Trading Blog

[Beginner] The Wheel Options Strategy Guide 1–2 Tips & Tricks.

LIM WEI XIANG

Jun 28, 2024 — 3 min read

TL;DR

The Tasty way to trade without getting assigned.
Implement the Tasty way into option trades.
General Theory/Idea.

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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The Wheel Option Strategy stands out as one of the simplest and most effective methods for investing in stocks. It allows investors a good opportunity to earn additional income while waiting to acquire stocks. However, some investors, like myself, who may prefer holding cash instead of owning stocks for extended periods. We prefer the flexibility of having cash on hand for emergencies while still being able to participate in the market. I’ve discovered a strategy that allows us to avoid stock assignments and earn money from selling options, let me explain.

The Tasty Way To Trade!

Tasty Trade / Tasty Live conducted a thorough backtest and analysis of options trading strategies to maximize yields. Essentially, they discovered that executing option trades at 45 Days To Expiration (45 DTE), with a 20 Delta strike price and managing the trades at 21 DTE yield the highest returns in the long run! Let’s apply it to the wheel option strategy!

Tasty Way To Cash Secure Put (CSP)

In the previous article, we learned that a Cash Secure Put involves selling a put option below the current market price, collecting a premium(money) while waiting for the trade to expire worthless and determine if we are getting assigned. This strategy typically could be executed on a weekly (7 DTE) or monthly (30DTE) basis, with a 20 delta, and the option is allowed to expire at the end of the option day.

Now, with the Tasty Way, we modify this strategy slightly. We execute the Cash Secure Put (CSP) at 45 DTE and 20 Delta below the current market price. We then have two exit strategies. The first is to close or manage the trade when there are 21 DTE left, regardless of the profit or loss. The second way is to set a take profit level at 50% and allow the trade to automatically exit when it reaches this 50% profit mark.

No Assignment — Holding CASH!

With the Tasty Way, we will never let the trade hold to expiration and risk shares assignment. In other words, we will always have cash on hand in case of emergency while continuing to earn some side income.

By managing/closing the trade at 21 DTE left or closing the trade at 50% profit mark, we will free up our collateral and allow us to open another 45 DTE trade sooner, thus earning more money!

General Theory/Idea

The concept behind the 45 DTE trade is to take advantage of Theta decay. As expiration approaches, the rate of Theta decay accelerates, causing the trade to lose value over time and our profit to slowly increase. At around 45 DTE, the time decay is significant enough to benefit options sellers while still allowing for more time for adjustments if necessary.

HOWEVER…

We will miss out on Capital Appreciation

This strategy can only be executed on Cash Secure Put (CSP). We will not be able to own the stocks we want to invest in and because of that, we might risk losing capital appreciation if the stocks run towards the upside.

We will still lose if stock tanks

Similar to normal Cash Secure Put, we need the underlying stock price to either appreciate to upside or stay neutral, so that our option trade will lose value and goes into profits. However, if the stock value drops, our option trade value will increase which would become a losing trade. Either way, it is best to exit the trade at 21 DTE to minimise losses and maximise profits!

Endnote

I would recommend investors to consider adopting this strategy if they prefer holding cash instead of owning stocks. Holding cash can be a good strategy, as it provides the freedom to choose which stocks to trade after the current trade ends.