wheel

What Is The Wheel Strategy And Why I Love It?

When it comes to trading styles and strategies, they can be grouped in so many different ways. Day trading, Swing trading, Momentum trading, Scalping, etc. To me, all of these types of trading sound hectic. They all require active monitoring of stock price, stock movement, stock news, etc etc etc. I have personally tried a few of these and they have never worked out for me. Don’t get me wrong, they do work for many people but they are just not a good match for my personality.

I started out trading penny stocks and eventually made my way to Indexes and ended up trading options. Over the years, I have tried many different types of options trading. Some require more work than others. Some have a higher probability of success than others. Some are premium selling and some are premium buying.

As you can see it was not a straight path for me to get to the Wheel strategy. It was a lot of trials and errors before I ended up realizing the Wheel strategy is the most profitable way to trade, at least for me.

What is the Wheel Strategy?

It’s essentially selling Put and followed by selling Covered Call.

Here are the steps.

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.

Please note this is the way I prefer to trade the Wheel Strategy.

If someone wants to own a stock for the long term, the Wheel Strategy can be used as well, by purposely selling in the deep money Put to get assigned for the stock at a discount, then keep selling Covered Call and avoid assignment by rolling the Call out if likely to get assigned.

5 Reasons Why I Love the Wheel Strategy

1) It doesn’t require me to sit in front of the computer all day long

For some people, trading is just another job. They want to make a lot of money FAST. They look for ways to trade as much as they can and most of them ended up day trading. I am not looking to have another job. In fact, I am looking for ways to NOT have a job. The wheel strategy allows me to do just that. Place the trade and I can walk away for a while.

2) It doesn’t require my attention all the time

Trading the Wheel strategy is relatively simple. Find good stocks that you wouldn’t mind owning them for a while and make sure to choose ones that are unlikely to go bankrupt or reverse split in near future. Once you have done your homework and place the trade, that’s it. Just want and monitor the price once in a while until expiration.

3) It doesn’t make me stressed out or drenched in adrenaline all-day

Trading should not be exciting. If you are looking for excitement, go do something else. We trade to make money, that’s it. There is no need to get stressed or drenched in adrenaline. Do the homework, place the trade, then close the position when the time comes. That’s it.

When placing trades for the Wheel strategy, I already know when I want to get out. If I get assigned, I would just calmly place a Covered call order and wait for it to get assigned. Yes, the stock price might go beyond the strike price. Yes, the stock might go much lower than I anticipated. I am ok with that because I have already taken those factors into consideration/calculation before I placed the trade.

4) It has a high win rate

The term “win rate” might be different from person to person because some people might count on getting assigned a “loss”. The way I count it is based on PNL. Even if my positions get assigned, as long as I managed to sell the stock above the entry point I consider it a win, because the overall PNL (sold PUT, sold Call) is positive.

Based on my own trading record in 2020 so far, the win rate is 89% for the Wheel strategy.

5) It’s easy to understand and manage

Have you ever tried to roll up or down an Iron Condor or a Double Diagonal Calendar spread? So many legs we have to figure out what to do with those. I was into trading those at one point because Iron Condor is ideal for high volatility trades and Calendar spread is ideal for low volatility trades.

When it comes to the Wheel strategy, it’s a simple Naked (or cash-secured) Put and a Covered Call, that’s it. To open, decide at what price point you don’t mind owning the stock and choose the strike price based on that to sell Put. If the stock price declined beyond the strike price and you get assigned, hold the stock and decide at what price point you are willing to sell the stock, then choose the strike price to open a Covered Call.

The Wheel Strategy Trading Results

If you are interested, check my trading journals to see my Wheel strategy trading results. I also discuss some of the underlying that I trade here. What I am sharing with you is not an overnight success. It took me more than 10 years to get here. The reason it took me so long was partly due to my lack of focus. Every time I tried something new that did not work, I would take some time off for a while then come back to trading again. However, it was during those “off” moments when I would discover new strategies to try so discounting the “time off” as non-productive time might be wrong.

A straight line is not always the fastest path to a destination (check the video below).

Straight isn’t the fastest path.

Posted by Ben Berger on Tuesday, February 18, 2020

 

9 replies
  1. Bryan
    Bryan says:

    Hi ,i like everything that you wrote here,i learnt new knowledge from here. Any way can join your discussion room or discord?

    Reply
    • Tony
      Tony says:

      Hi Bryan,
      Thank you for asking but I do not provide a discussion room or discord service.
      If you have a question please feel free to post it here in the comment or send me a message using the contact us page. I will do my best to answer your questions.

      Reply
  2. b-lambda
    b-lambda says:

    Thank you for this. I’ve just gotten back into investing after selling my home, but have to admit, for all my previous experience, CSP’s were a new concept, and the missing piece it turns out. Love CSP’s! When I put everything together and saw it work, though, my thought was, “Why isn’t everyone doing this!? They must just love sweating the market from 9:30-4 every day.” Having just gotten started on it, it’s reassuring to hear from others who are using it. Anyway, my question for anyone and everyone is this: have you come up with a good screen to find securities with attractively-priced options? So far I’m finding that volatility and volume should be part of it. But that still means going through a lot of duds to find the diamonds.

    Reply

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