Today I've very excited to bring one of our very own Option Alpha family members on the show, MACDDaddy aka Robert. He's been a member for many years and someone I continue to seek advice from in many areas. During the show we'll dig deeper into the "Wheel Selling" option strategy which has created some fairly long and in-depth forum threads lately and warrants a little more attention from our weekly podcast.
Key Points from Today's Show:
- Our guest today is Rob, an Option Alpha member of many years.
- In building Option Alpha, Rob has brought a very objective thought process to the table which I humbly appreciate.
- Rob joined the Navy and flew for V23, a fleet of reconnaissance squadrons, running the com-center.
- Flying is all about discipline, being proactive, and having many checklists.
- His experience in the Navy and with checklists created the basis for his trading.
- Rob first started investing through AAII, American Association of Individual Investors.
- For the last 25 years, Rob has worked at HP and gained early exposure to the Internet and computers.
- He had an online brokerage in 1993, and has finally landed with his favorite, Think Or Swim.
- Rob went on a mission, and read 143 investment books, simply to discover that there is no holy grail.
- Overall, Rob’s mission is to retire and trade options full-time.
Rob’s Trading Journey:
- Rob has been trading options for 13 years and took the normal progression.
- He started out with the covered call, investing long with the strategies from fundamental investing.
- From there it just grew, and he continued with the goal to do one trade each day.
- Today he does three to four trades a day, and has created a strict trading routine.
- Rob spends 15 to 20 hours a week trading and researching, and sees trading as his second job.
The Wheel Strategy:
- The wheel strategy is one of the tools you need for different scenarios in the market.
- It provides a set of guidelines with steps where you get to make choices all the way through.
- You can make the strategy as simple as you want, or very complex.
- With the Wheel Strategy you can determine how much you want to be invested time wise.
- You can sell weekly, monthly, or every two months.
Example: Your first choice is to buy the stock or sell the out of the money put.
- Start the wheel with selling the out of the money put. That gives you money and a little bit of a cushion with the stock if it takes a bit of a downturn.
- Sell the put, it goes to expiration, and it gets put or expires.
- If it expires, sell the put again.
- It goes to expiration, expires worthless, sell the put again.
*This is the same thought process as a covered call in the sense that you have to like the stock, know the stock to some degree, and be okay with owning the shares.
The Steps (if you get stock put to you):
- Don't freak out.
- Decide if you still want the stock.
- Call your broker and ask about your choices.
* If you decide to keep the shares, the next thing you do is sell the call.
Choices When Selling the Call:
- How long do you want to own the shares?
- If you want to get out quickly, sell the call right at the money
- You will get the most money with the highest chance of it getting called away.
- If you want to make more money, go further out.
- the further out in time, the bigger the credit.
- If the call expires worthless, sell another call.
- Re-evaluate if you still want to own the shares, then sell the call again.
- If you get the shares called away by selling the covered call, you then go back and sell the put.
- This completes the wheel strategy.
*Overall, the wheel strategy forces you to buy low and sell high.
The Advanced Choices:
- If your account has the ability to own another 100 shares, instead of selling just a call you can sell a strangle.
- This brackets the stock that you own:
- If you get called away those shares go away and you receive the premium of the put.
- If it gets put to you, then you own 200 shares, and you would sell two calls.
Skewing the Outcome:
- If you want to have it called away quickly, put the call at the money and sell the put that's further down, at the 10 Delta.
- If it is already at a resistance point, you can skew it the other way so that the put is at the 40 Delta and the call is at the 20 or 10 Delta.
The Top-Down Approach:
1. Determine what the overall market is doing.
- most growth stocks are going to follow the market.
- if the market is going down, the stock will go down also, and vice versa
2. Look at earnings to decide on expiration and holding period.
- If you hold through earnings, go out further to expiration.
- Make sure that you get your position size correct.
- You have to have enough capital in your account to keep the lights on.
- Discipline and routine is key for being a successful trader: having a trading plan.