Wheel strategy is the ultimate trading cheat code
prefer selling options to buying if you want to be a winner in the long run
Investing in the stock market is confusing for many beginners and even veterans believe it or not who don’t understand all the different strategies you can use to make money.
WallStreetBets on reddit is full of stories of investors losing all their life savings on crazy bets. You don’t have to be one of them. It’s pure gambling and has a very high probability of you losing money instead. To be fair there are clear winners too who have become millionaires overnight but surely they are a handful minority
Now there are a lot of different strategies you can use in the stock market today. There is a simple buy and hold of stocks which you believe over the long term that majority of the people use. But I am going to be talking about the strategies in the options market instead.
My Life Of Learning
Over the last 5 years I have spent a lot time learning how options work and all the different strategies. Obviously, I haven’t tried all of them but have tried the most common ones which I will briefly discuss. According to optionstrading.org, there are 52 different strategies you can use today. It’s absolutely crazy!
I started out with Long Call/Put which is the most beginner friendly of them all. I made decent profit starting out making over 60% of my capital in a very short time which excited me to continue. Ultimately, I gave all my earnings back to the market and just broke even. This whole process lasted a good six months. I then moved onto Credit/Debit Spreads strictly which are not so beginner friendly but mathematically give you a higher probability of profitability. I had very good success over and over again and was able to grew my account consistently with this but ultimately gave back all my profits again on a steep market correction. At this point I was exhausted and wanted to move on from options trading
Until then I never thought of strictly selling naked options as all the brokers show it as having an unlimited risk potential but after being exhausted with the whip saw movement of my account I started looking into selling options and thats where I learnt the two most important things about options
- 80% of the option contracts expire worthless which means the buyers of those options keep losing money
- Warren Buffet made $5 billion dollars over the past several decades just by selling options
That was enough for me to switch sides and fast forward few months and I was knee deep into selling options. I have to say its been a heck of a journey and I have been able to grow my account considerably well over few years. At the time of writing this article I am up 40% of my account value using this strategy only. Over the period I have had very few bad trades but the beauty of this strategy is that you don’t actually lose money since you have time to hold the underlying until it recovers so it just requires some patience. Now what is this selling options strategy? Lets jump into it
The idea is to find an underlying that you believe in for the long term and start by selling a put option at a price of your choosing. Market gives you a premium for agreeing to buy 100 shares of the underlying at the price of your choosing if that contract expires and the price of the underlying at the time is below your agreed price(in the money). If the contract expires with the price of underlying staying above your agreed price(out of money) you simply walk away with the premium and then repeat the process by selling put again. If you are in the money instead then you get to purchase 100 shares of the underlying at the agreed price. At this point you have entered the next phase of the wheel strategy where you hold the stocks and can now sell a call against them. Market gives you a premium for agreeing to sell your shares at the price you choose. So you benefit with the stock appreciation and also receive a premium in the process. It’s beautiful
If you want to further explore the validity of this, I would suggest looking at the two case studies performed by Chicago Board Options Exchange and by James Doreen, the Bank of America Assistant Professor of Finance at Florida State University who used a 22-year trading period from 1996 through 2006. Both studies interestingly enough came to the same conclusion that selling put options(1st phase of the wheel strategy) beats all other strategies. Here’s a quick look at one of their findings when comparing buy and hold on the major indices to selling puts.
I understand that everybody is different so this strategy might not be for you but those who are like me who don’t like to take on risky bets and like to sleep in peace every night but still prefer the cash flow every single month you can really benefit from this. I have been using this money to pay bills, mortgage and everything in between while holding onto some great underlying who are decent dividend payers and have also appreciated a lot over time