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How To Find Stocks For The Wheel Options Trading Strategy?

One of the common misconceptions that I see when it comes to finding stocks for executing the Wheel options trading strategy is “I want to own the stock”.

People who jump into the Wheel strategy with this thinking will likely get low ROI (Return of Investment) unless they are really good at fundamental analysis or technical analysis. This is because they are using the Wheel as a way to own the stock and write Covered Call. In other words, most money is made when the stock performs when executed the Wheel strategy this way.

They are likely not putting too much thinking into how they should sell the Put in the first place (no pun intended) 🙂

The cool thing about trading options lies in the ability to sell “Volatility” and “Time value”. Combining the two will allow us to generate consistent income disregard whether how the underlying stock performs. This is why the emphasis should be held on how Put should be sold in the first place.

Why Focus on Selling Put Options?

This is the part of the Wheel strategy that we have the most power of control because we get to decide which strike to jump in. Just like the real estate investment analogy “you make money when you buy a property”, for the Wheel strategy, “you make money when you sell Put”. We can find underlying stocks with high IV percentile and options with enough time value for us to get a consistent return of 5% to 10% a month. The underlying does not necessarily need to be something you want to own, because the key focus is to NOT GET ASSIGNED and focus on profiting from the premium gained selling Put options.

Most people look for stocks that are trending and most talked about without thinking about IV percentile or time value. What they are doing is essentially the same as buying a promising stock but using the Wheel strategy to get a cheaper entry point, or selling Covered Call until the stock price rises to a point that they can make a huge profit.

As you can see, for people who focus on options trading, selling Covered Call is an afterthought and should not be the main focus of the Wheel strategy. We sell Covered Calls because it will let us keep making money until the stock price recovers to the strike that we got assigned, and allows us to get out breakeven or even profit more when the stock price recovers.

The Wheel Strategy Outline

1) Sell Put

2) Buyback when it hits your target or you can wait until it expires out of the money. Go back to step 1) and keep repeating it. 

3) If the stock price drops and gets assigned, sell Covered Call until the stock price recovers to the entry point.

4) Sell the stock as soon as you can. Do not hold it so the capital can be deployed for the next Put selling cycle.

How to Find Underlying Stocks for The Wheel?

The Concept

1) Find High IV Percentile Underlying Stocks

IV changes all the time based on what is going on in the market. News (good or bad) could change IV. IV also tends to spike before earning calls.

2) Choose the Right Expiration (Time Value)

Some expiration date is better than others. Maybe there is a product launch in 60 days. A phase 2 drug trial completing in 45 days. Check options close to 30 DTE (Day to Expiration) as a benchmark or even weeklies if there is one and calculate the “Monthly ROI”. Calculate the ROI for the shorter DTE Put option vs the longer DTE Put option. Choose the one that would allow you to get a 5% to 10% monthly return.

For example, ROI for a Put option strike price of $5 with 0.5 premium and 30 DTE is approximately 10% ROI per month using Cash Secured Put. Calculation based on 30 days = 1 month.

Methods

I use Thinkorswim platform and it comes with a very powerful Scan tool. The screenshot below shows one of the scans that I use. There are so many ways to narrow it down to find potential underlying. This is a constant Work In Progress for me.

I must point out this is only half of the work in finding a good underlying candidate. I recommend doing some quick fundamental analysis to make sure the company isn’t going bankrupt in the near future or the stock is not getting reverse split, and technical analysis (such as Trade Apgar Score) to find a good entry point and strike price.

TOS options scan for wheel

What Next?

As of now, I am still working on come up with a few scan setups because the setup I have right now doesn’t seem to do a very good job. As I discussed in one of my trading journals, I only have one stock right now that is generating a large portion of the PNL.

I am hoping to figure out a few promising scans in the coming weeks. In case you are interested in following the progress, please subscribe to the email list and get a notification.

5 replies
  1. Zane Gray
    Zane Gray says:

    Interesting article on the Trade Apgar screening method. I’m curious though when using it along with the Wheel Strategy, I’m assuming you’re screening to see if the underlying is in an uptrend? As with selling puts this will ensure you stay OTM? Thanks for the articles, solid read!

    Reply

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