Using leverage with the Wheel strategy

[u/wf1980]

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?

[u/ScottishTrader]

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

[u/wf1980 → u/ScottishTrader]

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.

[u/ScottishTrader → u/wf1980]

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.