The Wheel Investing Strategy: Making Consistent Income

The Wheel Investing Strategy

Looking for ways to make consistent income without having to sell your soul to the stock market gods? Well, look no further than the Wheel Investing Strategy.

Think of it like a game of roulette, but instead of a tiny ball bouncing around a wheel, you have the power to spin your own fortune by selling options on stocks. It's like being a master chef, but instead of cooking food, you're cooking up some serious dough. And the best part? You don't even have to be a stock market expert to get in on the action.

So sit back, relax, and get ready to learn about a strategy that could change your financial future forever. And who knows, with the Wheel Investing Strategy in your arsenal, you might just become the next Wolf of Wall Street (minus the illegal activities and questionable fashion choices).

What is the wheel investing strategy?

The Wheel Strategy is a clever way to earn income and acquire stocks at a discounted price. It combines selling Cash Secured Puts and Covered Calls to achieve this.

What is the wheel investing strategy?

Here's how it works: let's say you want to buy a stock, but you don't want to pay the full price. With the Wheel Strategy, you can sell Cash Secured Puts to obtain the stock at a discount. If you get assigned the stock, you can buy it at the short put strike and then start generating additional income by selling Covered Calls.

But before you start, make sure you understand the ins and outs of selling Cash Secured Puts and Covered Calls. It's like learning how to ride a bike before taking it for a spin.

To implement the Wheel Strategy, follow these three steps:

  1. Sell Cash Secured Puts and receive premiums until the shares are assigned at the strike price.
  2. Sell Covered Calls to keep the income flowing until the stock is called away and the shares are sold at the strike price.
  3. Rinse and repeat the process to keep making money.

This strategy allows you to earn income through premiums while waiting to open a long position on 100 shares. When the shares are eventually called away, you profit from the capital appreciation of the shares and the premiums received along the way. It's a win-win situation!

Pros & Cons of the Wheel Strategy

Pros

  • Passive Income: The Wheel Strategy allows investors to earn a passive income by selling options and collecting premiums. This can provide a steady stream of income without active management.
  • Lower Purchase Price: The premiums received from selling options lower the purchase price of the underlying asset. This can make it easier for investors to acquire stock at a discounted price and potentially profit from capital appreciation in the future.
  • Time Decay: The value of the options sold decreases over time, allowing investors to earn premiums by selling options and waiting for them to expire.

Cons

  • Limited Upside Potential: The cash-secured put and covered call have limited upside potential and significant downside potential. This means investors may not be able to profit as much as they would with other investment strategies.
  • Rising Implied Volatility: Rising implied volatility can increase the price of options and decrease the value of premiums.
  • Cash Settlement: Cash settlement means investors must make additional transactions, which can add complexity and transaction costs.

Risks

  • Short Put Option: The short put option may expire in-the-money and the underlying asset price jumps higher, resulting in a loss for the investor.
  • Covered Call: The covered call may expire in-the-money and result in a net loss if the market turns lower.

In short, while the Wheel Strategy can provide a steady income stream, it also has limitations and risks that investors should consider before using it.

Setting Up the Wheel Strategy

When using the wheel strategy, make sure you have enough money in your trading account to cover the difference between the strike price and the settlement price if the option expires in-the-money. This will make sure that the short put is "cash-secured."

To choose which put option to sell, consider the following:

  • How far below the current market price should the strike price be to achieve the desired result (either expiring worthless or being exercised)? If the goal is for the option to expire worthless, selling a put with a strike price way below the current market price works better.
  • How many days-to-expiration (DTE) should the option have? Selling near-dated puts with between 30-40 (DTE) offers a good way to maximize time decay.

If you want to acquire the underlying asset, choose a higher strike price you believe will expire in-the-money. Before deciding which maturity (expiration date) to sell, consider how the option premium changes over time. All options lose value as the expiration date draws near. Theta measures the rate at an option premium declines over time – it’s highest for At-The-Money (ATM) options and decreases when a strike price moves further into-the-money or out-of-the-money. For best results, sell near-dated puts.

To choose which call option to sell, consider the same factors used to determine which put to sell. When selling a covered call, make sure you hold the underlying crypto asset while the short-call contract is active. Similar to the put, selling a near-dated call option with between 30-40 DTE offers a good mix of value and flexibility.

Wheel Strategy

Delta is a tool that helps you choose which strike price to use with the wheel options strategy. It measures how an option's price changes when the underlying asset moves by $1.00. Call options have a positive delta ranging between 0 and 1, while put options have a negative delta ranging between -1 and 0.

