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If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.

This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.

Stock pick criteria

To trade this strategy I pick a stock that is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.

Trading the strategy

Once you have a stock that meets your criteria, start doing the following:

1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.

2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).

3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.

4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g., you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.

5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.

6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.

7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.

8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.

9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e., skip step 8 above).

10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or the next expiration and higher strike as long as it will result in a credit trade.

11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.

That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.

8 responses to “WHEEL STRATEGY”

  1. Tintin Tresna says:

    You mentioned pick a stock that is lazy(low volatility), what about SPY ETFs?

  2. Charles E. Herbert says:

    One of the best and comprehensive article , I am bookmarking it so I can read it again.Thank you, You really inspired me to learn more.

  3. Kyle says:

    I wonder if we can make this into a flowchart. Can you explain the 90% rule a bit more? I want to make sure I understand. What would the point be to sell at 90% when you can collect your whole premium instead of a percentage of it? Thanks for this. It helped me learn a lot.

    • Martin says:

      This rule depends on the time left in your contract. Imagine, you sell a put with 45 days to expiration and collect a $100 premium. Ten days later, the stock will go up so much, that your contract will be worth $10 only. Now, will you be waiting 35 days to collect an additional $10? No, it is not worth it. Close the trade, make $90 in 10 days, and open a new trade.

  4. Sean green says:

    In your article, you have offered to write further about what to do if the market drops so much that it is not possible to write a call at the cost basis. I would love to see this article, please

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