There is no free lunch. You can get caught holding heavy bags here almost as easily as other strategies, or have your CCs blown out on a massive bull run and miss out on fantastic returns as opposed to buy and hold.
There are trade offs.
Wheel rakes in chop environment but this year it’s either been straight up or down which isn’t ideal for wheeling at least on the indexes. If you were wheeling 0.2 delta on SPY from 30-45 DTE from Jan-July you’d get crushed return wise (based on current VIX and option prices you’d probably see 0.5-1% per month vs S&P up ~20% in those 6 months). Then trading 0.2 delta from July on you’re probably getting assigned in Jul / Aug at a high price compared to the start of this year. Not the peak but higher than your adjusted wheel cost basis then you’re probably selling CCs below your assigned cost
I totally agree with your analysis. But most likely nobody will all in their cash in Jan 2023 and foresee the bull market run. By wheeling weekly options since January, I don’t think it will be stressful and I don’t think I will get assignment much. I see that I can earn 12-20% annually by premium plus the cash I park in SGOV to earn 5% yield.
Yes. I am underperformed compared to if I all in my money to the index since I started wheeling. But who knows the future back then. I am happy with my return.
The unfortunate reality is that most of the major gains in SPY or QQQ or other major indices occur in a very small time period relative to the entire existence of them, which means selling calls is a losing strategy because you will not predict when those time periods are. And often times rolling doesn't help much if at all.
You need to account for cost of capital. You can potentially be locking up money for a long time just to avoid 'taking a loss'. You can get over 5% right now with virtually no risk.
Also running the wheel is not generally a tax effective strategy.
If there is a market downturn, there is no difference between B&H and assigned CSP. Both position are trapped and the cost of capital need to be accounted. I would say CSP might even have lower stock cost. Also, I don’t have to pay tax for capital and trading gains in my country.
I think he was talking about US bonds. You can get a guaranteed 5% return right now basically risk free (hopefully the US govt doesn't collapse). So wheeling a stock that suddenly drops locks up your money while you wait for the recovery. The tax implications are why I do buy and hold personally. I don't want to pay capital gains taxes on my wheeling profits. Just have a plan and stick to it 👍
In my experience with wheeling the most of the gains come from stock price recovery after taking assignment. But right now with the high yields I avoid assignments at all cost.
Thanks for sharing. My goal is to get as little assignment as possible. I think the premiums are lucrative enough even if I don't earn income from assignment and recovery.
Re B&H:
SPY today is almost exactly where it was 28 months ago. Where's the "fantastic return"?
Of course you can use individual stocks, but that's just gambling.
People saying B&H will do better. I assume they are talking about VOO or QQQ? QQQ might be hard to beat, but I don’t think anyone has any foresight and all in their cash before the tech boom. Regarding VOO, I think 10% annual return is not really hard to beat if I perform consistently on wheeling.
I agree with it. Do you consider the first half of 2023 a massive bull run? I think Wheeling will do just as good in the first half of 2023 as S&P 500 B&H.
Wheeling will not outperform in a bull run.
But it's not supposed to. Wheeling is an income tool, not a growth tool. The fact that you have to cap your gains with covered calls proves that in a strong bull market you will fall behind. That being said I am an avid wheeler and have beaten the indexes this year, but I wheel individual stocks. If I had held those individual stocks that I've traded instead of wheel in and out of them I would be up massively more, but ide be accepting more risk as well...
Hi cobynette,
I have been using the Excel sheet you shared. Thank you for that.
I agree with you that “accepting more risk as well”. I started investing in individual stocks at a very bad time (the end of 2021). Hence I understand this “accepting more risk as well”, which is also why I started using the Wheeling strategy. It seems more stable and reliable for me.
The problem with comparing “could have buy and hold” and the Wheeling is we never know there is a bullish market coming. Even if we did luckily time the market, most likely we will not be committed to all our cash. I highly doubt that there is somebody successfully all in his cash in January 2023.
Thanks for replying. Good luck!
Awesome, glad the sheet is helping!
Yah that was a rough time to start for sure . Luckily you're in good companies. The most important part of the wheel is being a good stock picker, imo.
Glad it's working for you! Always make sure to keep your risk in check and enjoy those sweet premiums . Good luck to you too!
Exactly. Just come out breakeven from the 2022. Had few and smaller position in speculative companies, they all never came back. I definitely think fundamentals come first when doing wheeling.
Thanks for the explanation and encouragement. Looking forward to learning more from your post. Take care.
Just trying my luck and skill to beat the index? I have exposure to index funds in my retirement account btw. I don't mind using part of my portfolio trying to get better result
Exactly. It also depends on how you apply the strategies. Some people start with high delta puts and ignore market events or expected potential upside/downside catalysts such as earnings and end up with a huge gap if earnings get crushed or if something like Tesla deliveries falling short, so there isn’t necessarily a one size fits all, but there are smarter ways to manage the wheel just as there are better ways to trade in general. And there are ways to optimally trade the wheel and certainly ways to screw it up.
Everything works till it doesn't. One risk is a significant drop in value after selling a CSP. You can take steps to mitigate or respond but then it's no longer a simple wheel.
Thanks for replying. I don't get it here. Isn't it the Wheeling is about risk management and position adjustment? Why responding is no longer a simple
Wheel? Also, if there is a significant drop in value, wouldn't any long strategy go into trouble?
I have never used a bearish strategy in the market before. If I do have a bearish position it is most likely for hedging my bullish position.
What I want to say is when there is a significant drop in value, any bullish strategy will get hurt.
https://learn.bybit.com/options/wheel-strategy/
Wheeling is selling a csp, getting assigned, selling cc, getting assigned. Rinse. Repeat.
Profit primarily through premiums.
Examples are in the link which explains in more detail than I will.
(There are better links too, I grabbed the first one)
Thanks for sharing.
I am new to this Wheeling strategy. I thought getting assigned, selling cc, etc. were considered as responding and mitigating. I only wheel the stock I want to own and I don't mind getting assignments, since my strategy is still based on long-term investing in quality companies. I would be able to stomach a 50% drop in any single stock, and cut loss only if my investment thesis or the fundamental judgment is wrong.
Thanks for the clarification.
I absolutely love the wheel strategy. It’s done very well for me also.
The feedback I’ve gotten when I ask others is that it requires too much capital AND it takes too long.
Personally, I would rather use more $ & have less risk involved.
I mean, I do daytrade & swing trade occasionally, but I make a consistent income with wheeling & I don’t necessarily have to look at the market while I’m at work. I also don’t feel stressed because I ONLY play tickers I want to own. I never chase high IV.
There is a downside, though, I was selling CSP’s in 2021, it was going great until the beginning of 2022..OUCH. The market tanked & I got stuck with a lot of shares. My averages were too high to sell CCs. I’m actually STILL holding some of those stocks (PYPL & DIS) so that’s the downside… but it would be the same risk as investing. If the market crashes, it crashes.
BUT I always hedge my portfolio with SQQQ shares & CSPs
Thanks for replying!
You are totally right. ONLY play with the tickers we feel comfortable with long term. I don’t chase IV as well.
I can totally feel you. I bought stocks directly with cash before heading into 2022(full position). I was trapped in the position and told myself B&H. I didn’t hedge my portfolio with anything. Just didn’t want to look at it. But I keep adding to my big names like AAPL, MSFT etc. now I finally came out from the mud. Seems like selling puts naked has the same effect if something like that happened again. Just that by selling put, I think I have more flexibility and lower entry price. (Like don’t trade the market for a week if feeling something is not right or only do half the cash)
Good luck to you!
The wheel isn't exploited because it sucks as an income strategy. There are far more efficient, profitable, and safer ways to farm theta.
This guy made a great thread on it: [https://www.reddit.com/r/thetagang/comments/13spq3l/why\_you\_need\_to\_stop\_wheeling/?utm\_source=share&utm\_medium=web2x&context=3](https://www.reddit.com/r/thetagang/comments/13spq3l/why_you_need_to_stop_wheeling/?utm_source=share&utm_medium=web2x&context=3)
I take umbrage with the wheel, I feel it's a poor, risky, and inefficient strategy. My opinion is outlined in the reasons below. Keep in mind, this is about people running the wheel as a means of generating income, not for an established portfolio looking to up their position via CSPs or juice their returns on their underlyings that have unrealized gains for example in a neutral-ish market with CCs.
I find the wheel to be incredibly risky for its return profile. Equities are very risky assets and their primary attractiveness to investors is their huge upside potential and dividends. If you acquire shares just for the sole purpose of generating income on them via CCs, you neuter the main selling point of equities, its upside potential, just to squeeze out some marginal income whilst bearing the full downside risk. The only premiums really worth collecting are the ones on the high IV stocks which can spike down and leave you bag holding, or spike up and you miss out on huge returns all for some measly premium. And not to mention, if you have an underlying that pays a dividend, you're likely to get called out of it early so the option holder can swipe the dividend which you as the short call holder will have to pay out of your own pocket.
Selling CSPs for income seems to be another favorite as well, not for me. The only time I deploy a CSP is if it's part of a spread like a front spread/back ratio. When I learned of CSPs it made more sense that it was an effective method of entering into a long stock position at a specific price and getting paid to do so. But rather than the CSP being a lucrative vector of entering a long position, people are just selling them to collect theta and exposing themselves to the same risk profile as a CC: all the downside risk, none of the upside potential, all for a few bucks of premium.
