“It has been said, ‘time heals all wounds.’ I do not agree. The wounds remain. In time, the mind, protecting its sanity, covers them with scar tissue and the pain lessens. But it is never gone.” – Rose Kennedy

CAUTION: This guide is designed for the Redditor who has, at the very least, a basic understanding of how financial markets work, and have, at a bare minimum, some experience in trading stocks and options with their own brokerage account. If this does not apply to you, please stop reading immediately. Trading is highly risky and can bring about monetary losses if not careful.

Hello Reddit! This is my guide to trading The Wheel, thetagang style! Since I’ve written a comprehensive guide on my approach to trading Options Spreads, I noticed a number of similarities between the two, so I thought I’d also create a guide to help alleviate some of the learning pain for beginners.

I made it my goal to design a guide that captivates both beginners and professionals; covering the basics while also discussing the more advanced/important things to look out for to increase the success rate of The Wheel. As a bonus, I also share my own $0.02 / personal experience with The Wheel at the end. Of course, some of the statements made in this guide are influenced by my personal experience with The Wheel, including some lessons learned from my mistakes made and losses realized.

Before we dive into The Wheel, let’s refresh our memory what an option is: a financial derivative that gives the holder the right, but not the obligation, to buy or sell the underlying equity at an agreed upon strike price on or before an expiration date.

If you think about it, selling options is just like being in the business of selling insurance. In our modern society, insurance is a necessity, for it helps people protect themselves against the risk of financial loss. And where there is demand for a necessity, there is opportunity to supply; there is a reason why there are many profitable insurance companies, both small and large, private and public!

Profitable insurance businesses will sell policies to the people who need it, and collect a premium until the policy term expires, whether naturally or artificially. With options, you can be in the business of selling insurance, all without jumping over the hurdles of setting up an insurance company! So how do we go about profiting from selling insurance premiums? By spending a ton of money on clever and funny ads about 15 minutes and 15 percent of course. Just kidding! If only selling options works that way. Though there’s a good chance you might find extra 15 percent portfolio gains after spending 15 minutes learning about selling options!

So how do we go about making a profit from selling options? The same way insurance businesses go about selling policies of course! By selling policies for as high of a premium as possible, while making as low of a payout as possible to the policy holders! When it comes to insurance premiums, they tend to be priced the highest when the probability of a risk event goes up. Think about the demand for umbrellas, raincoats, rainboots etc. during a rainy day – that’s when demand for protection against the elements are high, and when vendors can subsequently price and sell them for higher than during a regular sunny day.

I find that visualizing options contracts as insurance policies helps to understand the purpose of The Wheel strategy better: in the market, there is demand for Put options whenever stockholders wish to protect the downside, and a demand for Call options whenever short sellers wish to protect the upside. The Wheel aims to provide additional gains by means of selling options to these buyers for a premium.

Whether you plan on Wheeling in your brokerage or retirement account, there are a few challenges you’ll need to overcome. Firstly, you’ll need to ensure your account is approved to perform key components of The Wheel, primarily:

Selling a Cash Secured Put (CSP)

- You put up, at a minimum, a cash amount of 100x of the strike price as collateral, to be able to sell a Put option, while collecting the Put Premium.

Selling a Covered Call (CC)

- You put up, at a minimum, a 100 lot of shares as collateral, to be able to sell a Call option, while collecting the Call Premium.

Secondly, depending on the way you react to the above statements, you can already tell if The Wheel is a strategy for you. Due to the nature of options contracts in providing leverage (100x) the strategy can quickly require a substantial amount of capital to invest, depending on the underlying stock of course. The 100x amount may seem low if you are Wheeling penny stocks, and can quickly seem massive if you are Wheeling stocks like AMZN, BKNG, GOOGL, or CMG!

Now that we understand the requirements, we can proceed to discuss The Wheel strategy at its simplest form:

- Step 1: Sell a Cash Secured Put to Collect Premium

a. If Put Expires OTM --> Back to Step 1

b. If Put Assigned ITM --> Buy Stock at Assigned Price and go to Step 2

- Step 2: Hold Stock & Sell a Covered Call to Collect Premium

c. If Call Expires OTM --> Back to Step 2

d. If Call Exercised ITM --> Sell Stock at Exercised Price and go back to Step 1!

