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

[guru]

I agree with your post in general but I keep seeing people throw this "covered call == naked put" mantra and it's just not true

The difference: when trading covered calls you also get dividends.

That's a separate topic that doesn't change anything because when you do the Wheel then you will randomly have a covered call vs naked put at different times, so sometimes you'll get a dividend and sometimes not. This needs to be tested separately to not mix two different issues. Each thesis needs to be tested separately, one related to the Wheel, another one related to dividends. So when testing naked puts simply test stocks without dividends.
You can also test only selling covered calls and getting dividends. Once you compare all scenarios you'll know enough to talk about this like a pro

 

[Aquarians]

That's a separate topic that doesn't change anything because when you do the Wheel then you will randomly have a covered call vs naked put at different times, so sometimes you'll get a dividend and sometimes not. This needs to be tested separately to not mix two different issues together. Each thesis needs to be tested separately, one related to the Wheel, another one related to dividends. So when testing naked puts simply test stocks without dividends.
You can also test only selling covered calls and getting dividends. Once you compare all scenarios you'll know enough to talk about this like a pro

Back of the napkin calculation say that you hold stock about 50% of the time. Therefore you get about half the dividends, which in case of SPY is about half of 1.5% year. Not much but enough to cover commissions, which otherwise you need to pay from the premium collected.

 

[guru]

Back of the napkin calculation say that you hold stock about 50% of the time. Therefore you get about half the dividends, which in case of SPY is about half of 1.5% year. Not much but enough to cover commissions, which otherwise you need to pay from the premium collected.

Do your "back of napkin" calculations tell you about put-call parity and that you can sell naked puts for more money due to dividends, therefore they may be equal to covered-calls + dividend?

 

[BlueWaterSailor]

Ancient "system" sometimes touted by scammers. Likely to do a little better than the markets in down to flatish conditions. And worse during strong bull runs.

Bit of overstatement, I'd say. Yeah, this OP is coming off extremely scammy, but (like much else in trading) the devil is in the details; now that I've worked it out, my "tuned for me" version of the wheel has been paying all my bills for a while, and has now started topping up my bank account and my IRA. It won't replace my former salary - at least not until I grow the account some more - but I'm happier doing this than anything else I've ever done working for someone else.

I'm not boasting - good god, there's a number of people here who could spend the equivalent of my total account size for lunch and never miss it - but starting from ~$71k total and barely any knowledge of trading (my first ever wheel trade was on 7/23/2019), I've made $37.6k, with my total trading losses being $2373 during that same stretch. The key point here is that skill and practice make all the difference in the world: almost a third of those returns ($10.7k) are from this year, with the preceding third coming from 2.5 months before that. Yeah, in the absolutely worst case - total market crash that involves all the trades I've got on - I'll end up holding a bunch of losing stocks. But the opportunity cost of NOT taking that risk would have been over 50% of my account size, plus the knowledge of trading that I've gained during that time (which I consider to be infinitely more valuable), plus the independence that I've gained by having that skill. Yeah, that's a return I'll take a risk for, every time.

So yeah: it's possible to do quite well trading the wheel. But it takes one hell of a lot more than just a couple of silly rules... learning how to do everything that's needed, in every situation that the market has thrown at me so far, has been a huge mountain to climb, so I'm just as snarky at the OP's simplistic bullshit as anybody could be. But "ancient system", or returns below market? Not so much.

 

[guru]

Bit of overstatement, I'd say. Yeah, this OP is coming off extremely scammy, but (like much else in trading) the devil is in the details; now that I've worked it out, my "tuned for me" version of the wheel has been paying all my bills for a while, and has now started topping up my bank account and my IRA. It won't replace my former salary - at least not until I grow the account some more - but I'm happier doing this than anything else I've ever done working for someone else.

I'm not boasting - good god, there's a number of people here who could spend the equivalent of my total account size for lunch and never miss it - but starting from ~$71k total and barely any knowledge of trading (my first ever wheel trade was on 7/23/2019), I've made $37.6k, with my total trading losses being $2373 during that same stretch. The key point here is that skill and practice make all the difference in the world: almost a third of those returns ($10.7k) are from this year, with the preceding third coming from 2.5 months before that. Yeah, in the absolutely worst case - total market crash that involves all the trades I've got on - I'll end up holding a bunch of losing stocks. But the opportunity cost of NOT taking that risk would have been over 50% of my account size, plus the knowledge of trading that I've gained during that time (which I consider to be infinitely more valuable), plus the independence that I've gained by having that skill. Yeah, that's a return I'll take a risk for, every time.

So yeah: it's possible to do quite well trading the wheel. But it takes one hell of a lot more than just a couple of silly rules... learning how to do everything that's needed, in every situation that the market has thrown at me so far, has been a huge mountain to climb, so I'm just as snarky at the OP's simplistic bullshit as anybody could be. But "ancient system", or returns below market? Not so much.

These are nice results, just keep in mind that the market is up 35% since then, and generally The Wheel backtests show that it doesn't perform better than the underlying. There may be exceptions both on the upside and downside, as well as the ways of managing trades, but the issue still remains that people are generally throwing some numbers like '$5K' which mean nothing when not compared to how much they could make without The Wheel. Many also don't understand the difference between covered calls vs naked puts (there isn't any). While most people do this based on good feeling and convincing everyone else that The Wheel is superior to holding stocks, generating (enter some nice looking $ or % profits here).

 

[BlueWaterSailor]

Back of the napkin calculation say that you hold stock about 50% of the time.

See @guru, above. But also, from someone who has traded this strategy 90%+ of the time during the last 18+ months (that includes the 'rona crash, which - obviously - led to a number of assignments), I've held a grand total of 5 stocks during that time. The longest one was just under three months, and the shortest one was a couple of weeks as a dividend play.