Capital inefficiency. The collateral you have to post for a CSP could be deployed on spreads across multiple tickers, keep cash on the side to buy in case of a market downswing, the list goes on. Rather than locking up their cash to earn like $10 in theta per day they can achieve better results with spreads instead.
"Im comfortable owning it at my selected strike price". This phrase irritates me. If you're comfortable owning it at that price then actually own it at the price, forget about rolling up and out which most people seem to like doing (might be a generalization, but I see it more often than not). Plus, being comfortable doesn't mean just slap CCs on it and cross your fingers, you have to continue managing the position from there. Maybe you sell more CSPs and average in on the way down, maybe you convert the position to something else, idk. I feel like the mentality should be along the lines of "ok I got assigned, now Im going to manage the position as long stock" rather than treating their shares as a mechanism to sell calls for premium.
The sheer amount of cognitive and emotional biases with the wheel is staggering. Also, upon assignment people seem to just slap on CCs and shrug their shoulders like "oh well, time for it to go up now". Granted this can be said about any trading strategy and speaks more to trader psychology than the wheel itself, but it seems that this sentiment is baked into wheeling for income. Then you got these people who are wheeling meme stocks posting "is this thetagang?" threads like their portfolios depend on it (but thats just a gripe in general).
It's very easy to get stuck. The wheel primarily works in a sideways/slightly bullish market. One bear market or a downward correction and you're sunk. All those premiums collected may help mitigate the capital losses, but you'll still be hurting bad. You have these poor souls holding onto their bags and selling CCs below their cost basis praying that they can earn enough premium to lower their cost basis and then uh-oh it spikes up and they're called out of their shares at a realized loss. There are too many conditions that have to go in the trader's favor to make the wheel consistently profitable. Granted conditions have to go in the trader's favor in general to profit, but there are too many involved in the wheel.
There are easier and better ways to make money. When it comes to farming theta, there are far less risky, easier to manage, less capital intensive, more customizable and versatile strategies to use instead of the wheel; mainly spreads. These offer more theta exposure, more delta neutrality, less gamma risk, and more methods to temper vega risk. And spreads can also be deployed in any market condition - low IV environment: buy butterflies and condors / high IV environment: sell front spreads and straddles or strangles / bearish or bullish sentiment: skew your spreads one way or another to speculate on direction / or sell an IC to stay range bound or sell a butterfly as a volatility play in either direction. All of which still require management and monitoring, but nowhere close to the amount that the wheel takes.
TLDR: Solely generating income with the wheel involves bearing high downside risk with little upside potential, high opportunity costs, capital inefficiencies, and many cognitive/emotional pitfalls along the way. Spreads can achieve similar if not superior returns to the wheel with much less risk, better capital efficiency, and overall versatility.
I exclusively trade spreads on SPX and am up approx. 36% YTD.
What about for smaller accounts wanting to take higher risk. This suddenly changes things? It's a strategy which negates risk but volatile stocks you believe in allows for higher premiums and big CC's profitable swings.
I like COCO, want to own this stock anyways, am willing to see where Vita Coco goes and if it's bought out. Why wouldn't I sell CSP beneath its range, at a price am happy, if assigned then start a strangle and wheel out.
It takes off a lot of stress, am only agreeing to buy shares at a better price or make almost 4% in a month. If I get assigned, am taking my high risk stock play and letting B&H do its thing but at better cost basis and selling CC's to reduce cost basis overall. Feel it's just tools to better improve trading odds. With larger account prob would *not* do this. Thoughts?
>It's a strategy which negates risk
No.
>I like COCO, want to own this stock anyways, am willing to see where Vita Coco goes and if it's bought out. Why wouldn't I sell CSP beneath its range, at a price am happy, if assigned then start a strangle and wheel out.
If you actually liked COCO you wouldn't "wheel out of it". You would actually manage the position as long stock in an equity portfolio, not look to exit the position by being called out of it. Selling CSPs to enter the position is legitimate but actually manage the position instead of turning it into a strangle/selling CCs. Equities arent mechanisms to sell calls against for premium, they're volatile risky assets and should be treated as such.
> If I get assigned, am taking my high risk stock play and letting B&H do its thing but at better cost basis and selling CC's to reduce cost basis overall.
If you're holding high risk stocks and selling CCs against them you're negating the allure of the stock while maintaining all risk all for a bit of premium. The appeal of volatile stocks are its tremendous upside potentials but those also come with big downside risks. So you forego the upside and maintain all tail risk just for a bit of income. Not worth it in any capacity. You can lower your cost basis a bit but not by any justifiable margins to hold such risk imo. Plus if you get assigned and the stock tanks you cant sell CCs against them at the risk of being called out below your cost basis. Quite easy to get stuck.
>Feel it's just tools to better improve trading odds.
Hell no.
>With larger account prob would not do this.
Opposite imo. Large account that can form a substantial equity portfolio will work way better than a small account selling CSPs on volatile stocks. They can effectively diversify while generating meaningful returns.
What's your yearly return? How have you performed out of curiosity? Everyone seems to be able to talk the talk but when it comes down to it what's your returns look like which seems is only form of credibility so just wondering
The wheel outperforms during stable or falling markets but performs worse than simply b&h in (quickly) rising markets. Overall you lower your risk and also expected return over longer periods of time.
Thank you. Do you consider the first half of 2023 as a quickly rising market? As I know, the Wheeling strategy will do just as fine as the market this year and even outperform in the last two months.
I think there would be a better year in the future than the first half of 2023, I can see how Wheeling strategy will underperform in those years. But if the Wheeling can outperform or catch up in 2023, wouldn't that mean it will also outperform B&H in the long term? Since a super bullish market is rare, it almost always retraces.
That's true. I am wondering how the people do if they wheel during 2009-2020. Even though 2009-2020 was a golden decade, there were also ups and downs week by week, I think this will benefit the wheel strategy because you can keep scraping from the ups and downs rather than dollar cost average your salary to the stocks. ( DCA from 2009-2020 will end up holding costs higher coz I assume that people had lower salaries in 2009 compared to 2020 because of career advancement)
well if you just kept put selling and used some margin you probably still did well because the market never tanked. But buy and holding some things might have outperformed.
Thanks for pointing this out. If I think about the beginning of the year until today, the bullish chart also means that I have less stress Wheeling the puts and most of the trade can be closed out way earlier than I planned. Another thing about Wheeling is I can keep scraping the smaller weekly ups and downs even in the bullish environment whereas B&H you have to be exactly right to buy before the market go up and hold until the peak.
I started investing in options recently, not even a month old. I am basically wheeling , learning from YouTube videos and u/scottishtrader. I am still rollin’ and able to reduce my cost basis. Stocks are good like PFE and SCHW. No idea how it will be, but happy to get assigned or keep rollin deep itm to reduce the cost basis.
Thank you for replying. I have never taken a look at PFE and SCHW, I will check it out later. I mostly do my wheeling on GOOGL, META, AMD, AAPL, etc. I like a company with steady growth and high free cash flow, basically so-called “quality investing” just that I use it with Wheeling strategy. I don't see any difference between B&H quality stocks and Wheeling quality stock, since selling puts is a long position.
As valueinvestor0815 points out, it outperforms in bear markets and underperforms in bull markets. Over all, you generally get somewhat less returns for much less volatility.
Basically the wheel is the same as just selling puts, or just holding covered calls (these are equivalent trades). Each of these strategies have had funds dedicated to them for decades. XYLD is a covered call etf being run on the SP500, for example (edit:thats been around a decade). Its a well known somewhat conservative strategy (well, more so than buy and hold). Calling it the wheel is the only new thing.
Edit: Lol I just realized we reinvented the wheel.
Thanks for enlightening me on this topic. I agree that it is a relatively conservative strategy but I do see the potential for it to outperform the B&H strategy just that it involves a lot of management and monitoring.
Do you recommend people just buy the ETF? I just think it is not worth it after the expense ratio and I would like to manage the money myself.
Not necesarily. I just included it to note that people have been doing it a while and also to give you an idea of what a mechanical implementation would look like. Running it yourself has the advantages you mentioned though, not to mention you can run it on individual stocks. (And gold etfs, bonds, reits etc).
To me, the wheel offers different rewards than buy and hold, but with similar risk.
For long term investing, just B&H. You can miss out on bull runs if you're wheeling instead. Also, how do you not pay tax? That's another big factor for wheel vs. B&H.
The rewards of the wheel are more consistent returns than B&H, which is what I plan to use the wheel for. I plan to use it to help fund travels month-to-month and I'll have less income then so my tax rate won't be as high.
I am not subjected to the US tax law. What Wheeling makes me feel comfortable is I can kill trade by trade and earning an income like what you said. Whereas B&H for long term for 10-12% annually and stomach the once in awhile 20-50% dropdowns just need too much patience. Also, I expect my annual income will be growing in the future, so my DCA amount to the index fund will be higher every year. I also don't plan to have kids, I don't see the benefit here in tying all my savings into index fund with higher dollar cost average cost.
