Jul 16, 2024 6 min read Options

Mastering the Wheeling Strategy: A Profitable Options Trading Technique

Learn the ins and outs of the Wheeling strategy, a lucrative options trading technique that balances risk and reward. Perfect for traders looking to optimize returns.

Photo by Daniel Dan / Unsplash

I've been studying options over the past few months, exploring how they could fit into my trading account. I've bought calls and puts and sold puts. My options trading record shows a loss of $2,700, with the biggest setback coming from a second COST call trade (that's for another post).

While this loss stings, it's part of the tuition you have to pay to learn a new market and trading method. Making money in options can be complicated but lucrative. The tricky part is you have to be sure about the direction of an underlying stock’s price and then wait it out. This is why so many options traders sell options; they reap premiums based on theta (time) decay.

I've always wondered how many of these options expire worthless. A number I hear a lot is 70% of them expire worthless, but is that true?

The CBOE has some statistics on this:

10% of option contracts are exercised
55% – 60% of option contracts are closed out before expiration
30% – 35% of option contracts expire worthless (out-of-the-money with no intrinsic value) - via The Blue Collar Investor

The short of those statistics this that 30-35% of options expire worthless and 10% only ever get exercised. Those two statistics will be handy later when we talk about Wheeling.

Simple Option Trading Strategies

Perhaps the simplest of option trading strategies to make money is doing credit spreads. I've read books (affiliate link) on how to construct call and put credit spreads to limit your risk, and I liked those strategies. They’re a great way to get started with a low amount of trading capital and cap your risks. You can turn a few thousand dollars into big money if you're patient and diligent.

For credit spreads, you need at least two options with different expiration dates, with the longer-dated one being your risk stop and the shorter duration ones being your premium money-making machine.

What about just selling put options? Wouldn’t that be easier? Yes, it would, but it exposes you to a ton of risk if you get assigned. Even if the chance of being assigned is 10%, would you be willing to expose yourself to unlimited downside risk for a few hundred or thousand dollars of premium?

The answer is yes if you use an option strategy called “Wheeling” and don’t mind getting assigned the stock.

Option Wheeling Strategy

I stumbled across Wheeling in the r/thetagang group on Reddit. The strategy is simple, and you can make money in two ways, but you need a bit of trading capital to do it.

The way to make money option wheeling is by selling a put contract on a stock for the premium. Then you wait until expiration. If you don’t get assigned, you keep the premium and do it again.

If you do get assigned, you need to buy 100 shares of the underlying stock. This is where having the trading capital to cover the cost of those 100 shares is important. Chances are, if you were assigned, it was because the stock sold off, so now you’re sitting on a losing position, right?

That’s correct, but now you can sell a covered call option on those 100 shares you just got assigned. You keep doing this until you get called away. Then the wheel continues again.

Option Wheeling Example

Let’s use Ford (F) as an example to highlight option wheeling. As of yesterday’s close, Ford is at $14.22 a share.

You look at the chart and think that F is breaking out and going to go higher, so how could you make money from this? You look at the option chain and see that a $14.00 put option expiring on July 26, 2024, is $0.83.

Selling one contract will net you $83 in premium, less any fees.

You sell that option and net your $83. Great, but where’s the risk? The risk is that you’re on the hook to buy 100 shares of F at $14 if you get assigned, so you need to have $1,400 in your account to cover that cost.

Let’s run two scenarios in the future.

Scenario A: Ford climbs higher, and the option expires worthless, allowing you to keep the $83. $83 on $1,400 is a 5.9% return for just a week or two of time.

Scenario B: Ford drops below $14 a share, and you get assigned 100 shares of Ford. You now own $1,400 worth of Ford.

Now what? What do you do with these 100 shares of Ford?

Now you sell a covered call and collect premium again.

An August 2, 2024, dated call option has a premium of $0.63, so that would net you $63 (less any fees) for a week’s worth of holding. If you don’t get assigned away the shares, you can sell the August 9, 2024, call.

Of course, there are tax implications to this short-time-horizon trading, and you might sell your underlying stock at a loss, but there’s always a risk in trading.

You can continue to do this until called away, or you can just sit on this stock if you like it. Traders will sometimes sell put options on stocks they like as a way to get assigned into them if they believe a particular asset is having a short-term selloff before heading higher.

TL;dr

Over the past few months, I've been diving into options trading, exploring strategies like the Wheeling strategy to see how they fit into my trading account. Despite a $2,700 loss, the learning curve has been invaluable. The Wheeling strategy involves selling put options to collect premiums.

If the stock price drops and you get assigned, you buy 100 shares and then sell covered calls on them. This cyclical process can generate profits whether the options expire worthless or you get assigned the stock. Using Ford (F) as an example, I illustrate how you can make solid returns while managing risk. With enough trading capital, this strategy could be a lucrative addition to your trading toolkit.