 

[BlueWaterSailor]

These are nice results, just keep in mind that the market is up 35% since then, and generally The Wheel backtests show that it doesn't perform better than the underlying. There may be exceptions both on the upside and downside, as well as the ways of managing trades, but the issue still remains that people are generally throwing some numbers like '$5K' which mean nothing when not compared to how much they could make without The Wheel. Many also don't understand the difference between covered calls vs naked puts (there isn't any). While most people do this based on good feeling and convincing everyone else that The Wheel is superior to holding stocks, generating (enter some nice looking $ or % profits here). This is similar to kids convincing themselves that $GME would be over $10K per share by now, if not for greedy hedge funds conspiring to suppress it.

Backtests, just like $BXMD, are based on naive assumptions, so they're not a reasonable representation. I do agree that most people, especially scammers who are trying to rope in the gullible innocents, misrepresent the wheel as some easy way to make money; I'd also say that most who jump into it without solid fundamental knowledge of risk management, etc. are going to lose their money. All I can say is that I run a Telegram group where we focus on the wheel - it's free, so I'm not hyping anything - and we're all doing pretty well. I can't keep track of anybody's account but my own, but given that we all list our entries, exits, and results, my mental snapshot would be that most other folks there are doing about as well as I am.

 

[guru]

Backtests, just like $BXMD, are based on naive assumptions, so they're not a reasonable representation. I do agree that most people, especially scammers who are trying to rope in the gullible innocents, misrepresent the wheel as some easy way to make money; I'd also say that most who jump into it without solid fundamental knowledge of risk management, etc. are going to lose their money. All I can say is that I run a Telegram group where we focus on the wheel - it's free, so I'm not hyping anything - and we're all doing pretty well. I can't keep track of anybody's account but my own, but given that we all list our entries, exits, and results, my mental snapshot would be that most other folks there are doing about as well as I am.

I disagree that backtests are based on naive assumptions. They produce hard scientific data used by quants who are highly paid just to do that. Assumptions are a choice, and can be as naive as people. Most people won't even be able to get results near those that they should because they'll screw up in variety of situations. At least it's unreasonable to expect that more than a small % of people may be able to beat a basic, backtested strategy.
The advantage you may have is in picking high-IV stocks that don't move much, though backtesting those should also show advantages of picking such stocks. So stock picking does work, but that's the part that can also be tested naively with those specific stocks ;-)
As for your group, again, the issue is that people are doing "pretty well" but without reference of how well they'd be doing just by holding the underlyings. When they make 30% over some period then they'll sure be proud and talk to everyone about it, but this really needs to be compared to the underlyings' performance...

 

[BlueWaterSailor]

I disagree that backtests are based on naive assumptions. They produce hard scientific data used by quants who are highly paid just to do that.

Perhaps we mean different things by 'backtest'. The ones I've seen publicized for the wheel have all been based on simplistic assumptions, like the ones posted by the OP, or the ones that BXMD was based on. I've seen one - only one - that was based on a less-naive assumption (I don't recall what it was, but something a bit less idiotic than a simple, crude "sell puts/hold to expiration/sell calls/hold to expiration"), and it did quite a bit better. I suspect that there's an element of self-interest in this: most people who have worked out a system that produces a good return are going to keep it close to their vest, or maybe sell subscriptions. Me, I've been teaching and sharing knowledge for most of my life, and have a rather strong need to "pay it forward" - so I do. Maybe I'm a gratitude junkie, but it's what works for me. I love to see people succeed, especially if I had a hand in it.

I'm sure that there are some backtests that were done by quants that are much more sophisticated than what is available to the public. I certainly don't have access to them. But then, neither does anyone outside the firms that have paid for them - so it's a rather meaningless distinction. Meanwhile, my forward test has already returned enough that I consider it to be fully paid up even if I somehow manage to lose everything... and I don't see how that can happen, since all of my trades are cash-covered, and I don't trade junk underlyings.

Assumptions are a choice, and can be as naive as people. Most people won't even be able to get results near those that they should because they'll screw up in variety of situations. At least it's unreasonable to expect that more than a small % of people may be able to beat a basic, backtested strategy.

You're most likely right. I consider myself very lucky in having gotten this far, and having paid so little for my education. I'll also note that the largest losses I've had in any of the trading I've done - wheel or otherwise - did not come from the market doing its thing, but from technical and other mistakes that I made. The only thing I can say for myself is that I don't make that kind of mistakes more than once.

The advantage you may have is in picking high-IV stocks that don't move much, though backtesting those should also show advantages of picking such stocks. So stock picking does work, but that's the part that can also be tested naively with those specific stocks ;-)
As for your group, again, the issue is that people are doing "pretty well" but without reference of how well they'd be doing just by holding the underlyings. When they make 30% over some period then they'll sure be proud and talk to everyone about it, but this really needs to be compared to the underlyings' performance...

I wish I could find stocks that don't move much but have a high IV - I'd grab those unicorns by the ears and ride them for the rest of my life! But "just holding the underlying" would not be a reasonable comparison even if such stocks existed: if a given stock cycles around an average price, I can make money by selling a put every time it bottoms out - but holding it would have produced no return over the long term while tying up all of my cash. That's why returns can only be compared against the broad market.

There's a number of advantages to the wheel over B&H, but I'm not going to get into those subtleties now. I'll just say that the risks of B&H don't appeal to me - and that I don't consider hindsight, or naive backtests, anything like sufficient evidence to change.

 

[qlai]

All I can say is that I run a Telegram group where we focus on the wheel

Hey, when I run the wheel on individual stocks, I think about it more as Swing Trading strategy with options. In other words, I start selling puts only at a point where I would normally start getting long the stock. Curious if you incorporate any technical analysis or other factors in your decision process.