scan for wheel strategy

How To Screen Best Stocks For The Wheel Strategy?

When it comes to trading the Wheel strategy, I think there are largely two schools of thought. One is to profit primarily from focusing on selling Covered Call by finding stocks that have a high potential to continue to increase in price. The other is to profit from selling premium by focusing on selling Cash Secured Put or Naked Put (requires a margin account).

I belong to the latter and a big fan of selling Naked Put. After seeing what is possible with the Wheel Strategy from the September monthly trading report, I decided to start digging deeper into improving the trading process.

Unlike some people who prefer to only trade hot/well-known stocks or Indexes, the best stocks for the Wheel Strategy (for me at least) are stocks with high Implied Volatility (IV). As I discussed previously, I believe focusing on selling put is the best way to generate a consistent profit. Based on my experience, trades with high IV underlying have been pretty profitable. Don’t get me wrong. I do trade options of non-high IV underlying as well when the setup is right, but I tend to use more energy looking for high IV opportunities.

Scanning for High IV Underlying

I use Thinkorswim and it comes with a powerful scanning tool. It allows me to combine multiple criteria for Stock, Option, and various Studies (image below). The setup I am sharing here is focusing on low-priced underlying because even though I have a margin account, I still like to focus on what it would actually cost to hold the entire position. This forces me to not take way too many risks and keep me grounded, which means I cannot open a large position for high-priced underlying. In other words, if I want to aim for a 10% return per month, I need to find a lower-priced underlying to get higher returns.

 

scan for wheel strategy

Open interests (Option)

This is essentially equivalent to “volume” for options. If there are more open interests, likely less slippage and easier to buy and sell options.

I set it to 500.



Last (Option Last Traded Price)

This is set to 0.4 because I am looking for a very low strike price option with a high return.

For example, a strike price of $5 with 0.4 is equivalent to putting $500 down to get $40 in return, which is about 8%. If you use a margin account, that ROI will go even higher.

As an example, BCLI fits very well with these criteria. Thanks to its really high IV, $500 down to get $195 profit in about 60 days (image below). That is about 19.5% ROI per month.

bcli iV for Dec

Option type (Option)

Set this to Put only, since we are looking for Put options.

Days to Expiration (Option)

Set to 69 days. Obviously longer the DTE, the higher the premium. This is why it’s set to about 2 months since we want to look for opportunities that would provide 10% per month ROI.

Strike (Option strike price)

Below 7. Could be a little higher but if it’s set too high, it will not give enough ROI.

Example: Stike 8 with 0.4 = $800 down to get $40 in return. That is a 5% ROI.

Volume (Stock volume)

Set to 130,000. Underlying with high liquidity (popular stock) also likely means options with high open interests.

Last (Stock price)

At least $1. If you are a risk-taker, stock hovering around $1 tends to have a pretty high IV.

IV Percentile (Study filter)

Between 49-100%.

Scan Result

Currently (10/24/2020) there are 12 stocks that match the criteria.

NOTE: While the setup above does not contain an Implied Volatility (IV) filter, all the stocks found by the scan happened to had an ImpVolatility higher than 1 in this example. In case if the scan result contains low IV stocks as well, I would just use the sort function to look for high IV stocks.

Alternatively, you could add an IV filter to the setup above so the result would only contain the IV level you specify.

wheel scan result

What’s Next?

I think the scan can be used for higher price underlying as well. Will need to figure out how to set that up.

As I mentioned before, finding underlying is only half of the work. I will need to come up with a streamlined due diligence process to figure out which ones are worth trading. In case you are interested in following the progress, please subscribe to the email list to get a notification.

Please comment or provide feedback below. I would love to learn what you do to improve your options trades.

April 2021 Update

Check out my trading room to see my Wheel Strategy watchlist!

7 replies
  1. Jeff Look
    Jeff Look says:

    Although you lay everything out so nicely, why did you say you were looking for stocks with high IV? You never scanned for high IV and I’m sure you are well aware what IVP is. So either you forgot to add a scan criteria for IV above a certain number that you consider “high”, or you failed to clearly explain that you were scanning for stocks which currently are in the higher area of it’s specific IV historical range.

    Reply
    • tony
      tony says:

      Hi Jeff,
      Thanks for pointing that out. I normally would just use the sort function to sort the result and look for high IV stocks.
      Added the following note for clarification.

      “While the setup above does not contain an Implied Volatility (IV) filter, all the stocks found by the scan happened to had an ImpVolatility higher than 1. In case if the scan result contains low IV stocks as well, I would just use the sort function to look for high IV stocks.”

      Reply
  2. Bo
    Bo says:

    Hello,
    I am not finding an IV_Percentile study filter on TOS. Is that something you created, or am I not looking in the right place?
    Thanks,

    Reply

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