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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.
The Ultimate Guide On How To Get Started With Wheel Options Trading
- A Step-by-Step Guide to Wheel Options Trading
- The First Source of Income – The Secured Put Premium
- The Second Source of Income – The Covered Call
- The Third and Fourth Source Of Income – The Stock
- Risks and Rewards of the Wheel Options Strategy
- Step 1 – Select the Stock
- Summing It Up
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.
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