The Ultimate Guide On How To Get Started With Wheel Options Trading

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Ever thought you could get paid for buying the stock you love? The Wheel options trading makes it possible. This strategy is an enhanced version of the Buy and Hold strategy of the stock market and allows you to earn money from a single stock in four ways. But as you know, nothing in the stock market world comes without risk. But the Wheel options strategy has a relatively lower risk and higher profitability than other strategies.

Without creating more suspense, I will jump onto the steps.

A Step-by-Step Guide to Wheel Options Trading 

Step 1 – Select the stock

Step 2 – Sell Secured Put

Step 3 – Sell Covered Call

Step 4 – Repeat

Look’s simple! Now, let’s dive into the technicals of each step. I will come to the first step at the end as it is the most important step and can determine the success of this strategy.

The First Source of Income – The Secured Put Premium 

Starting with step 2, you have decided on your favorite stock you want to buy and hold for the long term. Now, accumulate the cash you need to buy 100 shares of your favorite stock, and then sell a put option for that stock.

Let’s take, you to want to buy  Lightspeed POS (LSPD) stock, which is trading close to $100. You accumulate $10,000 needed to buy 100 shares and then sell a 30-day put option with a strike price of $94. The options buyer pays you a $3/share premium for the put option. 

With the put option, you are now under an obligation to buy 100 LSPD shares for $94 if the buyer exercises the option. And for buying your favorite stock, you are also getting paid $300. 

On maturity, the stock price is $96, and the buyer does not exercise the option. Your total income = $300.

You still have $10,000 in your account and no shares. You keeping selling a put option and bagging in premium until the option gets exercised and you are in possession of the stock.

So you sell another 30-day secured put on LSPD shares with a strike price of $94 for a premium of $2/share. This time your option gets exercised. Your cost per share has been reduced to $89 after deducting the two put premiums ($3+$2). 

The Second Source of Income – The Covered Call 

Now you are in possession of the stock you love. Here comes the next step – sell a covered call. As a seller of a covered call, you have an obligation to sell the shares that you already own at a predetermined price if the buyer exercises the option.

Coming back to the LSPD example, the stock is trading at $94. You decide to sell a 30-day covered call with a $97 strike price for a premium of $2/share. 

On maturity, the stock price is $96, and the buyer does not exercise the option. Your total income = $200. That is your second source of income. If you include the above call premium, your overall cost per share is reduced to $87. 

Once again, you keep selling covered calls till you sell your shares and keep earning a premium.

The Third and Fourth Source Of Income – The Stock 

The third and fourth source of income is the dividends and capital appreciation the share brings to those who hold it.

Instead of selling the covered call immediately, you can hold LSPD stock if you believe that it will surge significantly in the holiday season. You expected to sell the stock at $105 in December, and as the year-end nears, the stock price reaches $103. Instead of selling the stock directly, you can sell a covered call with a $105 strike price and also earn a premium of $1/share. 

Your third source of income is the capital appreciation of $11/share ($105-$94), which comes to $1,100. 

Risks and Rewards of the Wheel Options Strategy 

The reward is very obvious – the put and the call premium. The more options mature unexercised, the more premium you earn for wanting to buy a stock at the dip and sell at a rally. In the above case, you were willing to buy LSPD even at $100/share, but the call and put premiums reduced your overall cost per share to $86 and enhanced your capital appreciation

Don’t forget there is a risk that your put option gets exercised in the first go, and the stock continues to fall. Imagine buying a put option for Facedrive (FD) in February. The stock has lost more than 75% value since then and shows no signs of growth.

Mistakes happen, but options are all about mitigating your loss. If the stock continues to fall even after you purchased the stock, you can either hold it or buy a put option at a price below which your losses escalate. While this will mitigate your losses but it will reduce your income from options premium

Hence, it is imperative you choose the right stock. This is where I come to the first step of how to choose the right stock.

Step 1 – Select the Stock 

As I said before, the success of the wheel option trading depends on the stock you choose.

Always choose high-quality stocks with strong fundamentals that are in a long-term upside. You could even go for dividend aristocrats. This way, you won’t mind holding the stock for the long term.

Sell the first secured put when the stock’s Relative Strength Index (RSI) is below 30, which indicates the stock is oversold. It has been noted that a fundamentally strong stock rises after it bottoms out as it gives value investors an opportunity to buy the dip. This reduces the chances of a steep decline in the stock price after you have purchased the stock through a put option.

Summing It Up 

In a normal scenario, you will buy the stock at the dip and sell the rally. But in the Wheel options trading, you get paid for the same. The options premium enhances your returns and reduces your risk. When practiced with the right stock, it will add a cherry on top to your Buy and Hold strategy and give you sub-passive income.


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