As I mentioned in the last monthly report, I will start sharing a non-margin account since a lot of people trade a much smaller account compared to the one that I have been sharing. This will allow me to share some of the challenges that I face when trading a smaller account, as well as provide more useful information tailored for smaller accounts.
I know some people are skeptical about the Wheel Strategy and claim that it does not generate a return as well as a “buy and hold” strategy of a diversified Index, with a bit of “market timing” (for example, exiting the entire positions in February 2020 when COVID-19 happened and reentered when the market hit the bottom a few months later). It might be true if such a “buy and hold with a market timing” strategy is executed with consistency, but in reality, people who do “buy and hold” are buying and holding because they have no idea how to time the market in the first place. Whereas the Wheel Strategy is possible to generate a consistent return when executed correctly.
Aside from market timing, according to barrons.com, as of May 18, 2021, S&P 500 has returned 10.7% YTD, compared to the Wheel Strategy’s return of around 12.5% YTD.
It’s not a significant difference this year so far but the Wheel Strategy is keeping up with the market return under a somewhat “normal” market condition. (Air quoting “normal” because the VIX is still really high and the pandemic is still happening).
Barron.com S&P 500 YTD Data
The Wheel Strategy YTD Return
The primary challenge of trading a small account is money management (only risking 5 to 10% of the account per trade or position) and diversification (holding more than a few positions, ideally in different industries).
The account I am sharing has around $4,500 currently and that prevents me from trading underlying that are way too expensive. Even risking 10% would only amount to $450. This has forced me to look for stocks that are less than $5 with good enough fundamental data, such as it should not go bankrupt and is not likely to raise more money (share dilution) in the next few months while I am holding the position.
The primary criteria are to find opportunities that will return 10% in the next 30 to 60 days so identified underlying tend to have high Implied Volatility.
Account History (Up to Mid May 2021)
The account was opened in March 2020 with funding of $3,300. Only the Wheel Strategy has been traded in this account and it grew about 40% in one year.
Since the Wheel Strategy is a positive beta strategy and positively correlates to the market, recent market correction has caused a noticeable dip to the account in late April and early May.
The Wheel Strategy Return Since Account Opening
Current holdings primarily consist of Health Care related stocks. My primary strategy for this account is to look for low-priced underlying with high Implied Volatility.
The typical price for the underlying is between $1 to $5 and traded positions also had strike prices within the same range. The most expensive strike traded so far was $7.5 and that trade returned about 15%.
If you are interested in finding out my holdings, I discuss some of them occasionally in the trading strategies and ideas section.
April 2021 PNL
April was a reasonably positive month but it was also a month with a lot of Short Put positions got assigned. The market climate changed in April compared to the beginning of 2021. The stock price for a lot of electric vehicles related stocks and SPACs started to decline. The entire market declined in April at one point for several days which caused the entire account to dip significantly at one point when looking at a monthly basis.
No loss has been recorded YTD with a 100% winning rate so far.
The Wheel Strategy Return For April 2021
The Wheel Strategy Monthly PNL (Table)
The Wheel Strategy Monthly PNL (Graph)
Win / Loss Ratio
|Spread Type||Win||Loss||% Win|
NOTE: How I Record PNL for the Wheel Strategy
If I would get assigned for underlying stocks I would sell Covered call on them. I do not record PNL for such positions until I am able to close them.
In other words, I do not record the PNL unless the “Wheel” is completed.
Below is a brief summary of how the PNL is recorded.
Sell Put: If it expires out of the money (not assigned with a stock) or closed out early, it is recorded in the PNL. If a stock is assigned, it is not recorded.
Sell Covered Call: PNL is recorded when the Call is expired out of the money or closed out. It is also recorded when assigned and the stock is called away, or the entire Covered Call is closed out.
Thoughts for the April Report and What’s Next?
The market sentiment seems to be shifting a bit compared to the earlier month. Topics around Inflation are circling in the news and it seems to be one of the primary drivers for the recent market jittery. I personally am noticing price hike in many areas (food and services) in my everyday life as well so it’s just a matter of time when the interest rate will be increased. While it’s impossible for us to predict the future, monitoring VIX its relatives (VIX9D, VIX3M, and VVIX) could provide some clues as to when the market will likely go down or how far a market is likely to go lower.
My plan is to scale back and get out of positions where possible (ideally profitable) to have some free buying power ready for the next market dip.