Options wheeling is an options trading strategy that involves selling cash-secured puts and covered calls. The goal of options wheeling is to generate income and build a portfolio of stocks that you are bullish on.
How Options Wheeling Works
Options wheeling is a five-step process:
- Sell a cash-secured put.
- If assigned, buy the stock at the strike price.
- Sell a covered call.
- If assigned, sell the stock at the strike price.
- Rinse and repeat
Illustration of Options Wheeling
Suppose you are bullish on the AAPL. You sell a cash-secured put option with a strike price of $165 and an expiration date of one month. You collect a premium of $500 for selling the option.
Scenario 1: If the stock price is above $165 at expiration, the option will expire worthless and you will keep the $500 premium. Yay!
Scenario 2: If the stock price goes down and is below $165 at expiration, you will be assigned the stock and will be obligated to buy 100 shares at the strike price of $165 for each option.
You will then sell a covered call option with a strike price of $180 and an expiration date of one month. You will collect a premium of $300 for selling the call option.
- If the stock price is above $180 at expiration, the call option will be exercised and you will sell the stock at the strike price of $180. You will keep the $500 premium you collected from selling the put option, the $300 premium you collected from selling the call option, and the $1500 profit from selling the stock. You can then sell another cash-secured put option and start the process over again.
- If the stock price is below $180 at expiration, the call option will expire worthless and you will keep the $500 premium you collected from selling the put option and $300 premium you collected from selling the call option. You will continue to own the stock at a cost of $165 per share. Keep selling call options and collecting the premium until the stock is being called away.
Benefits of Options Wheeling
Options wheeling has several benefits, including:
- Income: Options wheeling can generate income in two ways: from the premium you collect when you sell the put option, and from the premium you collect when you sell the call option.
- Capital appreciation: If the stock price goes up, you will keep the premium you collected from selling the call option. You will also make a profit on the stock if you sell it at a higher price than you bought it for. This happens when you get assigned and you shares get called away.
- Reduce stock cost basis: Selling a put option allows you to collect premium up front which effectively reduce the cost basis of your underlying stock price even if it gets assigned.
Risks of Options Wheeling
Options wheeling also has some risks, including:
- Limited gains: If the stock price goes up, you will only make a profit equal to the premium you collected from selling the call option. You will not make any profit on the stock itself.
- Margin requirements: If you sell a put option, you will need to have enough money in your account to cover the purchase of the stock if you are assigned. Learn more about options margin here.
- Time decay: The value of an option decreases over time, so you may not make as much money as you expect if you sell an option with a long expiration date.
Conclusion
Options wheeling is a long-term options trading strategy that can be used to generate income and build a portfolio of stocks that you are bullish on. However, it is important to understand the risks involved before you start using this strategy.
Here are some additional tips for options wheeling:
- Choose stocks that you are comfortable owning. If you are assigned the stock, you will be obligated to buy it at the strike price. Make sure that you are comfortable owning the stock at that price.
- Set a stop-loss order. A stop-loss order is a type of order that will automatically sell your shares if the price goes below a certain level. This can help you to limit your losses if the stock price goes down sharply.
- Use margin carefully. When you sell put options, you are essentially borrowing money from your broker if you don’t have the cash. This can be a risky proposition, so use margin carefully.
Ready to roll? Check out our Web-based Options Selling Scanner/Screener to make selecting options to sell easier!