In this video, I’ll show you a very powerful options strategy called The Wheel. Enjoy!
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0:00 – Intro
1:13 – Recap on cash covered put
In cash covered put, you sell a put option to another investor, promising that you would buy the stock from him if it drops to a certain price. You will receive some money when selling put option.
2:06 – Recap on covered call
In covered call, you sell a call option to another investor, promising that you would sell your stocks to him if it rises above certain price. For selling the call option, you will receive some money.
2:52 – Wheel strategy
To do the wheel strategy, you first start by doing a cash covered put. 1 of the 2 things will happen. If the stock doesn’t drop to the strike price, the put option expires worthless and you do not have to buy the stock. When this happens, you resell the put option. Each time you sell, you receive money. Second scenario, if the stock drops below the strike price, you will be forced to buy the stock at the strike price.
When that happens, you start selling covered call. 1 of the 2 things will happen. If the stock doesn’t go above the strike price, the call option expires worthless and you get to keep your stock. Again, you can resell the call option and collect money each time. Second scenario, if the stock goes above the strike price, you will be forced to sell the stock away at the strike price.
When that happens, the wheel strategy is complete, and you restart by doing a cash covered put.
4:47 – Benefits of the strategy
Consistent income. Everytime you sell an option, you will receive money. You can use this strategy regardless of market conditions. It is very similar to dividend stocks, where you receive dividends consistently. But, dividend stocks require the company to perform well to continue paying dividends.
Triple income strategy. You earn from selling put options, selling call options, profit from selling away the stock. On top of that, you will receive dividends if you are holding the stock.
6:16 – Downsides of the strategy
Cash intensive. Whenever you sell options, you will have to sell 100 options. So if you were forced to buy the stock, you would have to buy 100 of the stock. Hence you will need a lot of money to do the wheel strategy.
Limited upside. When you are doing covered calls, you are selling away your stocks at a fixed price, causing you to limit your upside. That’s why this strategy will never outperform growth stocks.
Active strategy. Unlike dividend stocks which pay passive income, this strategy requires you to manually sell options to receive money.
8:36 – Recommended way for the strategy
Only do this on stocks which you don’t mind owning
Sell options between 30 to 45 days to expiry. This allows you to avoid huge fluctuations.
Sell options at 30 delta, giving you 70% chance of not being assigned
9:44 – My experience
I have been trying this strategy for a few months now. And it has been giving me consistent income. I’m planning to allocate a small percentage of my portfolio to the wheel strategy to get additional income.