How to Buy Low and Sell High in Today Market Using Options Wheel Strategy

[JSOP]

You are really taking the extreme low and high and comparing with my actual trade. I wont be able to buy at the low and sell right at the high at the exact high. Dont think anyone could.
Let look at nio yesterday close at 50.04. So is it good to buy if not at what is your propose level? If buy where is the propse tp?

Ok if you do have a chance to read my entire post which I know is long, I did NOT take the extreme high or extreme low for calculation and illustration purposes. I took the closing prices at the end of the day which are price levels that you could comfortably get a fill at to illustrate my point. And for Nio, I took today's closing price of $50.67 which is actually more favourable for you when you've bought it at $58 from being assigned by your short put.

If you look at it 1 month later it is easy to pinpoint when to buy and sell but at this exact date today 23rd feb on nio.
What is the propose level to buy and sell?
Opportunity cost is wasted if you are not filled for a long time

I could say buy nio at $1 but it is never going to get filled and opportunity cost is wasted here

I don't want to offend you but I don't think you understand the concept of "opportunity cost". Opportunity cost isn't the cost of opportunity lost. It's a term that refers to the concept of the "cost" of what could've been that you have forgone or gave up for making the choice that you made given something that's already happened like a price that has already happened, e.g. a closing price of $56.27 on the day that you got assigned from the short put. That's a price that you could've bought NIO. It's not a price that's in the future to be predicted or couldn't forsee, and on the day of Jan. 15, that's a price that happened on the day that closed that if you had wanted to buy NIO, you could've bought it at. But instead, you got assigned the put and was forced to buy it at $58.00. It's a price that you had no choice but to accept, but by accepting that price, you forwent the possibility of buying the stock at $56.27 that you could've at and because of that, you lost (56.27 - 58) = $1.73. Think of opportunity cost as the "loss" that you incurred by not taking or not being able to take the best choice AT ANY GIVEN MOMENT, not comparing to the future or comparing to the future, JUST at that moment. I will illustrate:

On Jan. 15, 2021, with a closing price of $56.27, you faced FOUR possible purchase scenarios with/without an assignment from the short put:

Scenario 1: You decided not to buy the stock and there is no assignment

Scenario 2: You decided to buy the stock and there is no assignment because you didn't do the wheel strategy

Scenario 3: You decided not to buy the stock buy got assigned from the short put

Scenario 4: You decided to buy the stock and got assigned from the short put

For simplicity, we will assume that you actually wanted to buy NIO and actually didn't mind getting assigned so we won't look at Scenario 3.

So with Scenario 1: You didn't want to buy the stock anyway and since you didn't do wheel, there is no assignment so for you the best choice is spending nothing, $0 and since you didn't do wheel, there won't be any possibility of getting assigned from any short option positions, so the potential cost is also zero. Best choice is zero and you took the best choice of not buying, so the opportunity cost is zero. 0 - 0 = 0.

Scenario 2: You wanted to buy the stock but you didn't do wheel. You wanted to buy on your own. So on Jan. 15, you saw the closing price was $56.27, so you decided to buy the stock at $56.27. For you that was the best choice AT THAT MOMENT, buying the stock at $56.27 so the best choice was $56.27. And since there is no possibility of assignment, so you won't have the possibility of being forced to pay more than $56.27. Since $56.27 was the best price and the best choice AT THAT MOMENT, whether it will be the best price in the future or whether it was the best price comparing to the past, you don't care. At that moment, the best choice to you was to buy the stock and the best price at that moment was $56.27 so you didn't give up anything or incur anything extra by not taking the best choice, so 56.27 - 56.27 = 0. The opportunity cost is also zero.

Scenario 4: You wanted to buy the stock and you did the wheel and got assigned from shorting the put. Now in this scenario, you wanted to buy the stock at the closing price was $56.27. But your put strike price is $58.00. So in this scenario, since you wanted to buy the stock, the best choice is obviously to buy the stock at $56.27 the closing price. That price was available to you; you didn't need to predict it or forecast. It was RIGHT THERE at that moment!! But you couldn't take that best choice because you got assigned. You had no choice but to pay $58 to buy the stock. If you had a choice between buying the stock at $56.27 and $58, would you have chosen to buy the stock at $58? Certainly not because that's not what you did in Scenario 2. But in this scenario, you had no choice but to take the choice that's NOT the best choice which is buying the stock at $56.27, you had to pay $58.00. So now the best choice is $56.27 but you had to pay $58, so now you have incurred something extra to deviate from the best choice, and that we call that something extra the opportunity cost, the difference between the best choice and the choice you end up making. In this case, it's 56.27 - 58.00 = 1.73. Yes you got compensated by the premium that you earned, $1.33 so your net opportunity cost is still 0.40. Yes you can argue what if I didn't get assigned, I would've had no opportunity cost but that's not available to you as a choice. As long you short an option, you always have to accept the possibility of getting assigned and when you do, you will ALWAYS be buying the stock at a worse price than the best choice, thus incurring an opportunity cost. That's what and many of the posters here are trying to illustrate to you. And I hope I have made it clearer to you now.

