Traders are always looking for the most profitable trading strategy.
Thankfully, there are several profitable options trading strategies that you can try.
David Jaffee of BestStockStrategy.com teaches his students how to sell option premium so that they can target a monthly return of ~3.5% appreciation in their account.
While David Jaffee does not recommend owning stocks, he recognizes that some traders prefer to buy and sell stocks.
The wheel strategy combines selling options and owning stock in an attempt to maximize profit.
Keep reading to learn more about the wheel strategy and how to become successful at trading options.
How do you use a wheel strategy?
The wheel strategy uses a combination of trades to collect premium.
Three trades are involved in the wheel strategy.
- Sell an out of the money put
- Get assigned the shares
- Sell a covered call on those shares
To implement the wheel strategy, start by selling out of the money puts.
With a put option, the owner of the option has the right, but not the obligation, to own the underlying security at the strike price on or before the expiration date.
When you sell a put option, you collect the premium, which you can keep regardless of the outcome of your trade.
Next, if the option expires in the money, you will get assigned and purchase the shares of the underlying stock at the strike price.
For each put that you sold, you will buy 100 shares of the stock.
Finally, you can sell out of the money calls against the shares you own.
By selling a covered call, you can collect additional premium (and keep that premium regardless of the outcome of your trade).
Is the wheel strategy profitable?
There are multiple possible outcomes when it comes to the wheel strategy.
While the wheel strategy can be profitable, it is important to recognize the risks associated with selling OTM puts and getting assigned stock.
One possible outcome it that you're assigned stock and the stock continues to fall.
If this occurs, you will have an unrealized loss.
Also, owning stock uses up significantly more buying power than selling options (which is why David Jaffee prefers to not own stock).
In this situation (where you're long stock), you collected the premium for selling the OTM put options and can also sell OTM covered calls on the stock to bring in additional income.
Once those call options expire, you'll continue to sell more calls in order to keep the “wheel” turning.
David Jaffee prefers to sell OTM calls with an expiration of ~2 weeks.
Another possible outcome is that when you sell an OTM put and the stock begins to trade higher than the strike price of your puts.
In this case, you will keep the premium that you received when selling the put option, wait for the option to expire and then restart the “wheel” by selling an OTM put again.
Another possible outcome occurs when, after you've been assigned stock, the stock begins to trade above the strike price of your call option.
If this occurs, you keep the premium premium from the call options sold, and you profit from the rise in your underlying stock (until the strike price of the call options), and then you will sell the shares at the strike price of the call options.
Under this scenario, you'll profit from selling the initial put, profit from selling the calls, and also profit from the capital appreciation and price increase of your underlying stock, while then selling the stock at the strike price of the call options.
Once you no longer own any stock, you can then begin the wheel again by selling OTM put options.
Overall, the wheel strategy can be profitable, but I don't believe it's the most effective trading strategy.
Is the wheel strategy risky?
All traders want to earn the highest returns possible on their investments, and many of them consider the wheel strategy as a low-risk method of trading.
By “wheeling a stock,” or using the wheel strategy with a specific stock, you are placing a bet on the future of the company.
While selling options and calls allows you to collect premium, you do not have to own stock. To successfully use the wheel strategy, you must purchase stock which uses significantly more buying power than when you trade options.
Purchasing stock comes with its own risks. The price of the stock could fall, leaving your stocks worth very little, or you could end up holding the shares for longer than anticipated.
If you want a better and safer options trading strategy, consider selling option premium.
Do you need a large account to use the wheel strategy?
In order to successfully execute the wheel strategy, you have to be able to trade stocks that are liquid and have an active options market.
While some prefer the lower risk of penny stocks, you will likely not be able to run the wheel strategy on penny stocks because they may not have active options.
To start using the wheel strategy, you should probably have at least $2,500 to $3,000 in your trading account.
You do not have to invest your entire account into the wheel strategy.
It is important to keep in mind the risks associated with the wheel strategy and only invest what you can afford to lose.
Maximize Your Options Trading Profits
Regardless of which options trading strategy you choose, the goal is the same: make a profit while reducing overall portfolio volatility.
David Jaffee has taught more than 1,500 students a strategy where trades can learn how to win ~95%+ of trades by selling option premium.
If you want to learn the best options trading strategy to minimize risk and maximize profit, David Jaffee is your best option trading coach and resource.