It is supposed to show us how much the price of a call option will increase when the underlying asset rises by $1.00, and how much it will decrease when the asset drops by $1.00. Put options work in the opposite direction: they gain value when the underlying asset falls and lose value when it rises.

  • Typically, an at-the-money call option will have a delta of 0.50, meaning the premium will +/- $0.50 for every $1.00 move in the underlying price.
  • Delta decreases as a call option moves further out-of-the-money (higher than the current market price), and increases as it moves deeper into-the-money (lower). The opposite is true for put options.
  • If you want to increase your chances of a strike price expiring in-the-money, look for options with a higher delta. An at-the-money option has a 50/50 chance of expiring in-the-money, while a delta of 0.20/-0.20 has a lower chance of 20%. So a higher delta means a higher chance of expiring in-the-money, while a lower delta means a lower chance of expiring in-the-money. Keep this in mind when choosing which options to trade.

It's important to remember that there are risks involved in this strategy, such as the short put option expiring in-the-money, and the covered call expiring in-the-money by more than the premium received. However, by carefully selecting the put and call options to sell and managing your risk, you can maximize your profits with the Wheel Strategy.

Step 1: Sell Out-of-The-Money (OTM) Cash-Secured Puts

The first step in the wheel strategy is to continually sell OTM cash-secured puts to collect option premiums. If the put option expires worthless, the writer keeps all the premium and repeats the process until a put eventually expires in-the-money (ITM). At this point, the option writer's account is debited for the difference between the strike price and the settlement price, minus the premium received.

It's important to note that Bybit's USDC crypto options are "cash-settled," meaning that no physical transfer of ownership takes place when exercising an option contract. Instead, the option seller's account is credited or debited to the associated cash (USDC) position.

Example:

An investor sells one BTC $20,000 put option and receives a $2,000 premium from the buyer. The option contract expires at a settlement price of $19,000, and the seller's account receives a credit of +$1,000 USDC (Strike Price – Settlement Price + Premium Received).

Step 2: Sell Out-of-The-Money (Covered) Calls

Now that the investor is holding the underlying crypto asset, the second step is to sell out-of-the-money (covered) calls to generate a consistent income. When a call option eventually expires in-the-money, the investor has two options:

  • Option 1: Sell the underlying crypto asset and return to Step 1, selling cash-secured puts.
  • Option 2: Keep the underlying asset and continue selling covered calls to generate income.

Who is the Wheel Strategy for?

The Wheel Strategy is a low-risk, high-return trading strategy that can be used to generate consistent income while minimizing the risks of holding cryptocurrency assets. It requires careful selection of both put and call options to maximize profits, but can provide investors with a steady stream of dividend-like income when done correctly.

This strategy is best suited to investors with an intermediate understanding of options trading, and knowledge of how option premiums move in relation to underlying asset prices. It also requires patience and flexibility as the strategy may take some time to find success. However, if done correctly, it can provide a consistent income stream that can help you achieve your investment goals. Good luck!

When to Use the Wheel Strategy

Timing is crucial for implementing the Wheel Strategy effectively. The best market conditions for the Wheel Strategy are when the market is range-bound, moving sideways with well-defined support and resistance levels, especially at round numbers. During such times, investors can leverage this strategy to generate positive returns in the following ways:

  • Earn a passive income by selling options and collecting premiums when the options expire worthless.
  • Lower the cost of acquiring the underlying crypto asset by selling short puts that expire in-the-money.
  • Increase the net sale price of the underlying asset by selling short calls that expire in-the-money.

Use Wisesheets to execute the Wheel Strategy like a pro

The Wheel Strategy can be a great way to generate consistent income while minimizing the risk of holding crypto assets. By carefully selecting and managing your positions, you can maximize your profits in both rising and falling markets.

Wisesheets is the perfect tool for executing this strategy. It’s a powerful add-on for Excel and Google Sheets that allows stock investors to get all the data they need on their spreadsheets.

Live stock data Excel

Here are a few ways that investors can use Wisesheets for the wheel strategy:

  1. Screen stocks: Wisesheets allows investors to quickly screen for stocks that meet certain criteria, such as a minimum market cap or a certain dividend yield. This can be helpful for investors looking to find stocks that are suitable for the wheel strategy.
  2. Track portfolio performance: Wisesheets allows investors to track the performance of their portfolio, including the premiums collected from selling options and the returns generated from holding the underlying assets. This can be helpful for investors looking to monitor the success of their wheel strategy over time.

Using Wisesheets for the wheel strategy can help investors maximize their profits, minimize risks, and keep track of their portfolio performance with ease. With this powerful tool, investors can take advantage of market volatility and make the most of their investments.

Try it for free today!

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