The "Wheel" Options Strategy – A Step By Step Walkthrough Of This Powerful Income Strategy

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The Wheel Options Strategy

This strategy is like “getting paid while you wait to buy a stock”. This is also one of the strategies known to be used by Warren Buffett.

This strategy is used on a stock that you’re bullish on. It is used to profit on the downward movement of a stock, as the stock approaches your entry point.

For instance, let’s say that you’re wanting to buy shares of a particular stock.
However, this stock is currently trading much higher than your entry point.
Typically you would wait until the stock price moves lower before loading up on shares.

For this example, we’re going to use the stock ticker SQ. In this scenario, SQ is currently trading at $121.5 and you want to purchase the stock when it hits $100.

You’re bullish on this stock and you expect the price to go up, but you’re looking for the right entry point.

Because you want to buy this stock at $100, you sell a put option contract at the $100 strike price and receive a credit of $3.50, or $350. In this example, we execute the trade and the margin required for this position is only $1,000. Without a margin, the cost would be $10,000.

If the put option contract expires and the strike price is still above $100, you get to keep the $350. This would be a return of 3.5% in 35 days, which is the length of the contract expiration.

The stock is STILL above your entry point, but now you’ve earned 3.5%

Let’s say you repeat the process again, and you sell another put option contract at the $100 strike price. BUT the strike falls below $100 at expiration. If the strike price fell to $90 at expiration. You would be assigned 100 shares of SQ stock at $100 each.

Since the strike price is currently at $90, and you purchased the shares at $100, there is an unrealized loss of $1,000.

However, In this same transaction, you also made $350 in premium. Because you’re longterm bullish on these shares, you do not sell them at $90 so there would be no loss realized. If you chose to sell them at $90, there would be a loss of $650. ($1,000-$350=$650)

Since you’re the proud owner of SQ shares that you’ve purchased for $100, you can now sell call options against them!

Let’s say that you sell a $110 call option for 35 days out, with an expiration date of SEP 18. The premium received for selling this call option contract is $500.

As the expiration date approaches, the strike price moves down to $80. This would be an unrealized loss of $2,000 in the values of the shares, but you still earned a $500 premium. Because you’re long-term bullish on these shares, you do not sell them. There is no realized loss, and you earned $500 in premium.

Up to this point, you were able to earn more than an 8.5% return, AND you purchased you still own the stock. If the stock trades sideways, and you still a call option contract, you STILL win with this strategy. The stock didn’t increase in value, but you earned premium by selling call options.

If you sold a $110 call option, and the strike price moved up to $120, you earn $1,000 from the shares and the premium from the option contract.

Then you start the cycle all over again, because “the wagon wheel keeps turning”

Key Points:
1.) A powerful strategy that can deliver 30% per year, rather “safely”. In this example, we earned 8.5% in 70 days which is more than 43% per year.
2.) It’s important you choose a stock that is trending positive.

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Comments

fitzroy Williams says:

Hi Markus,
Very Well explained.
Could you tell me if it is a good idea to get the maximum out of the trade by picking ATM options only, when choosing your strike prices?
Therefore every month you most probably have to Buy the Stock or Sell the stock. But the Premium collected would be much bigger.

ivanxyz says:

Good video. I have been trading the wheel strategy for a while now. It is a money faucet. Stocks and options together make the best business model. No tenants or employees to worry about.

Alex Mundo says:

Is he part of the Theta Gang?

John X says:

I would really love to get the wheel running but basically I dont see how this strategy is working in the long run..
See for example I made a backtest for SPY during recent crisis until now.

Selling options at Delta 20 would cause in getting assigned SPY at 334 (pay
33400) then later getting assigned for call 232 (getting your 100x spy etfs
buyed for 23200) then again getting assinged for 249 (buy 100 spy for 24900)
and getting called away for 277,5 ($27750) that in sum made a loss of $7350!

Even though there are some good premiums over time this would just relieve your
loss with around $4000 which still would made a loss of more than $3000 .

Considering that SPY is now higher than the start point from my backtest this
is a really disappointing outcome. Please see my backtest spreadsheet and hopefully you will find some mistakes.
https://docs.google.com/spreadsheets/d/1nDpv0qlMNtYxnhiYDg8H1VJuAbBue2ooj1znTIuBRLg/edit#gid=0

{Forbidden.Knowledge} says:

In robinhood, they require you to have 10,000. darn it. I wish I only have to coughup for 1000. What broker is this btw?

Roman Ray says:

Good review. I have been using this strategy on an “investment” which I should have cut. It works. Also, my six year old really enjoyed this video, he watched the whole thing with me and commented on the profit amount and was asking me questions about options. I was pleased and surprised by his interest.

kanechika konieczka says:

i think there is an error. 20*100=2000 not 1000 in one of the lines. one other possibility is before getting assigned roll out and sell a lower put for b/e in a bear market and maybe get the shares at a 40-60% discount. not sure how this works in reality if there is a fast drop.

76ers says:

Your style of teaching is exactly the way I like to be taught! Excellent work Markus, keep it up!

Sagar Pokharel says:

Why are we selling a put 35 days away and not a week away??

Juan Pablo Herrera says:

​@Marcus Heitkoetter Hello! Thanks for this strategy. Starting right away while markets get a regular rythm.
I have a question. 30% ROI is over the total buying power, so if you have a margin account 2:1 you could aim to 60%, Am I correct? In IB I got a margin account 4:1, I was wondering if in this case I should use the totality of the buying power and aim for 120%. As always, thanks for your support. You have no idea how this channel has impacted my life.

Homesteader Workouts says:

$320 profit, not $350. Just for those who are confused. Also, be very carful with this strategy. Make sure to pick stock you are fine with owning forever. Sometimes stocks just don't recover. So if you get put the shares and the shares never go back to 100, but just keep falling, then you're in trouble.

Ranjit's Helpful Videos says:

I am doing this strategy since few months. I liked your video. I agree with you about the return potential as I am achieving this with a higher percentage. 🙂

The Tattooed Entrepreneur says:

incredible video Markus, would it be better for me to wheel a large account with Margin or just stick with cash?

A C says:

I always stayed away from options but this video makes so much sense. I would be stupid not to sell options on stocks I already have. If I plan on selling a 100 shares of a stock at a certain price anyways in my IRA, why not collect a premium while I wait for it to hit my sell point or set it a little higher? If it triggers, not a big deal. I still make a profit I was planning on making anyways plus the free money while I waited. I did the math and I can make over $1500 a month just by waiting.

Matt says:

Wouldn’t it be 18.5% in 70 days ? 1000+850 1850 out of 10k investment?????

Wat Pho says:

are you one of the Hudson brothers ? https://youtu.be/ZGgsADcNHBo

santiago crespo says:

I appreciate the teach…👍

Bruvax says:

How to attend your online training if outside usa?

maxjoey sirrock says:

Yes is very helpful and you going on the right pace thank you very much and keep up the good work

Yash says:

It is strategy called "Cash secured put"

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