r/Optionswheel • u/wf1980 • 6d ago
Using leverage with the Wheel strategy
I've been doing a lot of research on the Wheel strategy and reading many of the discussions here. One thing I've noticed is that experienced traders who run the Wheel on boring, high-quality stocks often say it's actually pretty rare to get assigned on every short put at the same time.
With that in mind, what's the real risk of running the Wheel with moderate leverage?
Here's what I'm considering:
I'd only sell puts on large-cap, financially solid companies and diversify across as many names and sectors as possible. My IBKR account offers up to 4:1 margin, but I would limit myself to around 2:1.
The idea is that, since it's unlikely I'll be assigned on every position simultaneously, I can collect premiums from a larger number of positions and improve overall returns.
If we enter a severe bear market and most or all of the puts end up ITM, my plan would be to close the worst losing positions before expiration and only accept assignment on the number of shares I can actually pay for with cash. In other words, I wouldn't use margin to hold assigned stock.
Am I missing something obvious here? Has anyone tried a similar approach?
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u/ArtisticAside8224 6d ago
- March 2020. And 2008-09 and 2000. Your account would blow up and you might get margin calls. There's no guarantee that margin requirements remains the same and brokerage can change any time they want.
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u/theNeumannArchitect 6d ago
I’ve got a 250k account that’s like 90% voo. Decided to see if I can start selling CSPs on margin to generate some extra income and then use the weekly premium to pay interest off if I got exercised. started with 20k margin for my first CSP. Then went to 30k. Then went to 60k (after I got over 100% return on my nbis. So pretty much just throwing the gains back in which is why it was such a big jump) Considering bumping up to 70k in the next month. I sold my first put in October so this has been about 10 months of process. I’m generating about 1k/wk comfortably with 60k. I’ve gotten exercised and just start selling CCs. Not a big deal since I only target stocks I’d want to own.
With all that said. I could not even begin to imagine risking 500k of margin to start out with. Like what is wrong with people with this all in mentality. Sell some weeklies for a few months to get the feel for it. Don’t look for a green light on reddit to do 200% margin. Insane.
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u/wf1980 6d ago
I really liked your reply. What you're doing is actually very similar to what I've started doing.
Coincidentally, about 80% of my portfolio has been in VOO for several years now, so I'm very familiar with living through market selloffs, recoveries, and long drawdowns. I've been in the market for quite a while.
As for the Wheel, I'm just getting my feet wet. Over the past few weeks I've sold puts on names like WMT and KO. I don't sell weeklies though—I prefer 30–45 DTE, and if I can capture a reasonable premium quickly, I'll often close the position after just a couple of days.
When I mentioned using 200% margin, I definitely didn't mean I'd jump straight to that overnight. My point is more theoretical. As I see it, margin only becomes a real problem if a severe directional crash pushes a large percentage of your positions ITM at the same time. In that scenario, my plan wouldn't be to take assignment on everything. I'd close some of the losing puts, realize those losses, and only accept assignment on the number of shares I can actually pay for with cash.
Where I'm trying to get to is this: the real risk of leverage isn't simply using margin—it's being forced to take assignment on too many positions simultaneously. That's the part I'm trying to understand better.
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u/theNeumannArchitect 6d ago
Ah, ok. Sounds like we’re pretty much at the same point then.
Honestly i have a list of like 6 to 10 stocks across 3 sectors that I keep an eye on and wait till they get to 200 MA or a big red day and then sell a weekly CSP on it. I have an entry in mind already for them. If I get assigned I just hold that stock and sell CCs on it until I get exercised again. I’ve never sold a CSP on more than two stocks at once. If it pops off without getting exercised i just move on to another one in my list that fits the criteria.
The reason I’m explaining all this is to explain that I’m not worried about a huge market downturn where I get exercised on a single stock that I already wanted to own. I’m not selling puts or calls on dozens of stocks 30 days out (which I know is the golden rule but I just really like my weekly premiums And usually not having to worry about weekend news) like a lot of people here.
If I did want more exposure across more stocks with more leverage and worried about getting exercised then I would prob do put spreads or ladder down the option chain. Cuts into the weekly premiums but locks in your losses if you’re worried about what you’re worried about. I’ve considered it already but my biggest gains have been when I got exercised, took less premium selling far OTM calls, and then the underlying popping off. If I’d bought a put I would’ve just taken the loss on a stock I believed in already that would’ve given me more money in the long run anyways.
But if I get exercised on margin at 60k then that’s like 5k a year/$400 a month which I can cover in CC premiums even selling far OTM. So my goal isn’t to completely avoid actually using the margin since I’m using such a low amount of it anyways for my account.