The other profit-taking scenarios with/without the call option assignment and holding onto the stock to covering the call work the same way.

This is why I say wheel strategy is overpaying to buy and cutting profit short when selling via the option assignment and not even able to profit while earning smaller premiums. What is the future price and what's a best price to go in a stock, what price can you get filled at is irrelevant. Any price is a good price and no price is ever a good price. Nobody can predict that and wheel strategy can't predict that either. On Feb. 1, you sold a call at $63 strike to expire on Feb. 5, but for that entire week, the price never went above $60, did that strike predict the tp price correctly?

 

[winstonwee]

Ok if you do have a chance to read my entire post which I know is long, I did NOT take the extreme high or extreme low for calculation and illustration purposes. I took the closing prices at the end of the day which are price levels that you could comfortably get a fill at to illustrate my point. And for Nio, I took today's closing price of $50.67 which is actually more favourable for you when you've bought it at $58 from being assigned by your short put.



I don't want to offend you but I don't think you understand the concept of "opportunity cost". Opportunity cost isn't the cost of opportunity lost. It's a term that refers to the concept of the "cost" of what could've been that you have forgone or gave up for making the choice that you made given something that's already happened like a price that has already happened, e.g. a closing price of $56.27 on the day that you got assigned from the short put. That's a price that you could've bought NIO. It's not a price that's in the future to be predicted or couldn't forsee, and on the day of Jan. 15, that's a price that happened on the day that closed that if you had wanted to buy NIO, you could've bought it at. But instead, you got assigned the put and was forced to buy it at $58.00. It's a price that you had no choice but to accept, but by accepting that price, you forwent the possibility of buying the stock at $56.27 that you could've at and because of that, you lost (56.27 - 58) = $1.73. Think of opportunity cost as the "loss" that you incurred by not taking or not being able to take the best choice AT ANY GIVEN MOMENT, not comparing to the future or comparing to the future, JUST at that moment. I will illustrate:

On Jan. 15, 2021, with a closing price of $56.27, you faced FOUR possible purchase scenarios with/without an assignment from the short put:

Scenario 1: You decided not to buy the stock and there is no assignment

Scenario 2: You decided to buy the stock and there is no assignment because you didn't do the wheel strategy

Scenario 3: You decided not to buy the stock buy got assigned from the short put

Scenario 4: You decided to buy the stock and got assigned from the short put

For simplicity, we will assume that you actually wanted to buy NIO and actually didn't mind getting assigned so we won't look at Scenario 3.

So with Scenario 1: You didn't want to buy the stock anyway and since you didn't do wheel, there is no assignment so for you the best choice is spending nothing, $0 and since you didn't do wheel, there won't be any possibility of getting assigned from any short option positions, so the potential cost is also zero. Best choice is zero and you took the best choice of not buying, so the opportunity cost is zero. 0 - 0 = 0.

Scenario 2: You wanted to buy the stock but you didn't do wheel. You wanted to buy on your own. So on Jan. 15, you saw the closing price was $56.27, so you decided to buy the stock at $56.27. For you that was the best choice AT THAT MOMENT, buying the stock at $56.27 so the best choice was $56.27. And since there is no possibility of assignment, so you won't have the possibility of being forced to pay more than $56.27. Since $56.27 was the best price and the best choice AT THAT MOMENT, whether it will be the best price in the future or whether it was the best price comparing to the past, you don't care. At that moment, the best choice to you was to buy the stock and the best price at that moment was $56.27 so you didn't give up anything or incur anything extra by not taking the best choice, so 56.27 - 56.27 = 0. The opportunity cost is also zero.

