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EWZ Wheel Trade Update

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Last year, I posted an example of a trade in EWZ using a strategy known as The Wheel.

Today I want to share another trade in EWZ that I’ve been building over the last 12 months. So far, the trade is up $713 or +8.34% whilst the ETF is -19.65%. Here are the details:

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  1. On June 30th 2015, with EWZ trading at 32.77, I sold a September $31 Put for $1.02.
  2. On August 20th 2015, with EWZ dropping to 26.01, I decided to add another short put for the September expiry, this time with a strike price of $25.
  3. On September 18th, EWZ was trading at $22.73 which was below both of my short put strikes, therefore I was assigned on both puts. I was assigned 100 shares at $31 and 100 at $25 for an average cost of $28.

At this point my outlay was $5,600 and I had received $180.28 in option premium for a net outlay of $5,419.72 and an effective average price of $27.10. With EWZ trading at $22.73 I was -16.12% on the position and EWZ was -30.64% having dropped from $32.77 to $22.73.

5. After being assigned on the shares, EWZ was too far below my cost price to sell any calls. With a net cost of $27.10 I would have had to go too far out in time to bring in enough premium for selling $27 or $28 calls. I needed to wait until EWZ rebounded to about $25-26 before selling calls. I also decided to increase my exposure by selling a December $21 put. This brought in additional premium of $112.

I knew that if I was assigned on another 100 shares it would further reduce my cost basis.

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6. On December 18th, EWZ was trading at $21.22 so my December put expired worthless. This time I sold 2 March 18th 2016 $20 puts bringing in another $283 in option premium. EWZ was still too low to sell calls. I didn’t want to sell calls below my cost price.

7. By mid-March EWZ had rebounded back above $26 so my 2 $20 puts expired worthless. At this point I just owned the 200 shares. With EWZ at $26.93 and above my effective cost basis I could now sell some calls. I sold 2 June 17 2016 $28 calls generating $347 in premium. I would be more than happy to part with the shares at that price. At the same time I also sold a $24 put generating $124.

I now had 200 shares with a gross cost of $28. Having brought in a total of $1047 in option premium, the net cost had been reduced to $22.76.

9. At close of business on May 26th, EWZ was trading at $26.33, well above my net cost of $22.76.

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So far the trade has returned a profit of $713 in 332 days using capital at risk of $8,552 which works is a return of +8.34% or roughly 9.17% annualized.

In comparison, over the course of this trade, EWZ moved from $32.77 to $26.33 for a return of -19.65%.

I’ll post another update once the trade is fully played out.

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What do you think of this trading strategy? Let me know in the comments below and don’t forget to share this post on Facebook and Twitter.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

5 Comments
  1. Ross says:

    Hi Gavin,

    Where is your stop loss on this? You seem to just keep willing to buy more on the way down. The low in Jan around $17 looks to be about $10 or 37% below your initial entry around 27. I know you collected a little more premium along the way, but its a decent amount to be underwater

    Cheers,
    Ross.

    1. Gavin says:

      Hi Ross, yes I was underwater by a bit. Realistically I should have probably set a stop loss about 20% below my effective cost basis of $27.

  2. shmuel says:

    A couple of things:
    Number 2 above should probably read August (and not June)?
    What happened in July?
    What judgement did you make to ascertain the put strike level to sell?
    What would you have done had the ETF kept on moving lower? Is there a way way to ascertain how low it can go?

    Thanks for posting and for the visual.

    1. Gavin says:

      Hi shmuel,

      Fixed, thanks. Yes, I was pretty far under water in Jan and close to being stopped out. I was willing to buy up to 400 shares so if I had bought another 200 shares at say $17, it would have brought my effective cost basis down to about $21-22. This was a small position for me and part of my long-term portfolio so I was prepared to sit on it for a while and wasn’t too concerned. I was confident it would bounce back as sentiment at the time was incredibly bearish which was a good contrary indicator.

      However, as I mentioned to Chandran, you have to be careful not to throw good money after bad with this strategy

  3. Chandran says:

    Hi Gavin,

    I have been holding JOY for a long time and kept buying those after selling puts, so my prices are 62.5, 52.5, 35 and 20 so hold about 400 shares now and JOY is at 16 I also have 4 Jan17 10 calls that I sold, because the stock kept moving on me and now I have that call which is deep ITM and I’d like to recover from that, but dont see how without taking some losses, so I have been selling some 15 Puts to try to reduce cost basis. Will see how this goes

    Thanks
    Chandran

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