What Is The Wheel Option Strategy?

29 Okt 2020

The Wheel is an options trading strategy where first we are selling puts to collect premium. In the instances where we get assigned the stock, we’re then selling calls to collect even more premium.

As you know, I’ve been actively trading “The Wheel” since the middle of the year (2020) and at the time of writing this, have yet to realize a loss.

In this article, (based on a video from August 21st, 2020), I want to talk about a specific “Wheel” trade on UBER where we ended up getting assigned shares.

Wheel Option Strategy Example: UBER

Within The Wheel, there are three trades that can take place.

The first is that we are selling puts.

The idea here is to collect premium and to get assigned stocks at a discount, to buy stocks at a lower price than they are trading right now.

Then once we have the shares, we are selling calls.

So let me walk you through step by step of exactly how it works.

Step 1: Selling Puts

So let’s talk about the first trade that we did here.

For the first trade, we were selling puts, and I want to take a look at the very specific example here.

We sold 7 August 14th expiration, 30 puts at $0.25. So this is $25 per option. 7 of these, times 25 so we collected $175 in a little bit less than one week.

The idea here was that I believe UBER would stay above $30 by this expiration, resulting in me just collecting the premium for the puts I sold.

So let’s review all the trades I’ve taken in UBER through this period:

I have eleven winning trades.

Here is what happened with Uber.

The price dipped below the magic 30. And here’s what happens.

If it would have stayed above 30 we would just collect the premium, be happy, and sell more puts again.

But on the day of expiration, UBER had a sharp sell off dipping below the put strikes I sold.

Step 2: Buying Shares

So we had to buy the shares and this is actually the second part of the trade.

This is what the broker did for us automatically. We bought Uber at 30.

Here’s the deal, for every one put that you’re selling you have to buy 100 shares.

Now, something odd happened here.

So I should have received 700 shares of Uber in my account because when you’re selling puts, it means this means you have to buy at the strike price that you’re selling it.

So since I sold 7 puts, I should have received 700 shares. But for one reason or another, I only received 400 shares.

Kind of a bummer, but it’s okay. Now, this premium, since we sold it, we are going to keep it.

Whenever we sell an option and collect premium, we are going to keep it (the premium) no matter what happens.

So now that I’m the proud owner of 400 shares of UBER at this stage, here’s where the next part of the trade comes in:

Step 3: Selling Calls

This is where now we start the “Wheel” rolling. This is the really fascinating part of the strategy and when it clicks, you’re going to see why I absolutely love it!

With 400 shares of UBER, this means I can now sell 4 calls against my shares, creating what’s called a “Covered Call.”

So we sold four calls at a strike price of 31 expiring August 28th. Again, this article was written based off a video I recorded on August 21st, 2020.

And we sold those for $0.52. This means $52 per one option. 52 times 4 means that we received another $208.

So this is the premium that we received and nobody can take this away from us. We’re not planning to close this trade and buy back this call, we would just leave it open.

So to this point we have received $383.

3 Scenarios That Could Happen With Uber

Now I want to look at three possible scenarios of what happens if Uber closed below $30 on August 28th.

So in a week from now, we want to see what happens if Uber is below $30, if it is between $30 and $31, and if it’s trading at $31.

First of all, the premium that we received for the puts we can keep. I mean, $175 is already ours nobody can take this way. This is in all scenarios here.

We also receive the premium for the calls that we have sold here and that is $208 and nobody can take this away from us.

Scenario 1: Uber is trading below $30

So let’s say Uber drops all the way down to $29.

In this case, on our shares, we would have an unrealized P&L. This is important, unrealized, 400 times $1, would be -$400.

Now the important thing, it’s unrealized because we kind of don’t care at this point, right? Because we’re not planning to sell Uber we are planning to hold it.

At this point, the whole premium collected is $175, plus $208 so it’s $383. This is how much we have realized to this point, but remember in this scenario we would be underwater on our shares (or an unrealized loss).

Now, what we would do here is sell more calls. But we’ll talk about this here in just a moment.

Scenario 2: Uber is trading between $30 and $31

If Uber is between $30 and $31, let’s just say Uber is at $30.50.

We bought Uber shares at $30, and in this scenario, it’s trading at $30.50, so we make 400 x $0.50.

So we’re making $200 on our shares, plus we’re making $383 on the calls and puts that we collected. So this would bring our total to $583. Not bad at all.

Scenario 3: Uber is trading above $31

If Uber is above $31, it doesn’t really matter because we sold 4 calls at a strike price of $31. So this means that we have to sell Uber again at $31.

Yes, if it goes to $33, $35 we cannot participate, and that’s okay.

It’s very likely that Uber stays between $29 and $31, maybe $32, right? If it rallies to $34 good for Uber.

Again we’re talking about the next week that’s what our outlook is here.

If this would happen, we would make $1.

Because we bought 400 shares at $30, and if we have to sell it again at $31, we make 400 times $1. So this means that we are making $400.

This is how much we are making on the stocks, plus the $383 that we received in premium we are going to keep.

This here is our best-case scenario.

So if Uber is below $30 we would sell calls again, and the Wheel would continue.

If it is between $30 and $31, we sell calls, and if it is above $31 we are being called away, so we are getting rid of the shares.

And this means that right now we would start selling puts again.

Wheel Option Strategy Summary

I wanted to show you this, and also very specifically, where we are right now with our Uber position.

If you look at Uber right now, you’ll see that we are making money on our shares and we are losing a little bit of money on our calls that we sold, but right now, we are up $292.

Now we hope that by next week we’re up either $583 or $783, and this would be the win of only two weeks.

This is how the Wheel works, this is how the Wheel ‘turns’.

The trades we are in right now are working quite well. Thus far we have a really great track record.

If you found this article on the Wheel option strategy helpful, feel free to leave a comment below and share it with others who will benefit from reading it.