Scenario 4: You wanted to buy the stock and you did the wheel and got assigned from shorting the put. Now in this scenario, you wanted to buy the stock at the closing price was $56.27. But your put strike price is $58.00. So in this scenario, since you wanted to buy the stock, the best choice is obviously to buy the stock at $56.27 the closing price. That price was available to you; you didn't need to predict it or forecast. It was RIGHT THERE at that moment!! But you couldn't take that best choice because you got assigned. You had no choice but to pay $58 to buy the stock. If you had a choice between buying the stock at $56.27 and $58, would you have chosen to buy the stock at $58? Certainly not because that's not what you did in Scenario 2. But in this scenario, you had no choice but to take the choice that's NOT the best choice which is buying the stock at $56.27, you had to pay $58.00. So now the best choice is $56.27 but you had to pay $58, so now you have incurred something extra to deviate from the best choice, and that we call that something extra the opportunity cost, the difference between the best choice and the choice you end up making. In this case, it's 56.27 - 58.00 = 1.73. Yes you got compensated by the premium that you earned, $1.33 so your net opportunity cost is still 0.40. Yes you can argue what if I didn't get assigned, I would've had no opportunity cost but that's not available to you as a choice. As long you short an option, you always have to accept the possibility of getting assigned and when you do, you will ALWAYS be buying the stock at a worse price than the best choice, thus incurring an opportunity cost. That's what and many of the posters here are trying to illustrate to you. And I hope I have made it clearer to you now.

The other profit-taking scenarios with/without the call option assignment and holding onto the stock to covering the call work the same way.

This is why I say wheel strategy is overpaying to buy and cutting profit short when selling via the option assignment and not even able to profit while earning smaller premiums. What is the future price and what's a best price to go in a stock, what price can you get filled at is irrelevant. Any price is a good price and no price is ever a good price. Nobody can predict that and wheel strategy can't predict that either. On Feb. 1, you sold a call at $63 strike to expire on Feb. 5, but for that entire week, the price never went above $60, did that strike predict the tp price correctly?

I have to salute you for writing this lengthy post. For that I give you a thumbs up. We could have different opinion in our trading. I didnt want to go on a disagreement with you, We each have our own opinion and know what best work for us. By using my 58 strike wasnt really fair to me. Because you didnt look at all my previous trade in which i quietly pocketing the premium

Also when you say the 56.27 was available to me yes, just like today NIO close at 50.68. (this price is available to me today I could have got it right here and then if I wanted to own NIO now. But I wouldnt know if NIO will go up from here or may go down further than all the Fibonacci stochastic number would come out to tell me if NIO is a good buy at 50.68. Using Wheel I could sell a 45 put and oh yeah if NIO shoot to $70 than I would lose $20 from the move. But what if NIO didnt shoot there or in fact drop to 46. Then I stand to gain and next week I could sell a 40 Put. That way when I am assign I am guaranteed to buy a low price from the initial date as of today.

Again we can disagree here again on which is better and there will be no end to the discussion that 50.68 is available to me.
What if I want to buy at 45 why dont I just sell a CSP put at 45 and collect some premium. Your logic is when NIO drop it may drop to 43.25 (so that price is available to me again) so I want to buy NIO at 45 or better how would I know if 43.25 is the best available price or maybe 42.50 will be available 30 mins later and who knows end of the day 39.50 is available. All this while i would need to color my chart and use all the calculator to convince myself that actually 41.25 is the best price and for all you know i can keep trying to get the best available price and never get it.

And for joke of the day
" My calculator actually tell me NIO APPL AMD best available price is $30, AMZN and TSLA at $300 is best available price. GME at 0.50, BLNK 19.99, IPOE at 5.67.I will dream tonight that I am filled at this price for this stock "
Peace out

 

[hypercube]

There is no "alpha" in your strategy at all, as I think so many around here would say.

Not that you can't make money off it, just that there is no particular reason to think you'd make more money with it over any other strategy.

That's quite a meaningless comment to make. Sure, if you assume markets are perfectly efficient, then there is no "alpha" in this strategy, or any other. Is there any strategy that you wouldn't object to on exactly the same grounds?

Part of the edge of this strategy is that it is very forgiving of your stock selection. Assuming you have a slight edge on picking the right stocks, it amplifies your margin for error. Sure if you had amazing insight you could have made much more money by buying bitcoin or out of the money Tesla calls last year, for instance. But the beauty of the strategy here is that it works even if you don't guess correctly how much or when the underlying is going up; it's profitable most of the time even when it goes down, and very often beats buying the underlying.

Notice also that expected returns (even if risk-adjusted) are only part of the story. If, for example, you come up with a leveraged strategy that beats the market most of the time, does not beat it on expectation, and yet the probability that you go bust during your trading life is small, it could make perfect sense to use it. I'm not necessarily claiming that this is the case here but it's not far off.

 

[hypercube]

Several people? So far it's only the bluewater idiot who doesn't even bother to read what I wrote. And at the end, he didn't even understand what the wheel strategy is. He's using ATM options and thinking that's part of wheel strategy and wasting everybody's time until @qlai called him out.

