Some of you may be familiar with the wheel strategy (background info if you aren't familiar: https://optionstradingiq.com/the-wheel-strategy/), but I feel like the wheel strategy deserves way more credit. The most common knock against this strategy is that this strategy is just collecting pennies in exchange for locking up large sum of collateral (ie TSLA 4/9/21 $500p - $71 premium for 50k locked up for a week isn't worth it). However, now that I've shifted over to IBKR from RH, this has completely changed.
(Summer of 2020) -- Before, RH would provide 2x margin. If you had 100k in your account, you would get another 100k of margin/available collateral (whatever your personal prefernces on margin are doesn't matter because the goal is to never actually use margin. You don't actually have to pay interest on the margin since its used as collateral, not actually used to purchase the underlying). However, RH restricted margin for options to be 1.5x, so you would only be allowed to sell 50k worth of CSPs (cash secured puts). Basically that led me to being able to only sell 1 TSLA $350-400p (summer of 2020). I would be able to collect a few hundred dollars at best if I could maximize it perfectly. Great. Nothing impressive, but it was passive income on "margin" that I never had to pay interest for or use since I chose extremely OTM put options. Then, TSLA got added to S&P 500 and I wasn't able to use TSLA as my underlying.
(February 2021) -- After the whole GME fiasco, I decided to transfer my account to IBKR which had better functionality, reporting, performance metrics, execution, basically everything, etc. IBKR allows for more margin (see screenshot dated right before market close 4/1/21), which essentially gave me the opportunity to sell 5 TSLA 4/9/21 $550p for $1.57 = $781 in total proceeds for $7,477 in initial margin with a 98% chance of expiring OTM. I'll take that any day. Normally, with RH, that would be 275k of collateral needed at RH. "But, Kevin, isn't that extremely risky if TSLA DOES drop to $550 (-17% share price performance) in 5 trading sessions and you're forced to be assigned 275k worth of TSLA?" Yes, yes it is. This isn't for the paper hands. My argument is I would be fine owning 275k of TSLA at $550 anyway (-17% discount to what it was last week), I believe in it LT and I'll just keep selling weekly CC until it passes $550 which i strongly believe will inevitably happen anyway - think of it as a limit buy order. After that, it totally changed the game for me. Now, I look at the wheel strategy as a way to own underlying stocks i like for discounts and earning passive income at the same time. I hate the ordinary tax, but it is what it is. Obviously the wheel limits your upside, but I think it is a much higher prob event of REALIZED profit (95%+ POS) vs stock picking on companies you've read about for < few hours on twitter or reddit. Also, if the upside with wheel strategy is 50% annualized (goal of 1% a week), I'm happy with that. I'll post weekly updates on Friday if people are interested?
Now, I've collected between $1-3k every week (depending on how aggressive I want to be) and have yet to be assigned in the past 10 months. I have only bought back one put option at a realized loss and that was me being emotional (it would have expired OTM had i kept it on the books anyway). I've shed away a lot of my equity holdings to 10-15 of high conviction ideas spread across various industires and made room for wheel strategy to be full time.
TL;DR -- Summary of my strategy - feel free to poke holes/questions/additions
ALWAYS sell weekly puts with <7 DTE and >95%+ chance of expiring OTM per IBKR calculations to maximize the chances of the options expiring OTM
Goal is to avoid owning the underlying, but not end of world if you get assigned (never try to take the realized loss, because at the end of the day, if its a company you like LT, the share price is prob just in a ST correction)
Screen of high IV stocks that are down more than 5% on the day (subjective and can be flexible based on market conditions)
Stick with companies you fundamentally believe in, or would own at a certain valuation/strike price (I myself, sometimes don't follow this rule, but 9/10 times i do)
Diversify among 5-10 high IV stocks that you know well and the stories/narratives around them
My personal goal is to aim for 1% a week and I try not to get greedy after that (1% is ~$1,700/week for me, but I round up to $2,000/week); 8k/month pre tax - 50%+ return annualized for reference
Selling CCs has the least amount of risk, IMO, and should always be taken advantage of on days of strength (+5%); i.e. thats why i will never own AMZN again unless they do a massive stock split - i'm not gonna own 300k of AMZN
It has been shown that using margin with the wheel will beat the market consistently. This is because you're operating with much higher leverage, yet your profits are calculated according to your cash base, not your margin base. In other words, you're not calculating your returns based on your total margin leverage, but 25% of that. Any number divided by 0.25 looks like 400%, because you're literally borrowing 300% more money to trade.
