How I Started
The wheel strategy is what first got me into options trading. Before that, I thought options were mysterious and too complicated to bother getting into. I found some posts on Reddit that described the options wheel strategy. I watched some YouTube videos. I read through a bunch of sites about the basics of options. Once I understood the basic concept, I was real excited to go all into it. It’s hard to imagine losing much money when you’re collecting premium for each trade. Even if the stocks go down, you’ve offset some of that loss by collecting premiums. If you’re starting off with a low budget like I did, you might only be looking for puts and calls with a low strike price under $10 or even under $5.
I’ve tried different methods and have had some wild rides as I looked for higher premium stocks to sell cash covered puts against. I found that there is a balancing act in choosing which stocks to sell puts and calls for the wheel trading strategy. Whatever your risk tolerance is, here is one way I’ve searched through stocks to find which ones I want to play for a wheel strategy. Remember, the usual way to trade the options wheel strategy is to pick a stock that you wouldn’t mind owning long term. From there, you sell puts against it until you’re assigned. Once you’re assigned, you sell calls against your shares.
FYI, in this article, I share some links from partners that help pay for this site. The products I share are relevant to options trading and I find them valuable tools on one’s journey to building wealth. I receive some compensation for every purchase made through those links and that helps pay for the work done to build this site.
Wheel Strategy Backtest
When I was trading the wheel strategy at first, I was looking for cheap stocks that offered options. These were mainly stocks that had strike prices under $5. For me, the easiest way to calculate my profits was by counting my premiums as a discount on the purchase of the stocks. For example, here are the trades I made with RIOT:
|8/10/2020||Sold 2 $4 Puts, 8/14/2020||+$80|
|8/10/2020||Bought 100 shares||-$416|
|8/10/2020||Sold 1 $4.5 Call, 8/14/2020||+$35|
|8/10/2020||Sold 2 $3.5 Puts, 8/14/2020||+$30|
|8/14/2020||Assigned 2 Puts $4 (RIOT price at expiration: $3.78). Total shares now 300||-$800|
|8/17/2020||Sold 2 Calls $4, 8/21/2020||+$84|
|8/17/2020||Sold 1 Call $4.5, 8/21/2020||+$25|
|8/21/2020||All Calls expired worthless (RIOT price at expiration $3.72). Still holding 300 shares||$0|
|8/24/2020||Sold 1 Call $3.5, 8/28/2020||+$30|
|8/24/2020||Sold 1 Call $4, 8/28/2020||+$12|
|8/24/2020||Sold 1 Call $4, 8/28/2020||+$10|
|8/28/2020||Assigned 1 Call $3.5. (RIOT price at expiration $3.59). Still holding 200 shares||+$350|
|8/31/2020||Sold 2 Calls $3, 9/4/2020||+$90|
|9/4/2020||Assigned 2 Calls $3. (RIOT price at expiration $3.11). No shares left.||+$600|
If you add all those numbers up, I made $130 total by the end of that month of trading RIOT. When I started on August 10, 2020, RIOT was trading around $4.16/share. I bought 100 shares at that price. But I then sold a call against it for $35, making my cost per share $3.81. Even though I was assigned 2 Puts on 8/14/2020 at $4/share when RIOT was only worth $3.78, my cost for them was $3.60/share because of the $40 I received for each Put earlier that week. The following week, I sold 2 $4 calls for $42 premium each, bringing my cost per share down to $3.18 for those 200 shares.
You can play with the math and see what the average costs were over time. Basically, I started with $1,071 on August 10th and on September 4th, I had $1,201. When I sold my final shares on September 4, 2020, RIOT had closed the day at $3.11 per share. If I just bought 300 shares on August 10th at $4.16/share and just tried buy and hold for the month, then sold them at $3.11 on September 4th, I would have gone from $1,248 down to $933 – a total loss of $315. Instead, for the same stock, I turned $1,071 into $1,201. That’s a drastic difference between losing 25.2% with buy and hold vs gaining 12.1% with the wheel strategy in just one month.
A beautiful thing about this is that once all your shares are sold, you now have some cash freed up to look for another stock to do this with.
How to find Stocks for the Wheel Strategy
When I was doing this with RIOT in 2020, I had a hard time finding cheap stocks that offered a decent premium on their options. I often just browsed around in the Robinhood app for stocks that were popular and clicking through different stocks they suggested until I found some that were cheap. Now, I’ve got a better way I find stocks. If you don’t have the ThinkOrSwim desktop app, I suggest you open a TD Ameritrade account so you can download it. They don’t even have a minimum deposit to open the account. At least with the account, you can use their ThinkOrSwim app and all the powerful tools they have.
One of the tools I find extremely valuable is the Option Hacker tool, listed under the “Scan” tab. Here are the parameters I have on my latest search for options:
Understanding the Options Hacker Settings
I think most of the filters are self-explanatory. By adjusting some of these parameters, you can find options within the expiration you’re seeking, within your price preferences, how much percent the premium is compared to the strike price, etc. I use this in my searches for options that have the potential to give me at least 3% gains per week. It’s part of my plan to turn $1,000 into at least $1,000,000 in about 5 years.
The filter called “Mark % of underlying” is the key filter that helps me find the pricier options. I have also included the filter called “% out of the money” to make sure that the option I’m finding is at least out of the money. I chose 1% out of the money and 2% as the minimum mark percentage of the underlying option. Here’s what those two mean:
If a stock is trading at $9, I want to find an option where the strike price is at least 1% away from $9 and the premium on it is at least 2% of the strike price. For example, right now, DIDI last traded at $8.27. The $8 Put for next Friday 10/22/2021 last traded at $0.17 (or $17, since each option is for 100 shares). Since the $8 strike is at least 1% away from the last price (it’s about 3.26% out of the money) and the premium is $17, which is 2.125% of $8, this option will show up in the search result if it meets the other filters I have setup.
I found that by limiting the max percent of underlying, I also filter out some of the very volatile stocks. This can help ease some of the stress that can come when a stock is having wild swings and you’re all in on a large account. Some people have had great success trading the wheel on volatile stocks. I personally know some people who like to just buy shares of volatile stocks when they’re low, then they sell calls against them.
In this post, I showed a small options wheel strategy backtest for a stock and compared it to what I would have gotten if I did buy and hold, then sold it all after the same time period. In this example, the wheel strategy wins. In my experience, the wheel strategy works better than just buy and hold. Selling premiums lets you average down the cost of your shares so that you can eventually sell the stocks for less than you bought them and still end up with profit. If you did it over a longer period and chose further out of the money options, you could collect enough premium to effectively own stocks for “free.”
Another good deal to have is a community where you get 3 trade ideas via email every week. It’s only $79/month and you can easily make more than that with just one trade. As someone who might not have a lot of time to spend looking at the markets and searching for the right stocks and options, I find it useful to get alerts that I can then use to initiate trades, making sure to set my trades at a risk level I am comfortable with. Options Pop is a service that includes a members only area, 3 trade ideas per week, and much more. Plus, you get a 30 day money back guarantee! I’ve tried other services and though they let you quit when you want, you didn’t get your money back if you weren’t satisfied.
If you’d like to have a complete options trading course from someone who’s been doing this for over 25 years, I suggest the Trading Pro System. He goes over every detail, giving you all the videos to keep forever, spreadsheets and pdf guides. The whole thing only costs $49.97 for now.
Let me know in the comments if there’s anything else I can share with you. Thank you for taking the time to read this.