Through the course of this article, we will understand all about the Wheel Option Strategy and how investors can use this trading strategy.
As part of a major options trading plan, the Wheel Strategy is a methodical way of selling cash-safe calls. You keep selling stock options to generate monthly cash, to put it clearly for our less knowledgeable readers.
In most cases, this is accomplished by trading CSPs (cash-secured puts) in order to collect the option premium on a regular basis. When your stock is finally called off, you need to sell your shares and begin selling further cash-secured assets on the same, or maybe other, stock.
Is the Wheel Option Strategy A Good Strategy for Trading?
There are various possible outcomes when using the stock wheel strategy method. While the wheel strategy may be advantageous, the risks of selling OTM (out of the money) items and buying/selling these stocks should be understood.
How to Use the Wheel Option Strategy to Generate Constant Profits
The Wheel Option Strategy Method is a very effective options trading method that enables you to benefit from a single stock in four separate ways, significantly increasing your overall long-term gains.
It’s one of the strongest options strategies accessible, with lower risk and bigger profit potential than many other common options strategies.
The Wheel Option Strategy can be considered a more advanced variant of the classic Buy&Hold strategy. It aims to invest in high-quality companies or index funds ETFs on a regular basis while also collecting additional premium.
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How to Use the Wheel Option Strategy
The Wheel Option Strategy is a long-term trading approach that involves selling option cash-secured puts and covered calls in a methodical manner.
To create monthly revenue, you maintain selling options on stocks in which you are optimistic.
The basic format is simple to follow:
- You trade cash-secured put options on stock till you are assigned and receive the stock shares.
- Then you sell covered call options on the allotted stock until it is called away, and you must sell the shares.
- Then repeat the cycle yet again.
To obtain option premium, you trade cash-secured puts (CSP) on a regular basis. If you are ever allocated, you must purchase the stock at the agreed-upon price. Then, while still owning the stock, you sell covered calls (CC) to get a higher premium.
When your stock is finally called away, you must sell the shares before returning to sell more cash-secured puts on the same or different stock.
The Wheel Option Strategy pays you to begin a long position, allows you to collect rewards and profit from stock price growth while retaining the stock shares, and then pays you to liquidate the position.
Step-By-Step Guide on the Wheel Option Strategy
Step One
The total procedure begins with the sale of a cash-secured put option on a stock as well as the collection of the premium. You should choose equities that you are sure to purchase at a given price and hold for the long run.
You must be willing and able to buy 100 shares of the stock at the agreed-upon strike price for each option contract traded.
There are two conceivable outcomes when the put option contract expires.
The First Possible Result
The current stock price is higher than the strike price. In this situation, the option will expire worthlessly, and you will receive 100% of the premium you received when selling the option.
Essentially, you are paid a premium to be able to purchase one of your preferred stocks at the agreed-upon strike price when the option expires. After that, you move on to looking for new puts to sell.
The Second Possible Result
The stock is trading at a discount to the strike price. In this situation, you must purchase 100 shares of the stock at the strike price for each option contract. That shouldn’t be an issue because you were optimistic on the stock and are now purchasing it at a discount, as the price is lower than when you sold the put option.
In this situation, you also keep the entire premium you received at the outset, lowering the stock’s overall cost structure.
Step Two
If you’ve been allotted a stock, sell an OTM (out-of-the-money) covered call with a strike price greater than the stock’s present value. If the stock you currently hold rises in value, but the covered call is not ITM (in-the-money) when it expires, you benefit from the premium paid as well as capital gains above the entry price.
So, while holding the stock, you can earn new revenue by selling covered calls numerous times for higher premium, lowering the stock’s cost structure in the event that all of these call options expire worthlessly. You keep repeating it until the call option stock expires in the money, and the shares are finally called away from you.
Selling a covered call at a strike price lower than its cost basis is usually avoided since it will result in a loss in the entire wheel transaction. To determine this, keep track of any and all premiums earned and stock appreciation.
You may be caught holding the commodity for an extended period of time until the uptrend restarts, and you are back in a profitable range. This is why you should only invest in companies and ETFs that you are confident in holding for the long term.
When your stock shares are called back from you, the Wheel Option Strategy process comes to an end.
If you trade dividend stocks, you may be able to capture some dividends if you keep the shares long enough. As a result, the Wheel Option Strategy can create a quadruple source of revenue, as you’ve already collected option premium both selling cash-secured puts (before the stock was allotted) and covered calls (before the stock was called away) throughout the wheel cycle, plus any benefits obtained while holding the shares, as well as prospective capital gains on the stock price.
Of course, keeping track of all the income made in the necessary stages of each wheel trade is critical, as you won’t be able to know if the total position was actually lucrative without this knowledge.
Conclusion
The Wheel Option Strategy is excellent for earning semi-passive steady income year after year, with reduced risk than many other investment options and frequently far outperforming a simple Buy&Hold strategy.
It aims to lower the cost basis of your preferred companies by collecting option premiums from the selling of cash-secured puts and covered calls, as well as dividend distributions where available.
However, this isn’t a get-rich-quick program that will make you a millionaire in a matter of days. Forget about the adrenaline rush of day trading. The Wheel is a deliberate and occasionally tedious strategy.
The Wheel Option Strategy will demand careful stock selection and a great deal of patience, but if executed correctly, it will yield regular and steady returns monthly.
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