Before we list my top ten ETFs for the Wheel, let’s review and see why I like using ETFs for the Wheel option strategy.
ETFs trade just like stocks and have options just like some stocks.
ETFs are not subject to earnings moves like individual stocks are.
Thereby, I can avoid big moves in the stock price during earnings announcements.
Since the Wheel is a slightly bullish strategy, I don’t want the underlying to gap down in price during earnings.
Even if the stock price gaps up, I might not be able to take full advantage of the move if I have a covered call that caps my gain.
This will be clearer when we look at the expiration graphs in a quick example.
Contents
Step 1 of the Wheel:
An investor sells an out-of-the-money cash-secured put option with the mental preparation to take ownership of the stock should it be assigned.
Suppose on July 26, 2023, an investor sells the $32 strike put option expiring on August 25 (about 30 days away).
Selling around the 25-delta on the option chain, the premium collected for selling this put is $0.36 (on a per-share basis).
With the ETF priced at around $34 per share, the premium collected in this example is about 1% of the share price.
We have the following bullish expiration graph:
Often, the put option will expire worthless at expiration, and the investor keeps the premium received.
I hand-picked this example to show what happens when the price of the ETF ends up below the strike price at expiration.
The price closed at $31.31 on August 25, which is below the strike price of $32.
The investor has to buy 100 shares of EWZ at $32 per share.
While this may seem like a loss of $69, this is only a net loss of $33 when you account for the $36 collected initially,
Step 2:
The following Monday, August 28, the investor has 100 shares of EWZ and sells an out-of-the-money call option with a strike price of $33, expiring on September 29.
Collecting a premium of $0.38 per share is nice, but the investor wants the ETF price to appreciate, as seen in this covered-call expiration graph.
Step 3: Repeat
If the price does not appreciate enough, the call option expires worthless at expiration, and the investor sells another covered call.
If the ETF is called away, start the Wheel again by selling another cash-secured put.
My Favorite ETFs
The symbols that I like to run this strategy on are:
EWA – Australia Index Fund
EWZ – Brazil ETF
EEM – Emerging Markets
EWU – United Kingdom
ARKK – Innovation ETF
FXI – China large-cap
XLU – Utilities sector fund
IYR – Real estate
XLK – Technology sector fund
XLF – Financial sector fund
Frequently Asked Questions
Can I sell in-the-money covered calls?
Yes, you can if you want to increase the probability of exiting your shares by having your shares called away.
If this happens, you will still capture the extrinsic value of the call option.
But if the asset price goes up significantly, you may not be able to capitalize on the gains because the call option is capping your profits.
Can I sell in-the-money cash-secured puts?
Yes, you can if you want to increase the probability of assignment and owning the shares.
You collect a larger premium upfront to account for the higher strike price than the current price, this represents the intrinsic value of the put option.
In addition, you collect a little bit more in terms of time value (or extrinsic value of the option).
Can I use these ETFs for iron condors?
But since the price per share of some of these ETFs is low, you might need to sell a lot of contracts to collect enough premium to be worth it.
The extra number of contracts adds to your transaction costs.
Conclusion
And there you have it.
Don’t just copy my list.
Find your own best Wheel candidates.
Some investors like to perform technical analysis and fundamental analysis screening to look for bullish assets.
Having a diverse set of ETFs to trade the Wheel strategy will help diversify your portfolio.
We hope you enjoyed this article on the top ten ETFs for the wheel strategy
If you have any questions, please send an email or leave a comment below.
Trade safe!
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.
Hi Gavin, thanks for the great article.
I’m a little surprised you use ARKK , it’s graph was a real rollercoaster.
May I aks how you choose ETFs? The SP500 is not volatile enough?
Thank you
SPY is great for the Wheel, but not everyone has the capital to buy 200 shares, so I tried to focus on lower priced ETFs. IWM is another good one.
Thanks Gav, Do you think there might be an ETF that we could look at in tonight’s meetup that fits your entry criteria to initiate the wheel. I know we are working on SLV but curious about something from your suggestion list
ARKK was a good one but the other ones are not really worth it
$32 a month ? Might as well watch grass grow I understand that not many can afford 200 shares of SPY but there has to be something better than that I think it has to have some volatility to be able to sell a little bit out of the money otherwise you might as well just buy the etf and sell it You could have bought EWZ yesterday and sold it the next day for double of the premium you received for one month