to look more carefully into what is their strategy for selling covered calls. It seems to me that if you're bullish on the stock, you're capping your upside by selling calls, and you'd be better off holding onto the stock as long as the pattern is good.

You can still sell covered calls on stocks you're bullish on, just sell a strike price that you don't think will get called away.

It's my understanding that the Wheel seeks pure income. Sell cash secured puts for income, if the shares get put to you, then you sell calls against them for both option income and potentially capital gains (if you sell calls that are a strike or two out of the money) until the shares get called away from you. When the shares get called away, you take that cash and start selling puts again. Rinse and repeat.

I don't know (or care about) all the details of the Greeks, I haven't tried any of the super-duper advanced strategies...Steel Butterfly, Wood condor, Sour Cream Hummingbird...(<--jokes) those strategies obviously have their place but I don't have the time right now to learn them well enough to use them.

[Eric]

I just bought 300 shares of WEAT for $11.45 in order to sell March 18 $13 covered calls against them for $1.25/share. If they get called away from me that's a 27.5% gain in 12 days (836% annualized gain). If it turns down I can still sell them on March 21 and have a cost basis of only $10.20 or sell April 15 calls to collect another $1-2/share of option premium.

[SOL]

I was hoping to start a conversation around options trading.
I have been read/watching a lot around Selling Cash Secured Puts (CSP) and Selling Covered Calls (CC) and stumbled upon The Wheel Strategy (TWS) which uses both.
Before you say it, I am not falling for any get rich quick schemes but wanted to know what your thoughts are on all the above (CSP, CC, TWS) and other options alphabet soup approaches (spreads, etc.).
Although I am a newbie, I don't fall (or at least try not to) for the easy way and I will spend a lot of time (maybe too much time) researching everything.
I want to take a portion of my investments and try new things related specifically to options.
Feel free to go as deep or light as you wish, but please don't go easy either. I am not looking for an easy way out and will dive in regardless; just looking for what you think and good and bad experiences.

Thanks for your time.

The others are doing a good job answering your question so I won't intervene.

However as you have done such a marvellous job with those spreadsheets, this is what our Team came up for you to as a small show of our appreciation. There are three avatars to choose from. I hope at least one makes you say that's the one I was looking for

[jlhooter]

I was hoping to start a conversation around options trading.
I have been read/watching a lot around Selling Cash Secured Puts (CSP) and Selling Covered Calls (CC) and stumbled upon The Wheel Strategy (TWS) which uses both.
Before you say it, I am not falling for any get rich quick schemes but wanted to know what your thoughts are on all the above (CSP, CC, TWS) and other options alphabet soup approaches (spreads, etc.).
Although I am a newbie, I don't fall (or at least try not to) for the easy way and I will spend a lot of time (maybe too much time) researching everything.
I want to take a portion of my investments and try new things related specifically to options.
Feel free to go as deep or light as you wish, but please don't go easy either. I am not looking for an easy way out and will dive in regardless; just looking for what you think and good and bad experiences.

Thanks for your time.

The others are doing a good job answering your question so I won't intervene.

However as you have done such a marvellous job with those spreadsheets, this is what our Team came up for you to as a small show of our appreciation. There are three avatars to choose from. I hope at least one makes you say that's the one I was looking for

Love it. I pick the top and thanks for that.

[jlhooter]

About selling cash-secured puts, I know Sol already talked about how it's a smart way to get paid to place a limit order on a stock you want to get into.

Now for the Wheel Strategy, I'd want to look more carefully into what is their strategy for selling covered calls. It seems to me that if you're bullish on the stock, you're capping your upside by selling calls, and you'd be better off holding onto the stock as long as the pattern is good.

Lyn Alden wrote a comprehensive article about selling covered calls as a strategy to enhance yield (https://www.lynalden.com/covered-calls/), and she kind of says the same thing, calling these systems "gimmicky". Replace "overvalued" in her article with "overbought" and you see how it can be applied to TI. If we have a profit target to sell half or close a position, why not sell covered calls and get paid once more to place a limit order.