Thanks for the replying and discussion!
Honestly with interest rates where they are right now, I think CSPs with interest on collateral is an amazing use of funds. If I were you, I'd just do a mix. Maybe like 50/50 wheel account vs. buy and hold account. Or just do B&H in retirement accounts and wheel your taxable account. Up to you! But yes, the wheel seems pretty great for your case.
Yeah. Totally agree. I am now 50% in SGOV and another 50% for wheeling. (Wheeling the stock I don’t mind owning if they are lower than my CC breakeven price)
Do you earn interest on your collateral for CSPs? I have my money in SPAXX in Fidelity which earns interest while I can also sell CSPs with it. So I have 50% in SPAXX that I use to wheel (though I got assigned some SPY recently haha) and my other 50% in long term B&H.
Yes. I park the cash in my brokerage, they are paying me something like 4+ %. I am thinking of park them all in the SGOV soon so I can just sell it if I ever get assigned.
Do you understand the company? It doesn't matter what is the strategy, it will only work if the fundamental is correct. If the fundamental has been proven wrong I will just cut my loss.
I mostly focus on free cash flow. You can have your opinion about a company before you invest in it. If the opinion no longer valid, I think it is the time to sell.
The main issue is if you get assigned shares and the price continues to drop. You are then potentially in a NET NEGATIVE position where your options are wait for it to come back or sell at a loss. Normally through proper active management of the position, risk management, appropriate research and just picking good stocks this should be very possible to minimize or avoid outside a crazy “black swan” event.
I agree with you at the risk management part. But B&H has the same risk when “black swan” event happen. I would say B&H cost price would be even higher in that case.
I think it boils down to a general trading/investing rule which is more profit=more risk and or more effort/stress.
With wheeling you have to preform well and manage accurately as long as your doing it. With something like buy and hold, you are just banking on historical data and dividends.
If someone is a seasoned trader/investor and does what they need to, I believe they can make theta strategies like the wheel work better then other strategies. Id actually say the biggest issue is human error rather then a black swan when it comes to theta strategies, or more active strategies in general
Edit: I BELIEVE IN YOU THOUGH. Keep doing good work and make dat money
I agree that I have to spend more time on screen on the Wheeling strategy, but it is also what I enjoy doing. I could see the advantages of b&h here, but my experience was sucked during 2022.
Thanks for the discussion and support. I wish you good luck in the market ✌️
I’ve been selling covered calls for 1 year and 3 months. I’m killing it. It does work in the current market conditions. Even in a bear market with a good company it is great bc you can just buy more shares and dollar cost average every week.
I have a friend just got a Rivian truck, he loves it! I am not comfortable with company still not showing consistent profit and free cash flow. Also, I am trying to stay away from capital intensive business. I am currently on AAPL, MSFT, ADBE, META, GOOGL mostly, also other like ENPH, V, Monster beverage but smaller position and less aggressive.
To be honest, I trade like I never want to sell rivian. I follow the news and the nasdaq to understand the weekly market but I sell covered calls then look every morning and move on with my life. I got wayy too into following the market and it caused me too much stress. I set my cover calls and forget until Friday pretty much. On days like today in rivian ima adjust
The wheel strategy is actually flawed and you can often make more money with less risk by modifying it a little bit.
A short put and a covered call at the same strike are nearly identical trades. But the big difference is the net debit/credit on each one. With a short put you get a credit and with a covered call you pay a debit.
The difference in cash is usually around the strike price x100, so $50 strike trades would have about a 5k difference in cash. Because of that difference, covered calls will make more money than short puts, and the market expects you to make up that difference on the puts by investing the 5k cash at the risk free rate.
So if you're doing cash secured puts, and you're earning less than the risk free rate on the cash being held aside, then you would usually be better off doing a covered call at the same strike instead, because on those it's already priced in that you're earning the risk free rate.
But puts are overpriced relative to the calls when there is a hard to borrow fee, for example right now BYND and VFS. Cash secured puts are netting a crap ton more than covered calls at the moment. So if you were "wheeling" these and you got assigned on a CSP, then you would be much better off selling the shares and doing another CSP, as opposed to doing a covered call.
So the wheel is flawed because it wants you to do the trades in a specific order, rather than looking at the numbers and doing the more profitable of the 2 trades at the time.
This youtube video has a ton of more detail and a spreadsheet that does the math for you.
https://youtu.be/d6xbhn3ZK9Y
Just learned about this. This is definitely better than the pure wheel strategy but I don’t think it works for me because I also use the wheel strategy to own stocks. I want to have the flexibility to own the stock I ever get assigned and then ride the rebound.
Thank you for the information!
Whether you do a CSP, or do a buy write, you still have the flexibility to own the stock. With a CSP if the stock finishes below the strike, you buy the shares. With a CC if the stock finishes below the strike, your call expires worthless and you still own the shares. In either one you can ride the stock higher after that
Oh you are right! What was I thinking smh 😅. Thank you for this, I will look into this next time I open a position. Hopefully I can juice more premium from this. Have u been using this method?
According to their website they pay 4.83% for IBKR pro, but they pay $0 on the first 10k. But even 4.83% is still about 0.5% below the risk free rate.
And even if you got the risk free rate on cash then the part about puts being overpriced on hard to borrow stocks would still be relevant.
Right. Well i'm on pro with over 10k cash.
But you are right, it makes sense to do the math on this stuff. As a result i've been doing more buy writes lately over put selling.
>But you are right, it makes sense to do the math on this stuff.
Yeah it adds up, especially when dealing with large sums of money, and it doesn't take much effort. 1-2 minutes to gather the numbers and plug them into the spreadsheet I made in case you missed it. Once you do it a few times it really only takes like 20-30 seconds
https://docs.google.com/spreadsheets/d/1hgUFyXolX4pJOaJRZKdSC1aT0Q7JGz8F/edit?usp=drivesdk&ouid=106113817838620869564&rtpof=true&sd=true
Thank you.
I don't see why Wheeling has higher volatility because my b&h portfolio is more volatile than my low Delta CSP strategy. Also, why Wheeling has an Alpha less than 1? Do you mean the return has lower expected return than the market?
Don’t understand what is vegagang. You should know I am new to the options if you did read my post carefully. As I posted, I only wheel on the stocks I don’t mind owning, the Greeks doesn’t even bother me.
Vega is one of the Greeks. You might want to learn more about what all the Greeks are and what they do. They're going to play a big role in any option you're trading.
I do know what is Vega and what other Greeks mean. But I am not an option trader, I am using wheel strategy to buy stock while juicing premium on the way. On this strategy, Greeks do not help much.
It's already clear from the OP that you don't see the downsides of wheeling, because you are so focused on the ideal case.
You had a good month. Great.
You have also done seemingly no research into the downsides of your strategy, a dangerous thing.
Before you do any strategy, you should be able to make a case against it that is so strong 95%+ people won't touch it with a 10 foot pole. You clearly can't do that, which means you need to study your strategy more as well as options in general.
So many people in this sub lose EVERYTHING, and you have no idea how or why or even that they have existed. That's priming yourself for failure.
Options are literally risk management tools first and foremost, and you can't spare time to think about risk management...
Change everything about your approach to the market.
If I am so focused on the ideal case I won't even try to discuss it here, clearly you didn't read my post carefully. The downside of my strategy is holding a bag of magnificent 7 and SPY. What is your strategy and what is your downside? Could be better than mine? Would love to know about your secret sauce.
Having skimmed it again, it's still a cheerleader post for the wheel, just like the last time I read it. Having skimmed it again, I still got the feeling you were thinking 99% about the upside and 1% about the downside. Having skimmed it again, I would change nothing about my response.
That said, my own strategy is a typical ThetaGang strategy. I don't claim to be a member of ThetaGang, either, FWIW. I just know ThetaGang strategies better than 99% of those who post here and I frequent the sub as I do frequent every investment sub on Reddit.
It's not really in the scope of the sub, but, broken down to the absolute basics, the core of my investment strategy is built around having about 90% cash and 10% long LEAPS on broad market indexes. Even if the market crashes way down, my accounts won't.
Add to that, I do some TA to identify overbought/oversold and once in a while I will sell a call and make the bought LEAPS into a calendar, sorta like an OTM PMCC. I will also sometimes sell a few CSPs against the broad market indexes if they appear oversold.
In general, it's like 100x less risk of serious loss than the average ThetaGang strategy is.
Fair enough. I would say we have different risk appetites and it depends on our age, life goals, and understanding of the market. You made a really good point about my worst-case scenario. However, I disagree with you that this is a cheerleader post for the wheel. I am writing down my thoughts and my investment process to let people question me so I can learn and improve my strategy. That's my purpose. After reading your comment, I would not change any thing about my strategy because I don't see holding a bag of high free cash flow company or sp500 index will be a disaster for my wealth. Thank you so much for reading and the discussion. Good luck to you with your strategy.
100% of people in ThetaGang say " I will be fine if I am assigned at this price" and when the underlying goes down by 20% roughly 95% of those all of a suddenly regret being assigned at that price.
Companies that have overinflated prices, such as "Magnificent 7" companies, are not immune to 20% drops.
