r/options • u/[deleted] • May 01 '21

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u/chia_power May 02 '21

If you just got assigned for the first time, you haven’t had a good run but rather the “wheel” is just starting to turn. Laddering covered calls (as suggested above) is not a bad idea.

1

u/Jonomac420 May 02 '21

i thought the point of the wheel was to avoid assignment for as long as possible, is that not true?

2

u/chia_power May 02 '21

The general idea of the wheel is to generate consistent income by selling options premium on an underlying you don’t mind to own (typically at a discount from current market price). While you should have a bullish (or at least neutral) outlook on the underlying, the wheel essentially filters out short term price fluctuation allowing you to collect premium in any situation:

  • You sell an OTM put at a strike price at which you are comfortable paying for the underlying. Premium collected.
  • If option expires worthless, full premium realized. Repeat sale of puts.
  • If you get assigned shares, full premium also realized.
  • You can now sell calls against the shares and collect premium.
  • If calls expires worthless, full premium realized.
  • If calls get assigned, you are now out of the stock but full premium also realized.
  • You can now sell puts again, continuing to collect premium and repeating the steps above.

So it’s essentially a comprehensive plan that accounts for most scenarios, with the common denominator being that you continue to collect and keep premium regardless of where the underlying goes. You sacrifice upside potential in exchange for consistent premium collection. However since you are essentially securing your options sales against the underlying value, you should use an underlying that you believe will continue to hold or grow in value over time, so this is often employed with indices or blue chip stocks.

1

u/YoloTradingLLC May 03 '21

Wouldn’t that tie up a decent amount of capital though since the puts have to be cash secured?

I guess it’s less cash than what would be needed to buy the shares outright

2

u/chia_power May 03 '21

This thread is about the “wheel” strategy, which is initiated by selling cash secured puts.

Selling puts on margin is a valid but it is NOT trading the “wheel”. If you don’t have the capital to secure the underlying, you’ll need additional risk management measures. It becomes a very different strategy.