Personally, the biggest hurdle so far in selling puts or calls is the share price x 100 fitting my lot size. I had my first try only recently, using the pullback in uranium to sell puts on UROY and UUUU. With annualized yields of 45 and 70%, it's definitely something I'll look to do more often when conditions are right!

Nicolas,
Thanks for the info. It was a very good article. As I have learned about CC and CSP, I like the idea of using CC for our limit orders when feasible. Of course I have the same issue with 100 min stock sizes.

[jlhooter]

I just bought 300 shares of WEAT for $11.45 in order to sell March 18 $13 covered calls against them for $1.25/share. If they get called away from me that's a 27.5% gain in 12 days (836% annualized gain). If it turns down I can still sell them on March 21 and have a cost basis of only $10.20 or sell April 15 calls to collect another $1-2/share of option premium.

Eric,
This is a great REAL example you did and after hours of reading/viewing about selling Covered Calls (CC) and selling Cash Secured Puts (CSP), your example is something that most didn't show as clearly as you did with only a few sentences.
Thanks for this.
To ensure I have the math correct, you calculated your gain by applying a cost-basis correction to your cost per share getting $10.20/share first and then you calculated your gain by doing the following: 13/10.2 - 1 = 27.5%.
What is cool is that if you don't get assigned, you get $1.25/share to keep (or 10.9% gain) + another gain and reduction in your cost basis for a future CC if you choose to do so. It seems that theoretically you could get your cost basis to $0 (although not probable).
I understand this process is not bullet proof and may go against you, so I want to make sure I use when the timing is right and for the right reasons.
I understand that the negatives to selling puts is you could get assigned, but it is only a negative if (1) you didn't plan to spend the money and (2) you sold a put on a poor performing stock (poor performing stock = something you wouldn't want to own if you got assigned). Rule #1: sell puts on something you want to own.
What are some of the negatives for selling covered calls? I assume you want to set a price that is acceptable if you get called and per TI rules you have a plan in place for acceptable gain even if you get called at the strike and the price is well over the strike; you 'lose' the extra gain, but TI teaches us to be ok with it since you went according to plan.
Thanks for your time.

[Eric]

To ensure I have the math correct, you calculated your gain by applying a cost-basis correction to your cost per share getting $10.20/share first and then you calculated your gain by doing the following: 13/10.2 - 1 = 27.5%.

That's how I calculated it. I'm not a mathmagician so it might be $14.25/$11.45 - 1= 24.5%.

What is cool is that if you don't get assigned, you get $1.25/share to keep (or 10.9% gain) + another gain and reduction in your cost basis for a future CC if you choose to do so.

I don't know if assigned is the right term (it might be). To keep things easy on my brain I say things like "shares put to my account" or "shares called away from me".

It seems that theoretically you could get your cost basis to $0 (although not probable).

Not only is it possible but over many years some people drive their basis negative.

I understand this process is bullet proof and may go against you, so I want to make sure I use when the timing is right and for the right reasons.

I may have broken every TI rule on this one... It's nearly a day-trade (timeline of 12 days vs 12-36 months). It's based on investment advice from a co-worker, it's not really thought out, I practically used a market order to buy the shares (I set a limit order at the market price). I spent about 3 minutes looking at the price chart and option chain in Yahoo finance before pulling the trigger. For these reasons and more the PTB/market makers will probably kick me in the teeth and take my lunch money.

I didn't/don't intend to wheel this, but I'll stay in it as long as I can write covered calls with a 10% premium every month.
For some reason I feel like a Wheel starts with a put but that's probably just me...after a couple revolutions does it even matter if you started with a CC or a put?

I think Fidelity even offers "Buy-Write" as a transaction type where you can buy shares and write a covered call in one single transaction but I've never used it.

[jlhooter]

Eric, thanks all good stuff and I do feel a little dirt feeling I could violate TI 'rules', but this stuff is very interesting. I dig in some more, but what you have revealed to me all makes sense.
I agree with the wheel comment you made. I think starting with Puts it helps you get in at a good price before starting a call and there is more to it, but interesting as well.
Thanks for your time; I have learned a lot.

