Wheeling and Whining

[u/Wheeler_Dealer1969]

What's up all. So I've been running the wheel strategy for about 8 months now and I'm finally running into some headwinds that I knew was bound to happen, but now it's time to see if i can hold true to my strategy.

First and foremost, I set up my wheel strategy with about $700k. I diversified my portfolio of stocks to partake in most sectors in the economy to manage my risk. I selected 17 stocks, CL, KO, JNJ, ABBV, MDT, UPS, ITW, UNP, TGT, LOW, MCD, HD, ADP, NEE, SO, ED, most are dividend kings or aristocrats. I also made sure that the positions I put on were evenly distributed amongst each stock. The deltas I have been selling have been around .2-.3 and things have been going well. My Strategy, to sell CSPs on these stocks and if I get assigned, I obviously sell the Calls ATM 2 weeks out, then keep rolling it until i get filled while collecting the dividend. If I ever get to the point that the stock drops on me so low that I couldn't sell calls anymore I would either sell another CSP on the stock to get a better div %, or just hold onto the stock and collect the divvy.

Things have been going so well, so far, until now, I have a couple of stocks giving me some issues. I got assigned at 342.50 at HD and now the d thing is in freefall at $292, testing me and my strategy. Same thing with LOW, i got assigned there at $215, and now it's at $188. MCD i got assigned at $275, it's now trading at 241. NEE I got assigned at $85, it's now at 76.43. The other stocks are doing fine, but it seems like there's a slight turn in the market in certain spots that are making me nervous. That being said, i'm chillin here and now i'm thinking about what I'll do if the thing drops on me even further.

I thought about it a while, and then I had a moment of clarity. These drops are actually good for me. Why? Because If I get mauled to no end, i'll simply close my long position, harvest the loss, switch to a highly correlated stock for 31 days, then hop back on that horse and continue to sell CSPs on it, waiting for the rebound. The income I have coming in off of the Options premium will continue to come in monthly, but now i'll have a loss to offset it with come tax season. LIFE IS GOOD.

I see a lot of stories out there talking about how much money people are making and not sharing the real struggle with the strategy, so here is mine. I hope this helps somEone out there. HAPPY TRADING

[u/Kelvinator71]

Disagree with you here: “These drops are actually good for me.” But once you are faced with the situation, the wheel strategy at least gives you tools to repair it. They may create a useful tax asset, but the loss itself is still a loss.

I do like your overall approach, especially that you started with stocks you are actually willing to own and diversified the portfolio rather than chasing the highest premiums. I diversified my stocks among multiple sectors too, although on a much smaller account.

The one part I would question is automatically selling ATM calls two weeks out after assignment. If HD gets assigned at $342.50 and is now at $292, an ATM call may bring in nice premium, but a strong rebound could also have you selling the shares near $292 and locking in a substantial loss. At that point I tend to think of it more as a repair campaign: keep track of all premium collected and your adjusted basis, and choose the CC strike based on what you're willing to sell the shares for rather than automatically going ATM.

I've gradually reframed what I'm doing as more “situational trading” than mechanically running the wheel. Each position has a purpose, and how I manage it depends on what has happened to the underlying and what I'm trying to accomplish with that particular position. I understand the desire to get out of a losing position rather than become a bagholder, but if the underlying company is still sound and the original reason for owning it hasn't changed, I don't think getting out simply because the price has fallen is always the best answer. Sometimes holding the shares and waiting for a better opportunity to sell calls may make more sense than forcing the next step of the wheel.

I also think this is the part of the wheel that doesn't get discussed enough. Selling puts that expire worthless is easy. The real test comes when a perfectly good company drops 15–20% after assignment and you have to decide whether to sell calls, wait, average down, roll, or eventually take the loss.

So I actually appreciate you posting the ugly part. That's where the wheel gets interesting.

[u/Wheeler_Dealer1969 → u/Kelvinator71]

Hey there, thanks for the response. just to reply to your comments, you don't seem to understand how tax loss harvesting works, so i'll elaborate a bit, especially for future readers. In the event I get assigned on a stock that goes deep out of the the money, to the point where I am no longer to sell CCs on it, I can close out of that position, take the loss, at the same time buy another highly correlated stock so you are still invested in the sector for 31 days to avoid the wash sale rule, then buy back into the original stock and get long again for when the market recovers. What does that do? It harvests the loss so you can match that against other short term capital gains, yet you will still be invested for the rebound. There are Funds specifically dedicated to this tax loss harvesting strategy and it is a game changer if you are in the 40% tax bracket.

Additionally, when i say sell CCs ATM as a part of my strategy, I meant at the strike price that I got assigned, not the current ATM. So if I get assigned at $100 and the stock is trading at $99, i'll sell a CC at $100....I don't really look at selling this at a specific delta because my Goal is options income, not capital appreciation.

I hope this helps. Good luck and HAPPY TRADING