*OTM – Out of The Money, ITM – In The Money

We want to profit the way insurance companies do: sell as many policies and collect as much premium as we can. Translated to The Wheel, it would mean that we try to sell as many Put and/or Call options as we can, while hoping for the options to expire OTM so we can collect the premium and move on.

How do we ensure that we can sell options that pays a high premium? When it rains, you sell umbrellas and raincoats! When people are hungry at the ball game, you sell snacks and drinks! It’s all a game of supply and demand. The best indicator of a great stock to start Wheeling will be its Implied Volatility (IV) and/or its IV Rank (IVR). IV will come in %, anywhere from 0 to 100s of %, while IVR will be between 0 and 100. You generally want to know when the forecast calls for the heaviest rain, so look for something volatile and ranked high. Personally, I look for at least 50% IVR.

Your brokerage should have this data available for you, and if not, do a quick search and you’ll find that there are a number of screeners out there who will give you this data for free albeit delayed; you don’t need IV/IVR data by the second, a 10-, 15- or 20-minute delay is fine, since you’re selling options days and weeks out anyway. Be warned: IV/IVR are both just indicators – once you identify high IV/IVR stocks, you need to understand why they are ranked high – did someone find out about fraud and theft? Is the company’s business model going obsolete, or are they filing bankruptcy? Whatever the reason, if the stock price is suddenly going to zero, there’s no reason to sell an option as insurance on the stock.

Another place you can find great stocks to sell options on is right here on Reddit! Just take a peek at the hottest threads to find what stocks are hotly discussed. Some of Reddit threads will even give you a weekly list of high IV tickers, all for free! Again, please make sure you understand why the stock has high IV/IVR before you dip your toes in!

In theory, The Wheel seems like a no lose, always win strategy; sell options as insurance, and walk away with pockets full of premiums. In practice however, the results may surprise you. I should warn you that The Wheel is by no means a magic silver bullet; losses are still possible especially when the strategy is executed poorly.

I’m going to list some of the most common mistakes made, challenges faced, and risks encountered:

- You decide to Wheel only one stock in your portfolio. This is an insanely bad idea and is no different from YOLO-ing your entire savings into one stock. The worst-case scenario can happen where the stock plummets and breaches your short Put option where you get assigned and forced to buy the stock at a high price. Now you’re stuck bag-holding a depreciated stock with unrealized losses in your account.

If you don’t have enough capital to hold a diversified risk basket of stocks, at a minimum of 100x each, then The Wheel is not for you! Yes, Wheeling solely EV, solely Cannabis, or solely GME is also a bad idea! Always diversify!

- You do not perform your own due diligence (DD) on the underlying stock and decide to start Wheeling the underlying. The worst-case scenario is where you have FOMO and start Wheeling by selling a CSP when the underlying has moved up significantly, where it has a significant chance of pulling back and catching you in assignment.

Being assigned the stock, you are now holding the depreciated shares and immediately sell a CC when the underlying dropped significantly, where it now has a significant chance of pushing back up and having your shares called away, before you even get the chance to let the stock appreciate back and help recoup some of your unrealized losses.

- When Wheeling, it is completely normal to see unrealized P/L numbers on your account swing widely, especially when the option has yet to expire, as the underlying stock price moves up and down. The worst-case scenario is where you get emotionally swayed by seeing big red numbers, and you buy back the option you sold at a significant loss, without even actually going through The Wheel. Yes, this can happen on both sides, the Put and the Call.

- Again, without performing your own DD, you begin Wheeling a high IV stock. A stock with a high IV does not automatically mean that it’s great for Wheeling! Some recent (as of Feb 2021) worst-case examples (granted, it was hard to foresee what was coming with these underlying): see WKHS or CCIV. This is why we emphasize on Wheeling a diversified basked of stocks!

One other consideration is to take in all available information at this point in time – yes, the stock has now dropped significantly: why is it doing that? Are they unable to grow their revenue? Has the company been found to be a fraud? Point is, if the underlying stock is a poor investment, you should cut your losses and move on to your next investment to find returns!

- When Wheeling, you sell CSPs on the underlying, but because of how strong the stock is, you never get assigned, and the stock keeps going up and now you feel like you missed out! Or you sell CCs on the underlying, but somehow the stock keeps going up only after your shares were called away, and now you feel like you missed out!

Understand that this is the inherent nature of The Wheel. When you sell a CSP, you are selling an insurance policy stating that the strike price you sold a Put at is the price you are willing to buy the stock at, if and when it drops to that level. Conversely, when you sell a CC, you are selling an insurance policy stating that the strike price you sold a Call at is the price you are willing to part with your stock.