Well I have also refuted your claims, for example in the post you are citing.

Besides, your "opportunity cost" analysis is totally wrong. There is an opportunity cost in buying/selling the stocks directly that you keep ignoring. You fail to realize that if today you have decided to buy a stock and you think that 40$ is a fair price, then there is an opportunity cost in setting a limit buy order at 40$, because you could instead sell a put at strike 40$. Who cares if one month later the stock drops to 20$ and you get assigned the 40$ put? It is irrelevant because, had you bought the stock at 40$ as you are proposing, you would be in a strictly worse position! You made the decision that 40$ was a good entry price, and whether the put gets assigned or not you are in a better position that if you had bought the underlying directly when you decided to do so. You are comparing the price today at 60$ with the 40$ price one month later, but this is an apples to oranges comparison as you didn't know that when you initiated the trade. And similarly, if you want to sell the stock, it is better to sell a covered call instead of setting a limit sell order.

The disadvantage of wheel-like strategies is NOT the opportunity cost you seem to think. If you are simply looking at the payoff on expiration day, these strategies are strictly superior to trading the underlying directly as you are advocating. The disadvantage is what happens between those dates; if volatility increases your NAV will go down in between, even if your trade is profitable on expiration.

 

[tsznecki]

@hypercube I called you out for you posting on an alias instead of your main user name in a post.

Now my earlier post has been removed. Either you are a massive bitch, or you are sucking the cock of @Magna

 

[ironchef]

No this has nothing to do with the prediction of future moves. I am not talking about whether the stock will reach a certain price or not. I am saying when the price of the stock WAS ONLY $20 and you had to pay $40 to buy it at double the price AT THE SAME TIME because you got assigned from shorting the put when you could've really bought it at $20 because that price was available to you. And when the stock ALREADY reached $100 at the same time you are only going to get $50 from again being assigned from shorting the call. Again that $100 is already reached, not some price that you still have to predict whether the stock will reach or not. The stock has already reached that price, $100! But because of the assignment of the call, you could only get $50 when you could've sold it for $100 if you've held stock itself or even a call. Opportunity cost is what I am talking about and I am just using arbitrary prices.

And quite honestly if you have call strike being so far apart from the put strike, you wouldn't be earning that much premiums. But if you want to earn some decent premiums then you would need to have the call and put strikes to be closer to each other and that just cuts off the potential profit even more especially should the price goes up for a large amount with the possibility of a potentially huge downfall that is unprotected and unhedged.

Anyway you said:


So I am giving you feedback and comment and discussion.

Been there done that back in 2013. Exact reasons why after six months, I stopped mechanically selling covered calls and writing cash secured puts.

On the other hand, almost any system with some up bias will work well in a bull market with stocks in a general up trend.

We shouldn't be too hard on OP, he is excited to share his winning strategy and I am thankful.

 

[BlueWaterSailor]

Been there done that back in 2013. Exact reasons why after six months, I stopped mechanically selling covered calls and writing cash secured puts.

On the other hand, almost any system with some up bias will work well in a bull market with stocks in a general up trend.

And this is exactly why you need to have more than one well-tested strategy under your belt. I'm doing the wheel while it pays - but also digging like hell into strategies that will work in other market environments. It's not The One Holy Grail - just something that's been working very well for me and a number of others.

We shouldn't be too hard on OP, he is excited to share his winning strategy and I am thankful.

Unfortunately, there's an accepted dynamic here on ET of panning the hell out of anything positive - and given that consistent returns in trading are a rather fragile thing that takes effort, focus, and awareness of a lot of different factors, it's trivially easy to criticize and mock. On the one hand, there's a benefit to this: it makes it easy to identify (and block) jealous losers because they will always take that cheap shot. But on the other hand, it kills off any desire that people, especially newbies, have for sharing what they've discovered.

There's not much to be done about it - even the best-kept lawns will have a dog turd on them sooner or later - but it's a bit sad, since it damages the utility of this forum.

 

[hypercube]

@hypercube I called you out for you posting on an alias instead of your main user name in a post.

Now my earlier post has been removed. Either you are a massive bitch, or you are sucking the cock of @Magna

@tsznecki
Your post was removed because I reported it for your false accusation and unwarranted insults.

I should do it again but I guess it's easier simply to put idiots like you in my ignore list. Obviously you can't contribute to the discussion or give any arguments about the content of my posts.

And LOL at "calling me out". This is my only account here.

 

[qlai]

Been there done that back in 2013. Exact reasons why after six months, I stopped mechanically selling covered calls and writing cash secured puts.

