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Book Review: “The Options Wheel Strategy”

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by Gavin in Blog
June 4, 2022 2 comments
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Contents

The Wheel has become a popular strategy due to its catchy name.

The book by Mark Greenberg, “The Options Wheel Strategy,” published in 2021, will keep you updated.

It covers what underlying to select, what strike and duration, and the Greeks.

We’ll highlight some of the important points.

As you know from earlier article, the Wheel strategy consists of selling and collecting premium from a cash-secured put — the book uses the abbreviation “CSP”.

If assigned, take ownership of the stock.

Then sell and collect premium from a covered call, which the book label as “CC”.

Repeat when stock is called away.

This book gives a realistic view of the wheel strategy.

It doesn’t hype it up as making huge returns nor paint the picture that it is a continuous money-making machine, and it is not.

Instead, it paints the picture of generating 15-25% returns without taking any additional risk to the portfolio.

The title of Chapter 1 is “The World’s Most Boring, Yet Reliable Options Strategy”.

Stock Selection

The book says, and rightfully so that the most important piece of the Wheel is the long stock and its proper selection.

If you select a poor stock that keeps going down, it can take years to get back to breakeven.

The amount of premium collected will not be enough to offset capital depreciation.

The book says to look for stocks with strike IV of between 30-50% and avoid “Media Darlings” and volatile stocks that move a lot. And no penny stocks or IPO stocks.

Only select stocks that you are willing to own.

Time Selection

The author prefers expirations that are 21 to 45 days out.

Plan to exit the trade at 50% of max potential profit or at 21 days to expiry (whichever comes first).

It is better to sell longer-dated options and hold them for one or two weeks rather than to sell one-week options held to expiration.

Strike Selection

A shorter-term investor who wants to collect premiums instead of owning the stock will want to sell further away from the money.

Avoiding assignment is the best course of action for these short-term investors.

Longer-term investors who want to own the stock for its appreciation will want to sell closer to the money.

The point is to get assigned the stock and buy it at a discount.

As a general rule of thumb, you want to capture premiums that are about 1% of the stock price.

For a $50 stock, you want to get a premium of $0.50.

The premium value would depend on the underlying stock, the strike selected, and the expiration cycle.

Don’t Use Margin

The book is quite adamant about not using margin, saying that

“Leverage with The Wheel can destabilize the rest of your portfolio, and it’s not worth it. Remember that The Wheel should comprise approximately 10% of your overall portfolio. Is there any situation when the use of leverage makes sense? Not really.” [page 127]

Options are already naturally leveraged; you don’t want to borrow money to do the Wheel.

If a trade goes bad, you will be on the hook for the borrowed money.

If you do not have enough money to do the Wheel, wait until you do.

The author’s recommendation of using 10% of the account for the Wheel means that the max risk to the portfolio is 10% (if the stock goes to zero).

Can It Be Done In An IRA?

Yes, it can; because all phases of Wheel are a limited-risk strategy.

The short put is covered by reserving the necessary cash in the IRA.

If the short put is assigned, the reserved cash will be used to buy the stock.

The call is covered by the stock. If the short call is assigned, the stock is sold.

Freeman Wheel Strategy Rules

Interspersed throughout the book are these ten rules:

Rule #1: If it looks too good to be true, it is.

Rule #2: Your current broker may not be the best choice for options trading.

Rule #3: The best move you can make as a wheel trader is to select the right stock in the first place.

Rule #4: Using stock screeners can help you research good candidates in less time.

Rule #5: It is better to master 2 – 3 technical indicators than have a broad knowledge of 50.

Rule #6: Avoid entering trade if the VIX is above 30.

Rule #7: Enter trades with 30-45 days left until expiry.

Rule #8: Only enter the trade if the option premium is at least 1% of the total stock price.

Rule #9: Always stick to a disciplined money management strategy.

Rule #10: Remember to account for commissions when tracking your P&L.

Tips For Beginners

The book recommends paper trading before live trading in the last chapter (chapter 11).

It writes:

“One of the biggest mistakes you can make in the market is to jump in without taking the time to prepare beforehand.”

“This prepares your mind for the rigors of live trading, and you can transfer your skills seamlessly when you begin working with real money. If you aren’t serious about it, you’ll end up losing money when you go live.”

But what if you are already an experienced trader?

Here is what the book has to say about that if the Wheel is a new strategy:

“Even if you’re an experienced options trader, we encourage you to paper trade before going live. This is how every successful trader operates, and it makes sense that you should follow this path as well.”

The book concludes by stressing the importance of practice.

It writes:

“You’ll need to spend time practicing it well before you can expect to make money.”

“Above all else, remain patient with The Wheel and take the time to fully study it before diving into it. Practice your skills properly before trading with live money.” [page 144]

We’ll end on that note.

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.

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2 Comments
  1. Nikolai Heim says:

    Did you send an offer Of a backtesting program last week? Cant find it in my email anymore.
    Nikolai

    1. Gavin says:

      I responded to your email, did you not get it? This is the software:

      https://optionstradingiq.com/optionnet-explorer-review/

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Options Trading 101 - The Ultimate Beginners Guide To Options

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