- You decide to Wheel an underlying stock that is not liquid, which even worse, is its options which are even less liquid. This means that on the options chain, you see massive gaps between the bid-ask spread. By Wheeling a non-liquid underlying, you potentially sell insurance policies that are low in demand, and thus collect low premiums that do not compensate you enough for the risk you are taking on.

And here are some good tips and tricks, as it relates to selling options and The Wheel:

- Only sell options on or Wheel underlying stocks with a high IV, which allows you to collect sufficient premium for the risk you are incurring. Having a high IV underlying also allows you to sell options further OTM to avoid assignment/exercise.

- Options accelerate in decay at the 45 Days To Expiration (DTE) mark, so sell options that expire in 45 days or less. Selling a further expiry gives you more margin for error, while selling a closer expiry gives you less margin for error.

- If the option you sold has lost significant value since you sold it, whether from theta decay, or a gamma or vega movement, it’s a good idea to take profits off the table by buying back the option and initiating a sell on another option.

- If you prefer not to own the underlying stock and am trying to avoid assignment/exercise of the option sold, you can choose to roll the option. What this means is to buy back the option you sold while simultaneously selling another option, both transactions when netted should allow you to collect additional premium, if not a one-for-one exchange.

My $0.02: like trading/investing with other strategies, one should be careful not to get swayed by emotions. The Wheel has many emotional avenues one can easily wander down: seeing unrealized losses when the underlying breaches your short option strike, or seeing your shares get called away and feel like you’ve missed out on the additional returns. Bad selection of the underlying stock to Wheel can also sometimes feel like “bag-holding with extra steps” due to the nature of taxes and time spent under portfolio management.

The Wheel is best used with the approach of selling Puts only when the underlying has moved significantly lower and selling Calls only when the underlying has moved significantly higher. It’s best approached using a combination of Fundamental Analysis (FA) and Technical Analysis (TA) to identify the low and high points of the stock before selling an option, that way you increase your chances of collecting option premiums without having your short option going ITM; I use the same approach when trading options spreads.

There may also be efficiency in returns to be found with a hybridized approach: instead of solely selling Puts on the underlying while waiting for assignment, consider both selling Puts and buying stock in the underlying. While this approach is far more complex due to multiple moving parts involved, it allows you to reap the multiple benefits of the wheel and not feel left out.

In my experience, I have found The Wheel’s returns after taxes to be lackluster after factoring in the investment of my time to monitor the underlying and manage my positions; if you’re actively monitoring and investing, why not seek higher returns to account for your time and energy investment? The best consideration: if I’m spending all this time to do The Wheel, am I getting paid enough to do it? Am I going to beat buying & holding an ETF after taxes? Am I getting compensated enough in the form of returns for experiencing the stress and emotions from The Wheel? For me, it was a solid “no” to all of the above, but YMMV.

TL;DR The Wheel can be an effective tool when used correctly, but its use requires both a sizable portfolio along with dedication of one’s time towards active monitoring of the underlying and management of portfolio positions. In summary:

Pros

- Ability to collect Put premiums from excess volatility to lower cost average.

- Ability to collect Call premiums from excess volatility to reap additional returns.

Neutral

- Requires sizable portfolio to allow for diversification of risk.

- Requires active monitoring of underlying stock & overall market.

- Requires active management of portfolio positions.

- Incurs short term capital gains tax, due to the nature of trading in and out of positions <1yr.

Cons

- Potential to miss entry point into underlying stock when Put option is not assigned.

- Potential to cap underlying stock returns when Call option sold is exercised.

Thanks for reading! As with any new strategy, I highly recommend that you paper trade it first to get yourself familiar before going in with your own hard-earned cash.

Let me know if there are other interesting thetagang (or even non-thetagang) strategies you’d like my two cents on. Like my opinion on The Wheel, I promise I will try my best to be factual and impartial to the strategy, while also giving you my own personal experience with the strategy (if I’ve traded it).

DISCLAIMER: I am not a financial advisor, just an opportunistic trader who has invested more than a decade of his own time and personal money to trade different stocks & options strategies for portfolio gains, sharing his experience for your kind Upvotes and Awards.

Edit: Noticed some funny/unknown symbols showing - edited post to remove them. Updated tickers and 100x multiple definition.