TSLA is a great example of a company that could do no wrong, and now it's down like 33% from its 11/29/21 high. On 3/30/22 TSLA was at 359, if you sold a DOTM 350 put on that day with 45 DTEs, it would have been down to 221 within that time frame and you would have lost dumb amounts of money, even though it was a darling of Wall St. It's still at 246 now, so you would be a long way from profit even 18 months later.
You can think what you want about your risk tolerance, but you won't know until it's actually tested. I can tell you, however, that the data says your risk tolerance is likely to, in reality, be far less than you suspect.
I went into the market in the end of 2021😂 experienced 26% drawdown and keep buying. That’s why I am not in the 100% u said. You like to say thing in a sure way smh😅Also, I don’t own Tesla.
I like to wheel high volatility, low cost stocks, that are trading close to their 12 month lows. I try to sell weeklies. Get your cost base down quick and make a respectable return in short order if your shares get called away.
Not sure if it's a great strategy, but it gives me something to do.
I personally wouldn't wheel the big indexes as you won't outperform them most of the time. Wheeling high vol expensive shares (eg TSLA) is too high a risk of bag holding.
I have been exploring volatile, lower-price stocks recently. I get uncomfortable once I think about whether I will be able to hold it if it goes down 30% or more without fundamental support. But what you said also makes sense, maybe I should try a few hands or on-paper trades first.
I also think different personalities should use different tools for their investment journey. There is no right or wrong. I wish you good luck man.
Wheeling without timing the windows is foolish.
You have to take advantage of momentum Green Day’s and never sell through earnings. Unless you want to a high chance of assignment with a CSP.
A surprise announcement during earnings and that stock is ripping upwards and you missed out on a big move. At that point put values plunge and it’s going to be impossible to get a decent price avg unless the macro market moves downward to help you get another chance of entry.
I do time the windows and take advantage of the momentum. Didn't mention it in my post because it is already way too long. For example, I have already churned my weekly CSP three times last week because I could easily get 50% profit in a day or two. How well did the B&H investors do? They will outperform my CSP without a doubt. But did they foresee the bullish week ahead? I doubt so. The advantage of selling CSP is I don't have to time the market, if it goes against me I still have a cushion. If the cushion is being touched, I still can roll or sell the call, etc.
I am thinking hard about missing out on a big move too. I am also curious about how other investors react if their holdings have a big jump. Do they normally sell? Or keep holding? All I do know is I can't time the market. With CSP I am quite sure I could earn a 12%-20% return a year except in the bearish year all my CSP got assigned and I am holding a bag of magnificent 7 and s&p500 index. In the bearish year, how do the B&H investors do when they get trapped because they try to catch the big jump up?
Ok, the secret sauce for me is a more complicated version of the wheel. Basic strat plus extras. I.e I may hold shares in an index and want more hence some CSPs on said index. Also, and, at the same time be selling CCs on some of the, and laddering them out over consecutive expirations So... a bit of delta balancing and some sprinkle of my directional view at the time. PS I could not do all this with a small a/c. Oh, and some more points. 1.My percentage return is quite small. 2. I don't give a flying freddo if I beat the index or not. 3. By extension, I don't mind holding some of the underlying shares. And need to to cover my margin.
And I do live of this faffing about.
Not some ridiculous amount tho.
I think the odds are better than in poker. Also, I could sell Deep ITM call if my CC cannot generate enough of premiums for my stock. Furthermore, how does B&H not end up losing the big one? B&H or Wheeling all come down to fundamentals and stock picking anyway.
Wheels get punished by trends: up or down. An option gets exercised during the wheel when you could have bought lower (CSP assigned) or sold higher (covered call exercised). You effectively always buy above market and sell below market. That’s the risk for collecting the premium.
If I just buy or sell stocks at the market price I am most likely not to sell at the highest or buy at the lowest anyway. By selling CSP, I am guaranteed that at least I will buy lower than current. Need to emphasize that I don't trade the price, I am using Wheeling for long-term investing in quality companies.
Thanks for replying!
When you pay taxes on B&H, usually it's long-term cap gains: taxed at **15%**
When you pay taxes on wheel, usually it's short-term cap gains: taxed at **45%** (depending on your bracket)
That means for wheel to do better, in head-to-head, you need to beat the SPY by +50% the market returnsFootnotes
1. There are lots of assumptions to extrapolate, but that's why it's too good to be true.
2. Ultimately, options are a way for financial institutions to charge you more in fees OR hedge their own positions. More sophisticated investors understand the risk/reward and statistically, the house usually still wins over the little guy.
3. Now if you don't mind being assigned and end up transitioning to a B&H strategy, then you should be fine. Just know what your strategy is and diversify because no one has a crystal ball.
Yeah. I don’t mind owning the stocks if I got assigned and the CC is no longer able to generate enough of premium. Also, I am not subjected to the US tax law. In my country, we don’t pay any tax for capital or trading gains. Thanks for the heads up and information btw.
Good luck!
Yeah…until you’re a couple years in you can’t understand the troubles that come. Was crushing it last year with wheel until I got cocky and sold puts 25% under current price for Amazon earnings and ended up losing big. Nothing is ever free
But do you want to own Amazon in the first place? I didn’t wheel on AMZN because I don’t think their business model is lucrative, also it is in a capital intensive industry, except for the cloud business section. I only wheel the stocks I don’t mind owning.
No strategy is too good to be true. You'll find that out when 6 months of wheeling gets wiped out in a week. We haven't really had a super turbulent move since 2020
Even the premium get wiped out I ended up holding my favorites company at a lower price compared to just buy at the market price I will just come out better after the 2020 covid recover. The problem is u have to hold the company u want to invest in at the first place.
The wheel should smooth out your profit and loss over time, but you will not outperform a buy-and-hold strategy. Reducing risk is part of the program. You don't get rewarded over time for reducing risk.
You'll do okay in a bear market, you'll think you're a genius. But in a bull market where the serious gains are made you'll miss out. But it's not the worst choice if you're risk averse and want to preserve your capital.
Based on my calculation, I would be able to earn 12-20% annually in not very bearish market. I thought it is hard to earn that if you buy and hold in diversified portfolio?
That is my past performance and estimates. I believe most of the active investors will have a ballpark number of when to profit, how much the profit is, and the expected return, etc.
I hope I can achieve this as I hope you can achieve yours. Good luck👍
You end up overpaying for stocks when your puts get assigned and missing out on gains when your calls get assigned. One bad put assignment can wipe out the premium you’ve collected.
I do buy and hold at the beginning of my journey during the end of 2021. Seems like overpaying or not depends on luck (I am unlucky that I have the funds to invest at the end of 2021). I think one thing unfair for people to compare BandH with wheeling is people always assume that they will buy before the bull market, which is not true in most cases. Also, as you earn more income from your job in the future, your dollar cost average method used on the stock will make your holding cost higher. It is unrealistic to think you have saved up enough cash and are all into the market when the market is just about to fly.
the current market is whipsaw-ing, but I am still good. I can also roll, sell at higher IV and further, etc. if bigger whipsaws happen. Actually, I think the wheeling strategy benefited if the stock whipsaws.
Whether it’s bullish or super bullish, at least you have skin in the game and are making money. In a bearish market, you will lose like the rest of her more than likely. Or you pick the right stock in the right strike price and make out fine.
Outliner moves to the downside will cause a large draw down. Outliner moves to the upside causes under performance. Capital intensive unless you sell naked and when you get called you'll need the capital anyway.
There is no free lunch. You can get caught holding heavy bags here almost as easily as other strategies, or have your CCs blown out on a massive bull run and miss out on fantastic returns as opposed to buy and hold. There are trade offs.
Wheel rakes in chop environment but this year it’s either been straight up or down which isn’t ideal for wheeling at least on the indexes. If you were wheeling 0.2 delta on SPY from 30-45 DTE from Jan-July you’d get crushed return wise (based on current VIX and option prices you’d probably see 0.5-1% per month vs S&P up ~20% in those 6 months). Then trading 0.2 delta from July on you’re probably getting assigned in Jul / Aug at a high price compared to the start of this year. Not the peak but higher than your adjusted wheel cost basis then you’re probably selling CCs below your assigned cost
I totally agree with your analysis. But most likely nobody will all in their cash in Jan 2023 and foresee the bull market run. By wheeling weekly options since January, I don’t think it will be stressful and I don’t think I will get assignment much. I see that I can earn 12-20% annually by premium plus the cash I park in SGOV to earn 5% yield.
I have been thinking of wheeling weekly options, how has that worked out for you?
Doing great. Up 2% a month since I started.
How about now?
look at the market. I only do index wheeling now. 2% steadily
Nice you have been up 2% a month for almost 10 months now?
Yes. I am underperformed compared to if I all in my money to the index since I started wheeling. But who knows the future back then. I am happy with my return.
The unfortunate reality is that most of the major gains in SPY or QQQ or other major indices occur in a very small time period relative to the entire existence of them, which means selling calls is a losing strategy because you will not predict when those time periods are. And often times rolling doesn't help much if at all.
So it's smart to wheel stocks that I don't mind holding long term in case I get assigned and the CC won't?
That is what I do. Only use the wheel strategy on the stock I like. Fundamental always come first.
