[Beginner] The Wheel Options Strategy Guide 1–1 Intro.

An Introductory to Wheel Options Trading.

TL;DR

1. What is The Wheel Option Strategy? — Cash Secure Put & Covered Call
2. How to Execute Wheel Option Strategy? — Step by Step Guide

Disclaimer: I am not a financial advisor. The content for this article is purely for educational/research purposes only and is merely based on my personal opinions.

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Options trading has truly transformed my financial journey. I’ve dedicated significant time to educating myself through reading and watching YouTube videos to understand various options trading concepts. My goal is to simplify complex strategies, starting with beginner-friendly strategies and gradually progressing to more advanced strategies in the future. Join me on this learning journey, and let’s trade together to earn a consistent income!

What is the Wheel Options Strategy

This strategy is one of the most popular strategies among all options traders. In simple terms; imagine earning some side income while waiting to own a particular stock and continue to earn more side income when you are owning the stocks! This strategy consists of 2 separate trade executions; CASH SECURE PUT & COVERED CALL.

Cash Secure Put

Instead of purchasing stocks directly from the market, we’ll use a Cash-Secured Put Option (Sell Put) strategy. This involves selling a Put option at a price below the market value (Strike Price), earning money (Premium) in the process.

If the stock’s price falls to our trade level by expiration, we’ll be obligated to buy 100 shares at that price. This is call Assignment, which means we’ll officially own 100 shares of the stock.

Note: We have to set aside cash as collateral throughout the entire trade.

Covered Call

After owning these stocks, we will use a Covered Call (Sell Call) Strategy. This involves selling a Call option at a price above the market value, again earning more money (Premium) in the process.

But this time, we will have to sell the shares away if the market value rises to the strike price. If everything goes well, you can sell the shares away at an even higher price than when you first purchased the stocks, therefore earning extra by the capital appreciation.

We will keep the premium(money) whether the price goes up or down.

Rinse and Repeat; Wheel Strategy

After successfully executing the Covered Call option and getting back our funds, we can repeat the entire process again starting with the Cash-Secured Put and followed by another Covered Call.

Notice that the wheel strategy involves selling Puts and selling Calls. Just imagine we are business owner trying to sell products to earn money!

How to Execute The Wheel Strategy

Select a stock you want to invest in.

Depending on your risk appetite and available capital, a single option trade is equal to 100 shares, having $10,000 capital might not be enough to execute a Cash Secured Put on Nvidia, which costs around $900 per share.

It’s always recommended to execute the Wheel Strategy on stocks you’re willing to invest in, while the chances of getting assigned might be low, it doesn’t mean it won’t happen. There have been many times when I’ve executed the Cash Secured Put with an 80% winning rate but still got assigned at expiration date due to various factors like US market data, earnings season, and flash crashes.

Additionally, the more expensive the stocks, the higher the premium you receive. Therefore, it’s important to slowly grow your account so that you can execute Cash Secured Puts on more expensive stocks, which will yield higher returns.

Look at the Expiration Date

After deciding on which stock to invest, it is time to decide on the Days To Expiration (DTE). Expiration Date or Days To Expiration (DTE) simply means the days the options will expire on. If we execute a 20 Days To Expiration (20 DTE), this mean the option will expire on 20 Days from the day you place your trades.

On th end of expiration day, the broker will see if your strike price is above or below the closing price. For Cash Secure Put, if the closing price is above the strike price when you purchased 20 days ago, this mean the trade is Out Of The Money (OTM) which mean you are not obligated to buy the shares. Then you can repeat Cash Secure Put again to earn more money(Premium).

In the future blog post I will share some tips and tricks I learnt!

Focus on Bid/Ask, Delta, Implied Volatility & Open Interest.

After selecting the expiration date, our attention shifts to the Bid/Ask Price, Delta, Implied Volatility, and Open Interest. While there are many other geeky symbols in the world of options trading, I believe these four are the most crucial factors to consider for the Wheel Strategy.

1. Bid Price — Look at this price if we are planning to BUY options.
2. Ask Price — Look at this price if we are planning to BUY options.
3. Delta — There are 2 interpretations of this symbol. 
   a) It measures how much an option price can be move for every $1 change in the price of the underlying stock. If the Delta is 0.2 the option’s price will theoretically move $0.20 for every $1 change in the price of the underlying stock. (Official Meaning)
   b) Delta can be referred to as the Percentage Of Profitability. If the Delta is 0.2, the options will be 100–20=80% chances of profitability. However, this percentage is not a fixed definition and should only be used as a reference!
4. Open Interest — Only shows how many number of trades are place for strike price, essentially showing trading volume. Whole Number Strike Price tends to have a higher number of open interest. Higher Open Interest tends to have better Bid/Ask Prices as well.

Execute Wheel Strategy Successfully

After analysing and selecting a good strike price based on the Greek Option Symbol. Just execute the trade, collect good money(Premium) and hope for the trade to expire Out Of The Money(OTM). Repeat the entire over and over again to grow our account!

Endnote

In my opinion, the Wheel Option Strategy could be the simplest option strategy to execute for all investors. This is due to its standardized trade execution, which doesn’t offer as many deviations as forex trading, where there are unlimited trading methods. Most importantly, the Wheel strategy allows investors to profit from day one and collect premiums along the way!

Stay tune for more tips and tricks for options trading and forex trading!

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