I am trying to do both. One one hand, I want to have a relatively “stable and predictable income” stream. On the other, I don’t want to miss great opportunities when they come up.
So I approach these two methods as two separate strategies. When I believe the market is unlikely to rip in either direction, I start running some sort of premium capture with portion of account. When I believe we are about to move, I start being more cautious of selling premium. I am never overextended, so if my read is wrong, I am unlikely to get hurt.

I am not trying to get the most money out of the market, just to satisfy the two objectives described earlier. And I am far from have had figured this out.

I'm doing the wheel while it pays - but also digging like hell into strategies that will work in other market environments. It's not The One Holy Grail - just something that's been working very well for me and a number of others.

Yes! Exactly that.

 

[JSOP]

I have to salute you for writing this lengthy post. For that I give you a thumbs up. We could have different opinion in our trading. I didnt want to go on a disagreement with you, We each have our own opinion and know what best work for us. By using my 58 strike wasnt really fair to me. Because you didnt look at all my previous trade in which i quietly pocketing the premium

Also when you say the 56.27 was available to me yes, just like today NIO close at 50.68. (this price is available to me today I could have got it right here and then if I wanted to own NIO now. But I wouldnt know if NIO will go up from here or may go down further than all the Fibonacci stochastic number would come out to tell me if NIO is a good buy at 50.68. Using Wheel I could sell a 45 put and oh yeah if NIO shoot to $70 than I would lose $20 from the move. But what if NIO didnt shoot there or in fact drop to 46. Then I stand to gain and next week I could sell a 40 Put. That way when I am assign I am guaranteed to buy a low price from the initial date as of today.

Again we can disagree here again on which is better and there will be no end to the discussion that 50.68 is available to me.
What if I want to buy at 45 why dont I just sell a CSP put at 45 and collect some premium. Your logic is when NIO drop it may drop to 43.25 (so that price is available to me again) so I want to buy NIO at 45 or better how would I know if 43.25 is the best available price or maybe 42.50 will be available 30 mins later and who knows end of the day 39.50 is available. All this while i would need to color my chart and use all the calculator to convince myself that actually 41.25 is the best price and for all you know i can keep trying to get the best available price and never get it.

And for joke of the day
" My calculator actually tell me NIO APPL AMD best available price is $30, AMZN and TSLA at $300 is best available price. GME at 0.50, BLNK 19.99, IPOE at 5.67.I will dream tonight that I am filled at this price for this stock "
Peace out

We are looking at different things. You are looking at things that might not be and thinking that wheel will help you to get something. I am looking at things that happened and were available seeing what could've been and seeing how wheel didn't get you the best deal. Like I said, nobody knows the future but what's important is getting the best thing, achieving the highest price efficiency among all the trading choices.

Well I have also refuted your claims, for example in the post you are citing.

Besides, your "opportunity cost" analysis is totally wrong. There is an opportunity cost in buying/selling the stocks directly that you keep ignoring. You fail to realize that if today you have decided to buy a stock and you think that 40$ is a fair price, then there is an opportunity cost in setting a limit buy order at 40$, because you could instead sell a put at strike 40$. Who cares if one month later the stock drops to 20$ and you get assigned the 40$ put? It is irrelevant because, had you bought the stock at 40$ as you are proposing, you would be in a strictly worse position! You made the decision that 40$ was a good entry price, and whether the put gets assigned or not you are in a better position that if you had bought the underlying directly when you decided to do so. You are comparing the price today at 60$ with the 40$ price one month later, but this is an apples to oranges comparison as you didn't know that when you initiated the trade. And similarly, if you want to sell the stock, it is better to sell a covered call instead of setting a limit sell order.

The disadvantage of wheel-like strategies is NOT the opportunity cost you seem to think. If you are simply looking at the payoff on expiration day, these strategies are strictly superior to trading the underlying directly as you are advocating. The disadvantage is what happens between those dates; if volatility increases your NAV will go down in between, even if your trade is profitable on expiration.

You need to read up more on the definition of opportunity cost. I have written THREE lengthy post explaining the concept and you still don't get it. I am not doing it anymore. The opportunity cost of doing that when I could be doing something else more enjoyable is just too high for me right now.

The disadvantage of the wheel strategy is not just the opportunity cost I agree. It's also the downside risk that doesn't have to be extreme but is just too large to be compensated by the income generated from option selling like today, NIO went down to $49.11 and @winstonwee is still holding it from $58.00, a loss of $1.56. And yet a put at a strike of $50 was only written for 55 cents. And if the price falls further on the expiration date and if the put is still not closed out, @winstonwee is going to get assigned another batch of NIO stocks incurring again opportunity cost, everybody's favorite concept.