[SOL]

I may have broken every TI rule on this one... It's nearly a day-trade (timeline of 12 days vs 12-36 months). It's based on investment advice from a co-worker, it's not really thought out, I practically used a market order to buy the shares (I set a limit order at the market price). I spent about 3 minutes looking at the price chart and option chain in Yahoo finance before pulling the trigger. For these reasons and more the PTB/market makers will probably kick me in the teeth and take my lunch money.

You might be happy to know there are very few TI rules when it comes to selling puts with the intention to own the stock or covered calls. In fact, if you can get a good premium, then it makes sense to sell covered calls with the least possible time and the same applies to selling puts.

If one has the patience then one of the best ways to get into TI recommendations would be to sell puts on plays that we issue (lower risk and ones that you like). You might not get all the shares assigned to your account but you will be walking away with a good profit. When the shares are assigned you will get in at a price that is generally 5 to 10% lower than any other TI member that has not used this strategy. It would relatively easy to earn over 20% using this strategy per year and your risk would be reduced by a factor of at least 75%. However, as they say most individuals while claiming to be risk-averse don't want to follow a boring strategy that over the long run yields incredibly superior results. These low-risk traders are risk-averse based on perceptions (in other words they perceive themselves to be risk-averse) but their actions illustrate that they are risk-takers and the worst kind of risk-takers otherwise known as gamblers. In other words, the secret desire to lose syndrome is what afflicts 90% of individuals.

For obvious reasons we cannot put this great strategy into play as it would be a nightmare dealing with the emails and fills and then assignments. However, we can provide guidance for this strategy. Eventually, our goal is to not only offer advisory services but real teaching services where individuals are taught tips, tricks and strategies to maximize their gains without having to take undue risk and without any of the hyperbolae that comes when one signs up for most services. However, there is no timeline yet for this. It will be done when the time is right or my parrot learns to curse in three languages.


Here is a potential way to turbocharge a put/ covered call selling strategy.

You have a share in a stock. Look for a call that offers a good premium. aim for the shortest time possible. If the stock is trading close to your strike price. Sell a put that offers a decent premium but with the shortest time premium one can find. Now if the shares are taken from you because the stock closed above your strike price. you will now earn another premium from the put you sold. In this manner, you potentially double your return. You can then wait for a pullback before getting into the stock again or look for a replacement candidate and start the whole process again.

Another variation if you are not looking to sell puts would be to buy the original call back and sell another call that is further out of the money; this method is for those that want to hold onto the stock.

Another option one should never forget is to use the DRIP option on any stock that offers a dividend. Combine this with the selling of covered calls and cash puts and it can really add up over the years.

The best time to put the Selling covered put and Selling cash put combo strategy into play is when the stock is trading around the neutrall zone on the monthly charts. The MACD's should be trading below 65.00 or any indicator that you use should be at most trading below the minium overbought ranges. This represents the optimum period to sell both

Look at the image below.



Why is it the optimum period to sell both, because of volatility. You can use it to jump in and out of covered calls or cash puts or sell them with short time premium so that your odds of winning are high.

The best time to sell a put if you are looking for a large premium and looking to get in at a price that is possibly even better than an screaming buy is when the stock is trading in the insanely oversold ranges. First of all the premium will be high and secondly if it gets assigned to you will get in at a mouth watering price. The best time to sell covered calls if you want to hold onto the stock is when the stock is trading in the insanely overbought ranges. Another option would be to sell a covered call that is 1 to 2 dollars out of the money, which means the odds of the stock being called will be high. Then you wait for the stock to pullback and sell a put to get in at a lower price. To ensure that you get in, after the stock has pulled back sell a put that is 1 to 2 dollars out of the money. Another option let the stock get called and use those funds to get into another strong stock that is trading in the oversold ranges. Better yet sell a put on it and once assigned start selling far out of the money calls.