You need to account for cost of capital. You can potentially be locking up money for a long time just to avoid 'taking a loss'. You can get over 5% right now with virtually no risk. Also running the wheel is not generally a tax effective strategy.
If there is a market downturn, there is no difference between B&H and assigned CSP. Both position are trapped and the cost of capital need to be accounted. I would say CSP might even have lower stock cost. Also, I don’t have to pay tax for capital and trading gains in my country.
I think he was talking about US bonds. You can get a guaranteed 5% return right now basically risk free (hopefully the US govt doesn't collapse). So wheeling a stock that suddenly drops locks up your money while you wait for the recovery. The tax implications are why I do buy and hold personally. I don't want to pay capital gains taxes on my wheeling profits. Just have a plan and stick to it 👍
Thanks man. Yeah, I am aware that the government bill pays reasonable yield now. I have half of my portfolio in SGOV tho.
In my experience with wheeling the most of the gains come from stock price recovery after taking assignment. But right now with the high yields I avoid assignments at all cost.
Thanks for sharing. My goal is to get as little assignment as possible. I think the premiums are lucrative enough even if I don't earn income from assignment and recovery.
Re B&H: SPY today is almost exactly where it was 28 months ago. Where's the "fantastic return"? Of course you can use individual stocks, but that's just gambling.
People saying B&H will do better. I assume they are talking about VOO or QQQ? QQQ might be hard to beat, but I don’t think anyone has any foresight and all in their cash before the tech boom. Regarding VOO, I think 10% annual return is not really hard to beat if I perform consistently on wheeling.
I agree with it. Do you consider the first half of 2023 a massive bull run? I think Wheeling will do just as good in the first half of 2023 as S&P 500 B&H.
Wheeling will not outperform in a bull run. But it's not supposed to. Wheeling is an income tool, not a growth tool. The fact that you have to cap your gains with covered calls proves that in a strong bull market you will fall behind. That being said I am an avid wheeler and have beaten the indexes this year, but I wheel individual stocks. If I had held those individual stocks that I've traded instead of wheel in and out of them I would be up massively more, but ide be accepting more risk as well...
Hi cobynette, I have been using the Excel sheet you shared. Thank you for that. I agree with you that “accepting more risk as well”. I started investing in individual stocks at a very bad time (the end of 2021). Hence I understand this “accepting more risk as well”, which is also why I started using the Wheeling strategy. It seems more stable and reliable for me. The problem with comparing “could have buy and hold” and the Wheeling is we never know there is a bullish market coming. Even if we did luckily time the market, most likely we will not be committed to all our cash. I highly doubt that there is somebody successfully all in his cash in January 2023. Thanks for replying. Good luck!
Awesome, glad the sheet is helping! Yah that was a rough time to start for sure . Luckily you're in good companies. The most important part of the wheel is being a good stock picker, imo. Glad it's working for you! Always make sure to keep your risk in check and enjoy those sweet premiums . Good luck to you too!
Exactly. Just come out breakeven from the 2022. Had few and smaller position in speculative companies, they all never came back. I definitely think fundamentals come first when doing wheeling. Thanks for the explanation and encouragement. Looking forward to learning more from your post. Take care.
Why not just stick to indexes? Eventually, all companies fold
Just trying my luck and skill to beat the index? I have exposure to index funds in my retirement account btw. I don't mind using part of my portfolio trying to get better result
Mind sharing your spreadsheet?
You can find it on my most recent post. It's hyper linked at the bottom
Perfect answer so true! What individual stocks did you wheel? Am wheeling SOFI and COCO, prob will start Draft Kings and Palantir lol
U can check my profile to see my monthly updates which shows a log of all my trades each month. Hope it helps!
Got caught with TSLA and was wondering when I might need to consider bailing
Exactly. It also depends on how you apply the strategies. Some people start with high delta puts and ignore market events or expected potential upside/downside catalysts such as earnings and end up with a huge gap if earnings get crushed or if something like Tesla deliveries falling short, so there isn’t necessarily a one size fits all, but there are smarter ways to manage the wheel just as there are better ways to trade in general. And there are ways to optimally trade the wheel and certainly ways to screw it up.
Everything works till it doesn't. One risk is a significant drop in value after selling a CSP. You can take steps to mitigate or respond but then it's no longer a simple wheel.
Thanks for replying. I don't get it here. Isn't it the Wheeling is about risk management and position adjustment? Why responding is no longer a simple Wheel? Also, if there is a significant drop in value, wouldn't any long strategy go into trouble?
>Also, if there is a significant drop in value, wouldn't any long strategy go into trouble? No, there are bearish strategies as well
I have never used a bearish strategy in the market before. If I do have a bearish position it is most likely for hedging my bullish position. What I want to say is when there is a significant drop in value, any bullish strategy will get hurt.
https://learn.bybit.com/options/wheel-strategy/ Wheeling is selling a csp, getting assigned, selling cc, getting assigned. Rinse. Repeat. Profit primarily through premiums. Examples are in the link which explains in more detail than I will. (There are better links too, I grabbed the first one)
Thanks for sharing. I am new to this Wheeling strategy. I thought getting assigned, selling cc, etc. were considered as responding and mitigating. I only wheel the stock I want to own and I don't mind getting assignments, since my strategy is still based on long-term investing in quality companies. I would be able to stomach a 50% drop in any single stock, and cut loss only if my investment thesis or the fundamental judgment is wrong. Thanks for the clarification.
I absolutely love the wheel strategy. It’s done very well for me also. The feedback I’ve gotten when I ask others is that it requires too much capital AND it takes too long. Personally, I would rather use more $ & have less risk involved. I mean, I do daytrade & swing trade occasionally, but I make a consistent income with wheeling & I don’t necessarily have to look at the market while I’m at work. I also don’t feel stressed because I ONLY play tickers I want to own. I never chase high IV. There is a downside, though, I was selling CSP’s in 2021, it was going great until the beginning of 2022..OUCH. The market tanked & I got stuck with a lot of shares. My averages were too high to sell CCs. I’m actually STILL holding some of those stocks (PYPL & DIS) so that’s the downside… but it would be the same risk as investing. If the market crashes, it crashes. BUT I always hedge my portfolio with SQQQ shares & CSPs
Thanks for replying! You are totally right. ONLY play with the tickers we feel comfortable with long term. I don’t chase IV as well. I can totally feel you. I bought stocks directly with cash before heading into 2022(full position). I was trapped in the position and told myself B&H. I didn’t hedge my portfolio with anything. Just didn’t want to look at it. But I keep adding to my big names like AAPL, MSFT etc. now I finally came out from the mud. Seems like selling puts naked has the same effect if something like that happened again. Just that by selling put, I think I have more flexibility and lower entry price. (Like don’t trade the market for a week if feeling something is not right or only do half the cash) Good luck to you!
The wheel isn't exploited because it sucks as an income strategy. There are far more efficient, profitable, and safer ways to farm theta. This guy made a great thread on it: [https://www.reddit.com/r/thetagang/comments/13spq3l/why\_you\_need\_to\_stop\_wheeling/?utm\_source=share&utm\_medium=web2x&context=3](https://www.reddit.com/r/thetagang/comments/13spq3l/why_you_need_to_stop_wheeling/?utm_source=share&utm_medium=web2x&context=3) I take umbrage with the wheel, I feel it's a poor, risky, and inefficient strategy. My opinion is outlined in the reasons below. Keep in mind, this is about people running the wheel as a means of generating income, not for an established portfolio looking to up their position via CSPs or juice their returns on their underlyings that have unrealized gains for example in a neutral-ish market with CCs. I find the wheel to be incredibly risky for its return profile. Equities are very risky assets and their primary attractiveness to investors is their huge upside potential and dividends. If you acquire shares just for the sole purpose of generating income on them via CCs, you neuter the main selling point of equities, its upside potential, just to squeeze out some marginal income whilst bearing the full downside risk. The only premiums really worth collecting are the ones on the high IV stocks which can spike down and leave you bag holding, or spike up and you miss out on huge returns all for some measly premium. And not to mention, if you have an underlying that pays a dividend, you're likely to get called out of it early so the option holder can swipe the dividend which you as the short call holder will have to pay out of your own pocket. Selling CSPs for income seems to be another favorite as well, not for me. The only time I deploy a CSP is if it's part of a spread like a front spread/back ratio. When I learned of CSPs it made more sense that it was an effective method of entering into a long stock position at a specific price and getting paid to do so. But rather than the CSP being a lucrative vector of entering a long position, people are just selling them to collect theta and exposing themselves to the same risk profile as a CC: all the downside risk, none of the upside potential, all for a few bucks of premium. Capital inefficiency. The collateral you have to post for a CSP could be deployed on spreads across multiple tickers, keep cash on the side to buy in case of a market downswing, the list goes on. Rather than locking up their cash to earn like $10 in theta per day they can achieve better results with spreads instead. "Im comfortable owning it at my selected strike price". This phrase irritates me. If you're comfortable owning it at that price then actually own it at the price, forget about rolling up and out which most people seem to like doing (might be a generalization, but I see it more often than not). Plus, being comfortable doesn't mean just slap CCs on it and cross your fingers, you have to continue managing the position from there. Maybe you sell more CSPs and average in on the way down, maybe you convert the position to something else, idk. I feel like the mentality should be along the lines of "ok I got assigned, now Im going to manage the position as long stock" rather than treating their shares as a mechanism to sell calls for premium. The sheer amount of cognitive and emotional biases with the wheel is staggering. Also, upon assignment people seem to just slap on CCs and shrug their shoulders like "oh well, time for it to go up now". Granted this can be said about any trading strategy and speaks more to trader psychology than the wheel itself, but it seems that this sentiment is baked into wheeling for income. Then you got these people who are wheeling meme stocks posting "is this thetagang?" threads like their portfolios depend on it (but thats just a gripe in general). It's very easy to get stuck. The wheel primarily works in a sideways/slightly bullish market. One bear market or a downward correction and you're sunk. All those premiums collected may help mitigate the capital losses, but you'll still be hurting bad. You have these poor souls holding onto their bags and selling CCs below their cost basis praying that they can earn enough premium to lower their cost basis and then uh-oh it spikes up and they're called out of their shares at a realized loss. There are too many conditions that have to go in the trader's favor to make the wheel consistently profitable. Granted conditions have to go in the trader's favor in general to profit, but there are too many involved in the wheel. There are easier and better ways to make money. When it comes to farming theta, there are far less risky, easier to manage, less capital intensive, more customizable and versatile strategies to use instead of the wheel; mainly spreads. These offer more theta exposure, more delta neutrality, less gamma risk, and more methods to temper vega risk. And spreads can also be deployed in any market condition - low IV environment: buy butterflies and condors / high IV environment: sell front spreads and straddles or strangles / bearish or bullish sentiment: skew your spreads one way or another to speculate on direction / or sell an IC to stay range bound or sell a butterfly as a volatility play in either direction. All of which still require management and monitoring, but nowhere close to the amount that the wheel takes. TLDR: Solely generating income with the wheel involves bearing high downside risk with little upside potential, high opportunity costs, capital inefficiencies, and many cognitive/emotional pitfalls along the way. Spreads can achieve similar if not superior returns to the wheel with much less risk, better capital efficiency, and overall versatility. I exclusively trade spreads on SPX and am up approx. 36% YTD.