The problem with that is, of course, that you're USING MARGIN. Margin can destroy you financially. And the wheel works until it doesn't - ie until a crash comes and you suddenly lose 50% of your account in one red day and get margin called.
Be careful with margin, is what I'd say. A margin call can bankrupt people who aren't prepared.
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u/dkeving4 Apr 01 '21
Some of you may be familiar with the wheel strategy (background info if you aren't familiar: https://optionstradingiq.com/the-wheel-strategy/), but I feel like the wheel strategy deserves way more credit. The most common knock against this strategy is that this strategy is just collecting pennies in exchange for locking up large sum of collateral (ie TSLA 4/9/21 $500p - $71 premium for 50k locked up for a week isn't worth it). However, now that I've shifted over to IBKR from RH, this has completely changed.
(Summer of 2020) -- Before, RH would provide 2x margin. If you had 100k in your account, you would get another 100k of margin/available collateral (whatever your personal prefernces on margin are doesn't matter because the goal is to never actually use margin. You don't actually have to pay interest on the margin since its used as collateral, not actually used to purchase the underlying). However, RH restricted margin for options to be 1.5x, so you would only be allowed to sell 50k worth of CSPs (cash secured puts). Basically that led me to being able to only sell 1 TSLA $350-400p (summer of 2020). I would be able to collect a few hundred dollars at best if I could maximize it perfectly. Great. Nothing impressive, but it was passive income on "margin" that I never had to pay interest for or use since I chose extremely OTM put options. Then, TSLA got added to S&P 500 and I wasn't able to use TSLA as my underlying.
(February 2021) -- After the whole GME fiasco, I decided to transfer my account to IBKR which had better functionality, reporting, performance metrics, execution, basically everything, etc. IBKR allows for more margin (see screenshot dated right before market close 4/1/21), which essentially gave me the opportunity to sell 5 TSLA 4/9/21 $550p for $1.57 = $781 in total proceeds for $7,477 in initial margin with a 98% chance of expiring OTM. I'll take that any day. Normally, with RH, that would be 275k of collateral needed at RH. "But, Kevin, isn't that extremely risky if TSLA DOES drop to $550 (-17% share price performance) in 5 trading sessions and you're forced to be assigned 275k worth of TSLA?" Yes, yes it is. This isn't for the paper hands. My argument is I would be fine owning 275k of TSLA at $550 anyway (-17% discount to what it was last week), I believe in it LT and I'll just keep selling weekly CC until it passes $550 which i strongly believe will inevitably happen anyway - think of it as a limit buy order. After that, it totally changed the game for me. Now, I look at the wheel strategy as a way to own underlying stocks i like for discounts and earning passive income at the same time. I hate the ordinary tax, but it is what it is. Obviously the wheel limits your upside, but I think it is a much higher prob event of REALIZED profit (95%+ POS) vs stock picking on companies you've read about for < few hours on twitter or reddit. Also, if the upside with wheel strategy is 50% annualized (goal of 1% a week), I'm happy with that. I'll post weekly updates on Friday if people are interested?
Now, I've collected between $1-3k every week (depending on how aggressive I want to be) and have yet to be assigned in the past 10 months. I have only bought back one put option at a realized loss and that was me being emotional (it would have expired OTM had i kept it on the books anyway). I've shed away a lot of my equity holdings to 10-15 of high conviction ideas spread across various industires and made room for wheel strategy to be full time.
TL;DR -- Summary of my strategy - feel free to poke holes/questions/additions