[harryg]

Very insightful options thread, I've often wondered about the strategy above (selling puts) as a strategic alternative to purchasing stocks outright. There could be a considerable reduction in risk (cash invested).

Just to return to one of the original queries, the risk profile for buying or selling options is not the same. To restate the obvious, option buyers can walk away at any time, whereas option sellers can be exercised / assigned, call it what you will.

The risk of selling puts is that shares tank massively. Let's assume that you sell NVDA puts @ 200 strike because you decide that you would be happy to buy @ 200 anyway. Overnight news is released that NVDA have made a terrible investment in a huge chip factory that turns out to be for tortilla chips. NVDA opens @ 140. All of a sudden you aren't so happy at being obliged to buy the shares @ 200, you would much rather have been in the position to decide (or not) to purchase in the open market @ 140.

For covered calls, you might find that the price rises significantly and you lose good shares that you wanted to keep (so your upside is capped). As Sol suggests, if this is your strategy from the outset then you wouldn't really mind and you would look for another candidate. Selling uncovered calls gives unlimited liability (in theory) as the share could go up to {insert large number}.

PS: In my opinion, strategies such as Condors and the like exist only to generate commissions and cocktail-party talk.

[Yodean]

The risk of selling puts is that shares tank massively. Let's assume that you sell NVDA puts @ 200 because you decide that you would be happy to buy @ 200 anyway. Overnight news is released that NVDA have made a terrible investment in a huge chip factory that turns out to be for tortilla chips. NVDA opens @ 140. All of a sudden you aren't so happy at being obliged to buy the shares @ 200, you would much rather have been in the position to decide (or not) to purchase in the open market @ 140.

PS: In my opinion, strategies such as Condors and the like exist only to generate commissions and cocktail-party talk.

Yeh, quite a few of us who are new to selling puts experienced this fairly recently with one of the first official TIT recommendations to sell puts - on CHGG - early lesson learned (i.e. when share price tanks massively, the selling puts strategy goes kaput).

Also good point on the cocktail-party talk. In my direct experience, and I do happen to know a fair number of fairly "rich" bastards, I have yet to meet a pure option trader who beat a good HODLer/swing-trader over a period of at least five years, especially when taxes, fees, etc. are taken into account - they probably do exist, in the same way that Santa Claus or a pink unicorn exists, I would tend to think.

The pure option traders generally have a few amazing 666%+ gains trades annually, which they are quite happen to tell you at the cocktail parties in agonizing detail, but they gloss over all the 100% losses they experienced from expiry, etc.

Tbh I think most beginning traders have no business trading options - because of the potential for quick, massive gains, they overlook the greater potential for losing all their money fast. If you have a small amount of investment capital, it's quite boring to watch, say, gold appreciate 10% - 20% over the course of a year or two, comparing to buying a few options for those potential 333%+ gains.

There is a place for options in a diversified portfolio, once it reaches a certain size, imo. I cap my exposure at <3%, and currently it's less than 1%. I participate in the TIT option plays more to increase my knowledge of the markets than anything else, really. I would be quite happy if the TB portfolio overall breaks even while also covering the subscription costs, lol. Anything on top of that is gravy.

[AstuteShift]

Condors are only good in a sideways market, in this environment you will lose way more doing this strategy

Selling puts and put spreads in a bull market is a fantastic strategy. Since volatility is so high and the VIX is high, the premiums are enormous

Remember options are not for newbies. Buying and selling stocks still generate enormous returns

[phsmith1616]

I used this strategy with Baidu back in 2007-2010. I managed to make decent money from it but in hind sight, I would have made significantly more if I just acummulated on the the downturns.
I definitely plan to sell puts and calls as I start my TI profolio, but I think I will apply this to the TP and just accumulate shares in the higher risk plays.
As for risk, one way of looking at it is, if you sell puts/calls you are accepting a predetermined risk already. Even if the share price drops well below your put, it should be looked at as another opportunity. And if your call gets exersised due to share price increases, well, you can't tell me you didnt do the math on how much profit you would make if that happened before you sold the call.