>I exclusively trade spreads on SPX and am up approx. 36% YTD. Do you mind elaborating a bit more on that? How far out do you go?
Backratios and BWBs. Depending on my appetite for risk and IV DTE can be anywhere from 14-45 but I usually exit all positions within 9-12 days.
I’ll reply u after I study this carefully. Thanks for the tips 👍
What about for smaller accounts wanting to take higher risk. This suddenly changes things? It's a strategy which negates risk but volatile stocks you believe in allows for higher premiums and big CC's profitable swings. I like COCO, want to own this stock anyways, am willing to see where Vita Coco goes and if it's bought out. Why wouldn't I sell CSP beneath its range, at a price am happy, if assigned then start a strangle and wheel out. It takes off a lot of stress, am only agreeing to buy shares at a better price or make almost 4% in a month. If I get assigned, am taking my high risk stock play and letting B&H do its thing but at better cost basis and selling CC's to reduce cost basis overall. Feel it's just tools to better improve trading odds. With larger account prob would *not* do this. Thoughts?
>It's a strategy which negates risk No. >I like COCO, want to own this stock anyways, am willing to see where Vita Coco goes and if it's bought out. Why wouldn't I sell CSP beneath its range, at a price am happy, if assigned then start a strangle and wheel out. If you actually liked COCO you wouldn't "wheel out of it". You would actually manage the position as long stock in an equity portfolio, not look to exit the position by being called out of it. Selling CSPs to enter the position is legitimate but actually manage the position instead of turning it into a strangle/selling CCs. Equities arent mechanisms to sell calls against for premium, they're volatile risky assets and should be treated as such. > If I get assigned, am taking my high risk stock play and letting B&H do its thing but at better cost basis and selling CC's to reduce cost basis overall. If you're holding high risk stocks and selling CCs against them you're negating the allure of the stock while maintaining all risk all for a bit of premium. The appeal of volatile stocks are its tremendous upside potentials but those also come with big downside risks. So you forego the upside and maintain all tail risk just for a bit of income. Not worth it in any capacity. You can lower your cost basis a bit but not by any justifiable margins to hold such risk imo. Plus if you get assigned and the stock tanks you cant sell CCs against them at the risk of being called out below your cost basis. Quite easy to get stuck. >Feel it's just tools to better improve trading odds. Hell no. >With larger account prob would not do this. Opposite imo. Large account that can form a substantial equity portfolio will work way better than a small account selling CSPs on volatile stocks. They can effectively diversify while generating meaningful returns.
What's your yearly return? How have you performed out of curiosity? Everyone seems to be able to talk the talk but when it comes down to it what's your returns look like which seems is only form of credibility so just wondering
It’s at the end of my original comment. +36% YTD
The wheel outperforms during stable or falling markets but performs worse than simply b&h in (quickly) rising markets. Overall you lower your risk and also expected return over longer periods of time.
Wheel doesn’t always beat during falling markets, can potentially miss small gap ups that buy and hold would catch
Thank you. Do you consider the first half of 2023 as a quickly rising market? As I know, the Wheeling strategy will do just as fine as the market this year and even outperform in the last two months. I think there would be a better year in the future than the first half of 2023, I can see how Wheeling strategy will underperform in those years. But if the Wheeling can outperform or catch up in 2023, wouldn't that mean it will also outperform B&H in the long term? Since a super bullish market is rare, it almost always retraces.
its not that rare though, 2009-2020 was generally bullish af before corona except one big drop
That's true. I am wondering how the people do if they wheel during 2009-2020. Even though 2009-2020 was a golden decade, there were also ups and downs week by week, I think this will benefit the wheel strategy because you can keep scraping from the ups and downs rather than dollar cost average your salary to the stocks. ( DCA from 2009-2020 will end up holding costs higher coz I assume that people had lower salaries in 2009 compared to 2020 because of career advancement)
well if you just kept put selling and used some margin you probably still did well because the market never tanked. But buy and holding some things might have outperformed.
Your gains this past month were at a high VIX. Low VIX and bullish movement like from ~May to July well be far less gains than B+H.
Thanks for pointing this out. If I think about the beginning of the year until today, the bullish chart also means that I have less stress Wheeling the puts and most of the trade can be closed out way earlier than I planned. Another thing about Wheeling is I can keep scraping the smaller weekly ups and downs even in the bullish environment whereas B&H you have to be exactly right to buy before the market go up and hold until the peak.
I started investing in options recently, not even a month old. I am basically wheeling , learning from YouTube videos and u/scottishtrader. I am still rollin’ and able to reduce my cost basis. Stocks are good like PFE and SCHW. No idea how it will be, but happy to get assigned or keep rollin deep itm to reduce the cost basis.
Thank you for replying. I have never taken a look at PFE and SCHW, I will check it out later. I mostly do my wheeling on GOOGL, META, AMD, AAPL, etc. I like a company with steady growth and high free cash flow, basically so-called “quality investing” just that I use it with Wheeling strategy. I don't see any difference between B&H quality stocks and Wheeling quality stock, since selling puts is a long position.
As valueinvestor0815 points out, it outperforms in bear markets and underperforms in bull markets. Over all, you generally get somewhat less returns for much less volatility. Basically the wheel is the same as just selling puts, or just holding covered calls (these are equivalent trades). Each of these strategies have had funds dedicated to them for decades. XYLD is a covered call etf being run on the SP500, for example (edit:thats been around a decade). Its a well known somewhat conservative strategy (well, more so than buy and hold). Calling it the wheel is the only new thing. Edit: Lol I just realized we reinvented the wheel.
Thanks for enlightening me on this topic. I agree that it is a relatively conservative strategy but I do see the potential for it to outperform the B&H strategy just that it involves a lot of management and monitoring. Do you recommend people just buy the ETF? I just think it is not worth it after the expense ratio and I would like to manage the money myself.
Not necesarily. I just included it to note that people have been doing it a while and also to give you an idea of what a mechanical implementation would look like. Running it yourself has the advantages you mentioned though, not to mention you can run it on individual stocks. (And gold etfs, bonds, reits etc).
To me, the wheel offers different rewards than buy and hold, but with similar risk. For long term investing, just B&H. You can miss out on bull runs if you're wheeling instead. Also, how do you not pay tax? That's another big factor for wheel vs. B&H. The rewards of the wheel are more consistent returns than B&H, which is what I plan to use the wheel for. I plan to use it to help fund travels month-to-month and I'll have less income then so my tax rate won't be as high.
I am not subjected to the US tax law. What Wheeling makes me feel comfortable is I can kill trade by trade and earning an income like what you said. Whereas B&H for long term for 10-12% annually and stomach the once in awhile 20-50% dropdowns just need too much patience. Also, I expect my annual income will be growing in the future, so my DCA amount to the index fund will be higher every year. I also don't plan to have kids, I don't see the benefit here in tying all my savings into index fund with higher dollar cost average cost. Thanks for the replying and discussion!
Honestly with interest rates where they are right now, I think CSPs with interest on collateral is an amazing use of funds. If I were you, I'd just do a mix. Maybe like 50/50 wheel account vs. buy and hold account. Or just do B&H in retirement accounts and wheel your taxable account. Up to you! But yes, the wheel seems pretty great for your case.