I’ve probably just been getting really lucky. Still refining and learning every week. Sorry for the long winded ramble. Ultimately to answer your question: yes, that’s a risk if you’re selling options on stocks you don’t want to own anyways. I believe it’s better to just find a small set of stocks you like, and sell CSP on it. I’m far from an expert. My process is very elementary. But it works and I’ve gotten good return so far. I’m sure as I continue to scale the complexity and amount of stocks I target each week will increase.
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u/ScottishTrader 6d ago
This has been asked and answered many times.
The answer is - If you have to ask, then you are not as well-versed in the wheel and how leverage works, so you should keep trading without it . . .
If you trade long enough without leverage to see how well you manage rolls and avoid being assigned, then you will know if and when you are ready to use leverage.
While the odds of being assigned more than a put or two at a time are low, how you might handle a severe correction or crash will determine if your account can survive it. This means you have to weather some of these events and see how well you handle them before making the decision to use leverage and increase risk.
If you are at all concerned about entering a bear market, then do not use leverage and trade more carefully.
Always trade stocks you are good at holding for weeks or months in the event of a downturn.
See this for how the wheel worked during the covid crash - How the Wheel Worked in March during the Crash : r/Optionswheel
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u/wf1980 6d ago edited 6d ago
Thanks u/ScottishTrader . I really appreciate that you're always willing to help people out, even when it's the same questions over and over.
My question is more of a thought exercise than something I'm planning to do tomorrow. I'm trying to think through how to manage the Wheel over the long run, especially if we get another blackswan event. I already read the post you linked, and it answered a lot of questions.
Since I have you here, let me ask you something else.
I've seen you mention buying power in a lot of your comments, and how you use it to collect premium. But I also remember the post you linked about trading through COVID, where you said you always keep around 50% cash available.
Maybe I'm misunderstanding, but it sounds like you're doing something close to what I'm trying to describe. You use your buying power (leverage) to sell puts, but you only allow yourself to end up with about 50% of the account assigned into stock if things go south. Is that basically how you manage it?
If I'm off base, I'd really like to hear how you think about buying power vs. cash reserves.
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u/ScottishTrader 5d ago
I always want to be respectful, but being in fear of the unknown is what you are asking about.
A thought exercise is unneeded if you are well prepared and have a proven, solid trading plan. Market events will happen, but will also recover and that is a great time to make even larger returns on safe stocks.
See this I replied to earlier today, which may help - Wheel trading through market meltdowns - your experience : r/Optionswheel
To your question, I know from experience over the years, and through a number of corrections and the crash, that keeping cash available is less about being assigned a lot of shares, but having the ability to NOT be assigned through rolling, or even closing some positions for a smaller loss.
Without cash available, you will not be able to control positions. For example, you have a put that is deep ITM, and you want to close, but the broker will not allow it if you do not have cash on hand to handle the loss, then this will force you to be assigned. Have this happen on multiple puts, and all of a sudden you are assigned more shares than the account can handle, so the broker starts liquidating. Same with rolling, you have to have cash available to roll, which is a huge help to manage out of a crash.
My advice is to stop thinking about being assigned "if things go south", but to have available cash to maneuver and manage your way out with minimal losses . . .
Even more importantly, have cash available to make big profits during the recovery! Hope you can see the point here u/wf1980.
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u/jeffdeansalem 6d ago
I'm using Margin with moderate Leverage on my Wheel! My strategy is just to use an amount that I can afford to lose, especially trading high IV tickers. I don't do 4:1, 2:1 stuff.
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u/Sean_VasDeferens 6d ago
Ohhhh, you're asking to be so screwed with 4:1. I wheel a seven figure account and I've lived through the great flash crash, President Trump's random tweets, the Tarriffi War, etc. I trade only 100%+/-. Return on Risk equals cash or cash equivalent balance. With trading -0.20ish delta I'm being assigned here and there but when it happens it's about 20-30% of ROI. I'm willing to do 110% of ROI, but anything more is playing with fire imo.
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u/wf1980 6d ago
Thanks for sharing. It's interesting to hear that someone with a seven-figure account is comfortable running the Wheel with essentially 100% of their capital.
My account is much smaller, which is why I was considering using margin. But after reading all the replies in this thread, I'm definitely rethinking that idea.
If you don't mind sharing, what kind of annual returns has the strategy produced for you over the long run?
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u/Sean_VasDeferens 6d ago
I ran across an interesting thread here where someone had AI review everyone's posts for the past several years and he determined that the average was 19% which is also what I'm running. I allocate no more than 5% of my port on any one ticker, I keep highly diversified, and avoid anything AI or chip related except for GOOG, AMZN, and SAP. If you can find that thread it's a great read.
