wheel method/thetagang (option strategy)

闲云野鹤

https://www.reddit.com/r/Options ... amp;utm_name=iossmf

The Wheel (sometimes called the Triple Income Strategy) is a strategy where a trader sells cash secured Puts to collect premiums on a stock or stocks they wouldn't mind owning long term. If the options expire or closed for a profit without being assigned, the premiums are all profit.  The goal is to set up trades and avoid being assigned, but it is understood that if the put is assigned the account will buy and hold the stock. Through the collection of premium, the initial cost basis of the stock can often be lower than the strike price paid.  

The next step of The Wheel is to sell covered calls on the stock.  It is highly preferable to sell a call with a strike higher than the stock's cost basis, but this is not always possible.  This is repeated over and over to collect even more premiums that continue to lower the stocks cost basis, and along with any rising stock price movement, works back to break-even or a profit.

At some point the call is exercised and the stock called away, or you can simply sell the stock, but when you add up all the premiums collected from selling the puts and calls, plus it is desired and common to end up selling the stock for a profit, this results in the Triple Income.  If the stock pays a dividend while you own it then you can collect that as well (Quadruple income!).

Below is a graphic showing the simple way to track the Credits and Debits to keep track of the overall position.

Step #1: Stock Selection - Most traders who have had a bad experience with the wheel have chosen the wrong stock. The stock(s) you chose must be a good candidate and one you don't mind owning for some length of time, as it is possible you could own it for months.

Use your own criteria that fits your account, but this is what I use:

• Profitable company that has solid cash flow
• Bullish, or Very Bullish, analyst ratings
• Priced around $10 to $50 so that I can afford to take the assignment if needed and I stay away from sub-$10 stocks as a rule
• A stable chart without wild gyrations (especially those caused by CEO tweets!)
• A nice dividend is always a good thing, both that you may collect it if assigned the stock but also that dividend stocks tend to more stable and predictable
  
  

Use your own fundamental analysis criteria to create a watchlist of 10 or so stocks that you can trade. If you find some lower priced ETFs, or have a larger account for the more expensive ones, then these can be included and make good candidates due to their normally steady movement, no ERs, and no CEO tweets. I look at my watchlist every few weeks and change it accordingly.

Step #2: Sell Puts - Cash Secured Puts (CSPs) indicates you have the cash/margin to buy the stock if it is assigned. Be aware of any upcoming ER or other events that could cause a spike or movement in the stock, it is best to close or have the Put expire prior to the event, in effect skipping it and then continue selling CSPs afterward if the stock still meets the criteria.

Sell a Put on the selected stock: Below is a suggested model, but up to the individual trader:

• 30 to 45 DTE offers a good premium as the time decay curve starts to accelerate
• 70% Prob OTM or higher (~.30 Delta)
• Number of contracts is based on account size able to handle an assignment
• The Put can be closed and re-opened, or rolled, at 50% profit if there is plenty of time left, although you can let it expire or close and re-open at any point
• Enter the Credits received, and any Debits paid to close or roll, on the Tracking P&L file
• Roll for a credit if the Put is challenged when possible, and provided a credit can be made it can be rolled as long as needed which can also be used to track the stock's movement by changing the strike price
• If a credit cannot be made then it is best to take assignment of the stock
  
  

The CSPs should be able to be sold over and over to collect as much premium as possible, and often never be assigned. If there is a fundamental change in the stock, close your position for an overall net profit and then move on to review and/or move on to another stock.

If assigned then Sell Covered Calls as shown in Step #3.

Step #3: Sell Covered Calls - Using the tracking file determine the net stock cost which is often already below where the stock is. As selling puts is usually the most profitable, some traders just sell the stock and move on to selling more CSPs, or sell a very high-value ITM Call that is sure to be called away and adds to the profit.

If your net stock cost is above the current market price and you keep the stock, then the goal is to sell CC premium to continue adding to the Credits and lowering the net stock cost below where the stock is trading before it gets called away.

Sell CCs, again here is a suggested process:

• Sell a Call above the net stock cost whenever possible, however, at times you may need to trade the strike below to get some good premium. Note that I will settle for a lower premium to be farther out to avoid the risk of early assignment and give the stock a chance to stabilize and possibly start to recover.
• Same as CSPs: 30 to 45 DTE, 70% Prob OTM or higher
• Close and re-open, or roll, at 50% profit
• Roll for a credit when possible, or allow exercise and the stock to be called away if a credit is not possible (especially if the strike is above the net stock cost)
• Track Credits and Debits, plus any Dividends captured, on the tracking file
• Continue this until the net stock cost is below the strike price at which time the stock can be left to be called away (some note that it cost less in fees to close the option and just sell the stock which accomplishes the same thing)
  
  

Step #4: Review and go back to Step #1 - While the tracking file makes it easy to see the P&L, review the trade to verify the numbers and then look for the next, or same, stock to sell CSPs in Step #1.

As they say, rinse and repeat.

Risks and Possible Problems: The single biggest issue for this strategy is the stock price drops significantly, but this is no more risk than just owning the stock outright.

Stock Drops: The reason to make these trades on a stock you wouldn't mind owning is because of this risk, and if a good stock is selected then this should be a very rare occurrence plus not a major issue.

• The price of the stock may drop well below the CSP strike and rolling for a credit will not be possible causing assignment.
• If CSPs were sold over and over the net stock cost may be much lower mitigating this drop in price.
• Management is to sell CCs over and over to allow time for the stock to recover, this can take time but when added to the CSP premiums collected the position can get "healthy" faster than you may think, however, this does take a lot of patience!
• There may be rare occasions when a stock is no longer viable (Enron?) and the position needs to be closed for a loss, again this shows the critical importance of stock selection.
  
  

Stock Rises: Many see this as a problem, but I personally do not as if the CC strike is above your net stock cost then the position profits, but just not as much.

• The stock is assigned and you sell CCs only to have the stock run well past your strike price.
• In most cases closing the CC and selling the stock outright can cause a bigger loss than just letting the stock be called at the strike price.
• It is, in this case, you may lament the profits that were "lost" by having the CC, but provided the above is done properly the position will still profit.
  
  

Impatience: By far this causes the most losses from this strategy!

• First, if you can't roll for a credit let the CSP play out! If you close the CSP early it will cause a major loss.
• If you get assigned the stock and sell CCs, do not try to "save" the stock through buying it back at an inflated price! If you can't roll for a credit then let the stock be called away and sell more CSPs to start the process over again provided the stock is still a viable candidate.
• Recognize it may take months selling CCs to build the premium up to a point where the net stock cost is less than the current stock price, but it will happen eventually if you can keep the CC from being exercised early.
  
  

Hopefully, this is a thorough and detailed trading plan, but let me know of any questions, typos or improvements you may have! -Scot