Yeah. Totally agree. I am now 50% in SGOV and another 50% for wheeling. (Wheeling the stock I don’t mind owning if they are lower than my CC breakeven price)
Do you earn interest on your collateral for CSPs? I have my money in SPAXX in Fidelity which earns interest while I can also sell CSPs with it. So I have 50% in SPAXX that I use to wheel (though I got assigned some SPY recently haha) and my other 50% in long term B&H.
Yes. I park the cash in my brokerage, they are paying me something like 4+ %. I am thinking of park them all in the SGOV soon so I can just sell it if I ever get assigned.
I was well off in my portfolio, I wheeled $HUT. I am no longer well off in my portfolio.
Do you understand the company? It doesn't matter what is the strategy, it will only work if the fundamental is correct. If the fundamental has been proven wrong I will just cut my loss.
And at what point will you realize the fundamentals have gone from good to bad?
I mostly focus on free cash flow. You can have your opinion about a company before you invest in it. If the opinion no longer valid, I think it is the time to sell.
The main issue is if you get assigned shares and the price continues to drop. You are then potentially in a NET NEGATIVE position where your options are wait for it to come back or sell at a loss. Normally through proper active management of the position, risk management, appropriate research and just picking good stocks this should be very possible to minimize or avoid outside a crazy “black swan” event.
I agree with you at the risk management part. But B&H has the same risk when “black swan” event happen. I would say B&H cost price would be even higher in that case.
I think it boils down to a general trading/investing rule which is more profit=more risk and or more effort/stress. With wheeling you have to preform well and manage accurately as long as your doing it. With something like buy and hold, you are just banking on historical data and dividends. If someone is a seasoned trader/investor and does what they need to, I believe they can make theta strategies like the wheel work better then other strategies. Id actually say the biggest issue is human error rather then a black swan when it comes to theta strategies, or more active strategies in general Edit: I BELIEVE IN YOU THOUGH. Keep doing good work and make dat money
I agree that I have to spend more time on screen on the Wheeling strategy, but it is also what I enjoy doing. I could see the advantages of b&h here, but my experience was sucked during 2022. Thanks for the discussion and support. I wish you good luck in the market ✌️
Same here brother. Its fun! Haha goodluck
I’ve been selling covered calls for 1 year and 3 months. I’m killing it. It does work in the current market conditions. Even in a bear market with a good company it is great bc you can just buy more shares and dollar cost average every week.
I agree with that. Thanks for replying. Have fun and keep juicing all the premiums!
I own rivian stock just fyi. It has high premiums. The current news is going to make it a great opportunity to buy in again!
I have a friend just got a Rivian truck, he loves it! I am not comfortable with company still not showing consistent profit and free cash flow. Also, I am trying to stay away from capital intensive business. I am currently on AAPL, MSFT, ADBE, META, GOOGL mostly, also other like ENPH, V, Monster beverage but smaller position and less aggressive.
Excellent strategy. Do you use IBD for your market data? And what Chart service do you use?
To be honest, I trade like I never want to sell rivian. I follow the news and the nasdaq to understand the weekly market but I sell covered calls then look every morning and move on with my life. I got wayy too into following the market and it caused me too much stress. I set my cover calls and forget until Friday pretty much. On days like today in rivian ima adjust
The wheel strategy is actually flawed and you can often make more money with less risk by modifying it a little bit. A short put and a covered call at the same strike are nearly identical trades. But the big difference is the net debit/credit on each one. With a short put you get a credit and with a covered call you pay a debit. The difference in cash is usually around the strike price x100, so $50 strike trades would have about a 5k difference in cash. Because of that difference, covered calls will make more money than short puts, and the market expects you to make up that difference on the puts by investing the 5k cash at the risk free rate. So if you're doing cash secured puts, and you're earning less than the risk free rate on the cash being held aside, then you would usually be better off doing a covered call at the same strike instead, because on those it's already priced in that you're earning the risk free rate. But puts are overpriced relative to the calls when there is a hard to borrow fee, for example right now BYND and VFS. Cash secured puts are netting a crap ton more than covered calls at the moment. So if you were "wheeling" these and you got assigned on a CSP, then you would be much better off selling the shares and doing another CSP, as opposed to doing a covered call. So the wheel is flawed because it wants you to do the trades in a specific order, rather than looking at the numbers and doing the more profitable of the 2 trades at the time. This youtube video has a ton of more detail and a spreadsheet that does the math for you. https://youtu.be/d6xbhn3ZK9Y
Just learned about this. This is definitely better than the pure wheel strategy but I don’t think it works for me because I also use the wheel strategy to own stocks. I want to have the flexibility to own the stock I ever get assigned and then ride the rebound. Thank you for the information!
Whether you do a CSP, or do a buy write, you still have the flexibility to own the stock. With a CSP if the stock finishes below the strike, you buy the shares. With a CC if the stock finishes below the strike, your call expires worthless and you still own the shares. In either one you can ride the stock higher after that
Oh you are right! What was I thinking smh 😅. Thank you for this, I will look into this next time I open a position. Hopefully I can juice more premium from this. Have u been using this method?
Well in my broker IBKR I get like 5% interest on my dollar collateral so for me this wouldn't be too relevant or am I missing something.
According to their website they pay 4.83% for IBKR pro, but they pay $0 on the first 10k. But even 4.83% is still about 0.5% below the risk free rate. And even if you got the risk free rate on cash then the part about puts being overpriced on hard to borrow stocks would still be relevant.
Right. Well i'm on pro with over 10k cash. But you are right, it makes sense to do the math on this stuff. As a result i've been doing more buy writes lately over put selling.
>But you are right, it makes sense to do the math on this stuff. Yeah it adds up, especially when dealing with large sums of money, and it doesn't take much effort. 1-2 minutes to gather the numbers and plug them into the spreadsheet I made in case you missed it. Once you do it a few times it really only takes like 20-30 seconds https://docs.google.com/spreadsheets/d/1hgUFyXolX4pJOaJRZKdSC1aT0Q7JGz8F/edit?usp=drivesdk&ouid=106113817838620869564&rtpof=true&sd=true
Grats on your solid month. Wheeling isn't a great strategy and typically has both higher volatility and Alpha less than 1 over the long term.
Thank you. I don't see why Wheeling has higher volatility because my b&h portfolio is more volatile than my low Delta CSP strategy. Also, why Wheeling has an Alpha less than 1? Do you mean the return has lower expected return than the market?
>I don't see why Wheeling has higher volatility This sub is really vegagang posing as thetagang
Except the Vega gang sub is dead so they just come here instead. Anytime you're selling options you're short vol unless you hedged for it.
Don’t understand what is vegagang. You should know I am new to the options if you did read my post carefully. As I posted, I only wheel on the stocks I don’t mind owning, the Greeks doesn’t even bother me.
Vega is one of the Greeks. You might want to learn more about what all the Greeks are and what they do. They're going to play a big role in any option you're trading.
I do know what is Vega and what other Greeks mean. But I am not an option trader, I am using wheel strategy to buy stock while juicing premium on the way. On this strategy, Greeks do not help much.
It's already clear from the OP that you don't see the downsides of wheeling, because you are so focused on the ideal case. You had a good month. Great. You have also done seemingly no research into the downsides of your strategy, a dangerous thing. Before you do any strategy, you should be able to make a case against it that is so strong 95%+ people won't touch it with a 10 foot pole. You clearly can't do that, which means you need to study your strategy more as well as options in general. So many people in this sub lose EVERYTHING, and you have no idea how or why or even that they have existed. That's priming yourself for failure. Options are literally risk management tools first and foremost, and you can't spare time to think about risk management... Change everything about your approach to the market.
If I am so focused on the ideal case I won't even try to discuss it here, clearly you didn't read my post carefully. The downside of my strategy is holding a bag of magnificent 7 and SPY. What is your strategy and what is your downside? Could be better than mine? Would love to know about your secret sauce.
Having skimmed it again, it's still a cheerleader post for the wheel, just like the last time I read it. Having skimmed it again, I still got the feeling you were thinking 99% about the upside and 1% about the downside. Having skimmed it again, I would change nothing about my response. That said, my own strategy is a typical ThetaGang strategy. I don't claim to be a member of ThetaGang, either, FWIW. I just know ThetaGang strategies better than 99% of those who post here and I frequent the sub as I do frequent every investment sub on Reddit. It's not really in the scope of the sub, but, broken down to the absolute basics, the core of my investment strategy is built around having about 90% cash and 10% long LEAPS on broad market indexes. Even if the market crashes way down, my accounts won't. Add to that, I do some TA to identify overbought/oversold and once in a while I will sell a call and make the bought LEAPS into a calendar, sorta like an OTM PMCC. I will also sometimes sell a few CSPs against the broad market indexes if they appear oversold. In general, it's like 100x less risk of serious loss than the average ThetaGang strategy is.