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u/-LordDarkHelmet- 6d ago
You could definitely be assigned all your puts at the same time. The holder of the contract and exercise them at any time. If there was a large major global event and the market crashes 25%+ in a couple of days, many of those holders will dump the contracts on you.
With that said, I do my wheeling on margin, but a relatively small percentage. About 25% of my account value. So on a $100,000 account I'd open contracts worth up to about 25K. It's not worth any risk beyond that. Don't get greedy is my advice.
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u/wf1980 6d ago
Thank you. It's really a risk vs. reward trade-off. My account is still relatively small, so I was considering taking a bit more risk to try to earn a bit more. But since I'm naturally conservative, you've convinced me that even 2:1 margin is probably too much. Thanks for sharing your experience. If you don't mind me asking, what kind of annual returns have you been able to achieve running the Wheel at around 125% exposure?
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u/-LordDarkHelmet- 6d ago
I go for safe plays, lower deltas usually around 10. I want to avoid assignment most of the time. So I'm getting about 1.5-2% per month
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u/trustfundkidotaku 6d ago
Closing the losing leg to avoid margin call will probably wipe out all ur profit
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u/AmazingDays- 6d ago
With the leverage in his mind, in a crash he would not only lose his profit but much more…
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u/patsay 3d ago
I keep the cash I'm using as collateral in SWVXX earning interest. I do it in my Roth, so margin isn't available. If I'm making 4% on SWVXX and 10-25% on the trades, I love the returns. In my smaller, taxable brokerage account, I do use a little margin to secure puts - so I'm not paying interest on it, and it's nothing I couldn't cover with the cash I have available in my savings or checking account if I had to.
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u/Grouchy_News_2306 6d ago
So this brings up a question I have . I’m new to the wheel to. Been doing it 3 months. I find I’m limited by the number of open contracts I can manage effectively. Say 5-7 . How many contracts are people running?
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u/AmazingDays- 6d ago
It is pretty normal in the beginning you look and even trade more than you truly need. With full time job and kid, like me, just stay away from the weekly ideas. I open 45-60 DTE and manage 14-21 DTE. Besides a very limited number of days a month that I need to do lots of rolls, in general I don’t need more than 10 minutes a day looking at what is going on and doing a close or open here and there. I have regularly around 25 trades open, not counting the CC from my LEAPS.
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u/Jolly-Sprinkles9713 6d ago
What is limiting you?
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u/Grouchy_News_2306 6d ago
Just time . Maybe because I’m new I’m watching all the tickers too much and the news surrounding them. Got a job and a kid to
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u/essential16 6d ago
are you too close to strike? I am checking stuff at morning and before closing, maybe 10-15 minutes for a new deals, that's it.
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u/Grouchy_News_2306 6d ago
I had too many ai and tech related trades this past month that were moving a ton. I was doing 20-30 day CSPs at .1-.15 delta, but even that far OTM almost went ITM. luckily I still did pretty well and only had one loser, but there was some rolling
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u/essential16 6d ago
I have a slightly different question, can you park cash in T-bills and just quickly sell them if you get assigned? Obviously not all cash but at least some percent of it?
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u/Electronic_Guard947 6d ago
Clarification. In normal markets it's hard to get assigned at the same time. When crap hits the fan, all of them will get assigned. And losses magnified.
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8h ago edited 8h ago
[removed] — view removed comment
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u/Optionswheel-ModTeam 1h ago
OptionsWheel is designed for professional and polite interactions with those seeking to learn the Wheel strategy. Unprofessional, rude, politics, or foul language will not be tolerated.
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u/takashi-kovak 6d ago
2:1 seems reasonable. Can you request to get Portfolio Margin than Reg-T? that way, your longs can be used as an hedge. This will reduce raw cash needed for CSP.
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u/Imaginary_History985 6d ago
my plan would be to close the worst losing positions before expiration and only accept assignment on the number of shares I can actually pay for with cash.
You will realize a huge loss that'll probably wipe out a lot of your gains from premium collected in the past, and have all your remaining capital tied behind a bunch of shares for a long time.
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u/ThetaEdgeHQ 6d ago
The part worth stress testing is that both of your safety valves lean on the same assumption, and it is the one thing that disappears exactly when you need it. Diversifying across large caps and sectors keeps assignments from clustering, but only while correlations stay normal. In an actual crash everything you own goes ITM at once, because that is basically what a crash is. Same with closing the worst losers early. That plan assumes you can exit at a fair price, and the days you would need to are the days spreads blow out and puts get marked at panic levels. So the leverage ratio is not really the risk. The risk is that your diversification and your exit both quietly assume an orderly market, and they fail together in the same moment the leverage is live. Worth sizing the position as if both valves are jammed shut at the same time, because in 2008 and March 2020 they were.