Option trading strategy: Wheel Strategy


Option strategy: Wheel Strategy
It’s a simple, straight forward option trading strategy
Step 1:
Select an instrument like stock or ETF you won’t mind acquiring. i.e. 100 shares of BABA.
Step 2:
Sell a out-of-the-money, OTM naked put option against that instrument, with around 2 to 4 weeks to expiration (DTE). You will collect relevant premium in your account.
Step 3.1:
If the price of the instrument stays above your selected put strike price at the expiry date. You will keep the credit you received and nothing else.
Step 3.2:
If the price of the instrument falls and closes below your put strike price at the expiry date or before, you will be assigned the instrument and you must pay the costing of owning the instrument at the strike price.
Step 4:
You now own the instrument and can therefore start selling a out-of-the-monet, OTM call option. Again 2 to 4 weeks to expiration (DTE). It’s so called covered call.
Now, 2 things can happen:
Step 5.1:
If the price stays below your call strike price at expiration. You keep the credit and still owns the instrument. Then, you can do it again every week or month and keep all the credits you receive.
Step 5.2:
If the price moves up above the call strike price and the instrument are called away at day of expiration. You still keep the credit for the short call, so it lowers your cost base even more. You now have nothing and can start all over again, step 1.

To conclude, the benefits of the wheel strategy:
1. When you sell the cash secured put, with premium you collected. If the put option get assigned, it will lower your overall cost base to own the instrument.
2. After you get assigned the instrument and sell the call, you keep the premium and it lowers your cost base even more.
The drawbacks:
If the instrument price drops sharply and extensively, you get assigned the instrument, but it keeps going lower, you might not be able to select a call that is close enough to the price. The average costing will lower and lower. Your capital (owning this instrument) will be reduced. But don’t worry. This the good instrument you selected and willing to own it in long term.