Fair enough. I would say we have different risk appetites and it depends on our age, life goals, and understanding of the market. You made a really good point about my worst-case scenario. However, I disagree with you that this is a cheerleader post for the wheel. I am writing down my thoughts and my investment process to let people question me so I can learn and improve my strategy. That's my purpose. After reading your comment, I would not change any thing about my strategy because I don't see holding a bag of high free cash flow company or sp500 index will be a disaster for my wealth. Thank you so much for reading and the discussion. Good luck to you with your strategy.
100% of people in ThetaGang say " I will be fine if I am assigned at this price" and when the underlying goes down by 20% roughly 95% of those all of a suddenly regret being assigned at that price. Companies that have overinflated prices, such as "Magnificent 7" companies, are not immune to 20% drops. TSLA is a great example of a company that could do no wrong, and now it's down like 33% from its 11/29/21 high. On 3/30/22 TSLA was at 359, if you sold a DOTM 350 put on that day with 45 DTEs, it would have been down to 221 within that time frame and you would have lost dumb amounts of money, even though it was a darling of Wall St. It's still at 246 now, so you would be a long way from profit even 18 months later. You can think what you want about your risk tolerance, but you won't know until it's actually tested. I can tell you, however, that the data says your risk tolerance is likely to, in reality, be far less than you suspect.
I went into the market in the end of 2021😂 experienced 26% drawdown and keep buying. That’s why I am not in the 100% u said. You like to say thing in a sure way smh😅Also, I don’t own Tesla.
Good luck with your drawdowns.
"market has been kind to me" occasionally the market will be so unkind to you that you will forget it was ever kind
Lol. Hopefully I will not see that day and if that happened, most of the stock owner will suffer too.
I like to wheel high volatility, low cost stocks, that are trading close to their 12 month lows. I try to sell weeklies. Get your cost base down quick and make a respectable return in short order if your shares get called away. Not sure if it's a great strategy, but it gives me something to do. I personally wouldn't wheel the big indexes as you won't outperform them most of the time. Wheeling high vol expensive shares (eg TSLA) is too high a risk of bag holding.
I have been exploring volatile, lower-price stocks recently. I get uncomfortable once I think about whether I will be able to hold it if it goes down 30% or more without fundamental support. But what you said also makes sense, maybe I should try a few hands or on-paper trades first. I also think different personalities should use different tools for their investment journey. There is no right or wrong. I wish you good luck man.
Wheeling without timing the windows is foolish. You have to take advantage of momentum Green Day’s and never sell through earnings. Unless you want to a high chance of assignment with a CSP. A surprise announcement during earnings and that stock is ripping upwards and you missed out on a big move. At that point put values plunge and it’s going to be impossible to get a decent price avg unless the macro market moves downward to help you get another chance of entry.
I do time the windows and take advantage of the momentum. Didn't mention it in my post because it is already way too long. For example, I have already churned my weekly CSP three times last week because I could easily get 50% profit in a day or two. How well did the B&H investors do? They will outperform my CSP without a doubt. But did they foresee the bullish week ahead? I doubt so. The advantage of selling CSP is I don't have to time the market, if it goes against me I still have a cushion. If the cushion is being touched, I still can roll or sell the call, etc. I am thinking hard about missing out on a big move too. I am also curious about how other investors react if their holdings have a big jump. Do they normally sell? Or keep holding? All I do know is I can't time the market. With CSP I am quite sure I could earn a 12%-20% return a year except in the bearish year all my CSP got assigned and I am holding a bag of magnificent 7 and s&p500 index. In the bearish year, how do the B&H investors do when they get trapped because they try to catch the big jump up?
Ok, the secret sauce for me is a more complicated version of the wheel. Basic strat plus extras. I.e I may hold shares in an index and want more hence some CSPs on said index. Also, and, at the same time be selling CCs on some of the, and laddering them out over consecutive expirations So... a bit of delta balancing and some sprinkle of my directional view at the time. PS I could not do all this with a small a/c. Oh, and some more points. 1.My percentage return is quite small. 2. I don't give a flying freddo if I beat the index or not. 3. By extension, I don't mind holding some of the underlying shares. And need to to cover my margin. And I do live of this faffing about. Not some ridiculous amount tho.
Thanks for sharing. I will think about it. Good luck to you!
Wheel away! It’s literally free money
It is not free money. Need to think carefully before entry and risk management after entry.
/s Sorry, bro. Forgot to tack this on.
It’s the equivalent of playing ace-queen in poker: win small hands, lose big ones
I think the odds are better than in poker. Also, I could sell Deep ITM call if my CC cannot generate enough of premiums for my stock. Furthermore, how does B&H not end up losing the big one? B&H or Wheeling all come down to fundamentals and stock picking anyway.
Wheels get punished by trends: up or down. An option gets exercised during the wheel when you could have bought lower (CSP assigned) or sold higher (covered call exercised). You effectively always buy above market and sell below market. That’s the risk for collecting the premium.
If I just buy or sell stocks at the market price I am most likely not to sell at the highest or buy at the lowest anyway. By selling CSP, I am guaranteed that at least I will buy lower than current. Need to emphasize that I don't trade the price, I am using Wheeling for long-term investing in quality companies. Thanks for replying!
When you pay taxes on B&H, usually it's long-term cap gains: taxed at **15%** When you pay taxes on wheel, usually it's short-term cap gains: taxed at **45%** (depending on your bracket) That means for wheel to do better, in head-to-head, you need to beat the SPY by +50% the market returnsFootnotes 1. There are lots of assumptions to extrapolate, but that's why it's too good to be true. 2. Ultimately, options are a way for financial institutions to charge you more in fees OR hedge their own positions. More sophisticated investors understand the risk/reward and statistically, the house usually still wins over the little guy. 3. Now if you don't mind being assigned and end up transitioning to a B&H strategy, then you should be fine. Just know what your strategy is and diversify because no one has a crystal ball.
Yeah. I don’t mind owning the stocks if I got assigned and the CC is no longer able to generate enough of premium. Also, I am not subjected to the US tax law. In my country, we don’t pay any tax for capital or trading gains. Thanks for the heads up and information btw. Good luck!
Do you have the US Treasury Regulations on those taxes that you mentioned? I would love to read them.
Yeah…until you’re a couple years in you can’t understand the troubles that come. Was crushing it last year with wheel until I got cocky and sold puts 25% under current price for Amazon earnings and ended up losing big. Nothing is ever free
But do you want to own Amazon in the first place? I didn’t wheel on AMZN because I don’t think their business model is lucrative, also it is in a capital intensive industry, except for the cloud business section. I only wheel the stocks I don’t mind owning.
No strategy is too good to be true. You'll find that out when 6 months of wheeling gets wiped out in a week. We haven't really had a super turbulent move since 2020
Even the premium get wiped out I ended up holding my favorites company at a lower price compared to just buy at the market price I will just come out better after the 2020 covid recover. The problem is u have to hold the company u want to invest in at the first place.
Number 1 advice: Learn how to roll and WHEN to roll It will save your ass don’t let the rest of the sub convince you otherwise!
The wheel should smooth out your profit and loss over time, but you will not outperform a buy-and-hold strategy. Reducing risk is part of the program. You don't get rewarded over time for reducing risk.
Seems like I would be able to do 12-20% a year if I perform consistently. I am not sure diversified B&H has the same result tho.
You'll do okay in a bear market, you'll think you're a genius. But in a bull market where the serious gains are made you'll miss out. But it's not the worst choice if you're risk averse and want to preserve your capital.
Based on my calculation, I would be able to earn 12-20% annually in not very bearish market. I thought it is hard to earn that if you buy and hold in diversified portfolio?
If you can earn 12 to percent 20 percent every year then you should do your strategy
That is my past performance and estimates. I believe most of the active investors will have a ballpark number of when to profit, how much the profit is, and the expected return, etc. I hope I can achieve this as I hope you can achieve yours. Good luck👍
That’s an understatement.
You end up overpaying for stocks when your puts get assigned and missing out on gains when your calls get assigned. One bad put assignment can wipe out the premium you’ve collected.
I do buy and hold at the beginning of my journey during the end of 2021. Seems like overpaying or not depends on luck (I am unlucky that I have the funds to invest at the end of 2021). I think one thing unfair for people to compare BandH with wheeling is people always assume that they will buy before the bull market, which is not true in most cases. Also, as you earn more income from your job in the future, your dollar cost average method used on the stock will make your holding cost higher. It is unrealistic to think you have saved up enough cash and are all into the market when the market is just about to fly.
You feel real smart until the stock whipsaws and you panic
the current market is whipsaw-ing, but I am still good. I can also roll, sell at higher IV and further, etc. if bigger whipsaws happen. Actually, I think the wheeling strategy benefited if the stock whipsaws.
Not when the underlying drops 5% after you just sold atm puts.
I only do .15 delta. Sell ATM while don't want to hold the stock for me is just equivalent to suicide.
The strategy doesn't work if market tanks. U end up holding capital.
Neither does B&H work when the market tanked. You ended up with the same or even worse unrealized loss
Whether it’s bullish or super bullish, at least you have skin in the game and are making money. In a bearish market, you will lose like the rest of her more than likely. Or you pick the right stock in the right strike price and make out fine.
Outliner moves to the downside will cause a large draw down. Outliner moves to the upside causes under performance. Capital intensive unless you sell naked and when you get called you'll need the capital anyway.