Easy Options Wheel
100% Guaranteed Success! Start with just $50! This simple introduction to the Wheel Strategy equips the novice investor with a simple means of generating guaranteed additional income.
This Article is for the Novice, written from the perspective of the Novice
(While we do generally recommend investing in Northern Dynasty (NAK), the theoretical example provided is not that recommendation).
Well, close to it. You always stand some chance of loss when you play with stocks, but that’s why we don’t invest in weed stocks.
Also, to be 100% technical, this isn’t “The Wheel” strategy you heard about on YouTube videos. Well, maybe. That depends on the video, as I’ve come across both varieties.
For our purposes, we’re just going to keep it super simple. And we’re going to start with just $50! For our example we’ll be using NAK, and we’re going to assume the price stays the same until 9/172021.
So we take our $50, fire up Robinhood, and search for NAK. At $0.45/share, we can afford 100 of these to write a covered call! That would gain us $3, or a 6% return, at the $0.50 strike. Actually more than 6%, But that’s not what we’ll do.
Instead, we’re going to write a cash secured put. So we sell a put at the $0.50 strike, at a $.07 premium, earning us a 14% return!
14% monthly return is pretty awesome. But, there’s an issue here you may have noticed.
NAK, according to Rockydennis Presents, probably is going to stay below $0.50 until October. So this means we’ll have to roll our option near the expiry to avoid assignment. Or do we?
If we’re assigned on our shares, we’ll have effectively paid $0.43, which we can then sell for $0.45, making $2. So we turned our $50 to $59 in just 2 weeks+. That’s an 18% return on our investment! Or, better yet, we sell a $0.50 call for $.03 for October. We’ll let you decide if that’s 14% or 20%, since at this point your $40 is still being held hostage.
Let’s take stock of where we’re at. We put up $50, collected $7, then got assigned. Our $43 is now in the form of NAK shares, which we then used as collateral to sell a call, collecting $3. That $10 is ours, no one can take that away from us. So, in a very worst case scenario, we have ‘spent’ only $40.
Continuing on to the end of October, we either get assigned or see the option expire. If the price is still $0.45, then the call option expires and we can write another one, presumably for $3. Our cost is down to $37. If we did this for another 13 months, we’d have made back our $50 + $2 of “free” money. If you’re like me, you’ll want to read the following the section a few times…
Math Explanation for the Rest of Us
So why not just do this forever and collect free $3 every month? Well, you can. If the price stays the same.
Now, in reality, eventually the price of NAK will increase. Let’s see what would happen if the price closed at $0.55/share in October.
At expiration, we would be assigned the call, meaning we would sell our shares for $0.50, so we give up our shares and collect $50. We just made $10! Not bad. We paid $43, and sold for $50, plus the $3 we got for selling the call contract.
Now we sell a put at $0.50 strike, but of course we’ll only get $3 for it. Now our cost is down to $37. Yes, there is $50 held as collateral, but only $37 is out of pocket. So what happens if we get assigned, how does that math work?
We put up $50, got $7.
So we put up $43.
We got assigned shares, put them up for $50, and got $3.
In other words, we now put up $43, and got $3.
So we put up $40.
We got assigned to sell the shares for $50.
If we stop here, we should have $60 in our pocket.
We spend that $10 on candy and soda. We still have our original $50!
Then we use that $50 cover a put, and collect $3. (the premiums changed based on share price).
So we put up $37. Even if we get assigned again, we still have $13 in our pocket and the 100 shares, which we can use as collateral for another call.
Quick Recap Then Wrap it Up
You could start with a cash secured put, or a covered call, and just keep letting it expire. Or when you get assigned, sell the other option. This is basically the Wheel.
Sort of. Most of us can stop here, and now go forth and apply this principle to our favorite stable stock. We like Energy Transfer (ET) for this, though the dividends can occasionally be an issue. Atossa Therapeutics (ATOS) is my personal favorite, but is much more volatile..
Either stick with stocks that play predictably, OR just be totally cool with having to hold shares/sell shares. That’s the only way to lose, is getting stuck in a position you aren’t happy with.
But It’s Not “The Wheel” Strategy!
You’re absolutely correct! But we can’t really get into that, since we haven’t even done a Straddle/Strangle Tutorial yet! Here’s a picture for those of you who are here for…
wait, why are you here if you’re already trading the wheel on margin?
It’s almost like a martingale roulette strategy. But it’s not. At all. Did you have the same thought? I like gambling, too.
