The "Wheel" Options Strategy - A Step By Step Walkthrough Of This Powerful Proven Trading Strategies
197,007
Published 2020-07-24
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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All Comments (21)
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20 * 100 = 2,000
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I have been looking for this info. EVERYWHERE. So glad I found your channel. Thanks for the sharing.
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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.
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I loved this video. You provide clarity. I actually understood everything you said.
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Love this video! Thanks for the lesson Markus! Really helped me understand this concept a lot. Happy Trading!
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Perfect. Love the specific examples and use of step by step charts
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Your style of teaching is exactly the way I like to be taught! Excellent work Markus, keep it up!
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This explanation on the wheel is so clear and simple. Thanks for the breakdown!
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This is one of the most understandable, digestible expansions I've seen. Thanks.
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You are amazing I been looking for a video that can explain this method for a while cause it was confusing as heck... you made it very easy to understand!
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I really appreciate your demeanor and clear explanations. It's clear you love what you do, and I've learned a lot from your channel
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Yes is very helpful and you going on the right pace thank you very much and keep up the good work
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Very easy to understand. Loved the clarity and the graphics made it that much easier. Thank you.
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Markus is an excellent teacher. He is very systematic. He makes a difficult subject so easy to understand. Thank you Markus.
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Finally! someone I can understand! Observational learning is the way I absorb (and hopefully retain) knowledge quickly. You're a godsend to all the new and aspiring investors out there. Keep it up!
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Great video. I’m new to trading and usually only do day trading through cheap stocks or options. Never considered actually owning stock, but now see a great benefit. You explain clearly and love the visuals. Thank you!
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This is perfection :) Thanks Markus, now I can share it with my buddies who think trading is rocket science.
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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.
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This is the most comprehensive, entertaining, and simplest way to understand options. I have my series 7 and struggled to understand options for the longest time. Thank you!
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Very honestly, from all the channels for option trading by far you are the best! am very happy to find you.
