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

[hypercube]

Don't think the guy is trying to sell anything, just wanted to share an option strategy that's making him some money and find out any pitfalls and solutions to those pitfalls from everybody. The thing with options is that it's profitable until it's not. With every single strategy, there is always always a pitfall that will eventually bring you losses. This "wheel" strategy is no exception.

This strategy is a directional move that hinges on the stock being in an uptrend but if the stock is indeed in an uptrend, you could've been much more profitable if you just buy the underlying stock itself, hold it and then sell it later afterwards when the price goes up or if you want to buy the stock with less investment, just buy the call option and then either sell the option afterwards or exercise the option afterwards to buy the stock and then sell the stock if a dividend happened to be paid during the holding of the option.

This "wheel" strategy is such an inefficient way to acquire and sell the stock when With this strategy, assuming that the stock is in an uptrend as you correctly predicted then you will always always be buying the stock above the market price and selling it below the market price at the same time. The only reason why you would be able to buy the stock through assignment from the put is because your put strike is higher than the market price of the stock so you could've bought the stock at a much lower price in the market but you end up buying the stock at a much higher price with the difference between the market price and the strike price larger than the premium that you received by selling the put in the first place. And then assuming the stock goes up afterwards, again you will be forced to sell your stock cheap when you could've reaped a much higher price in the market again possibly with the difference between the market price and the strike price being higher than the premium that you received from selling the call. So this strategy is forcing you voluntarily overpaying to buy the stock and then denying yourself the full profit when selling the stock for just a tiny bit of compensation from the premiums sold when you were and at the same time leaving you still exposed to unhedged, unmitigated losses.

To me, the only way this strategy could possibly be worth it is if the stock is really illiquid or extremely restricted from buying and selling like in the GME and other "meme" stocks cases by several brokerages and acquiring the stock and later on selling the stocks through the options is the only way otherwise it's really not that worth it.

I disagree with this. First, this strategy does not hinge on the stock being in an uptrend at all; it only assumes that it is not in a very sharp downtrend. It will be profitable also if the stock moves sideways (e.g., NVIDIA) or even goes down as long as it doesn't go beyond your strike price minus the premium received; this happens the vast majority of times if you select the right strike price. Second, this strategy actually reduces losses when compared with buying the stock outright, because you collect premium and your losses are strictly smaller no matter how the underlying goes. (However, as you correctly point out, it also limits your gains when the stock is on a very rapid rise, but this is often not the case.) You can think of this method as using a smart limit buy order: you buy the stock when the price goes down by a certain amount, and you get a premium irrespective of whether your order fills or not. (Of course it is not exactly the same because you could cancel a limit order any time but once you enter the trade you need to buy the put back if you want out.) Your third paragraph does not make sense: the only time you will be buying stock is when the price has gone down by a lot, much below the market price when you entered the trade, not above as you seem to imply. This is a good time to buy the stock if you think it's a normal drop and it's not going to collapse indefinitely.

I don't think this is an inefficient strategy at all, as long as you find stocks whose implied volatility is high and overrated, or simply stocks you'd like to buy at a cheap price. I have been using a similar strategy since last year with good returns (70% in 8 months). Its main problem is that the drawdown can be big when the whole market goes down (e.g., in September) because even if the puts you sold are still out of the money, increases in volatility drive the sold puts' prices up faster, which results in a temporarily lower net account value. Thus you incur more risk of getting a margin call in those times.

 

[misterkel]

Keep in mind two things:
1. selling covered calls vs naked puts are identical when executed at the same strike.

Theoretically, that's true, but I do CC's and stock-sub CC's ALL the time. In my experience, fills are much easier selling OTM options (much narrower spreads) and selling calls in general (greater liquidity on the target stocks). Now, if you want to sell ITM CC's then you're probably better off for the same reason with naked puts.

 

[winstonwee]

I sell strangles on stuff like PM, PG, PEP, COST where I'm not expecting a big move either direction even ahead of earnings. I would not sell a call on a meme stock. I did sell puts on GME far OTM (10 strike and 12 strike after it had already moved to $100 and so far those worked out well...already took half the position off at 70% profit). Bottom line, it's hard to use a one-size-fits-all system for selling options. You need to know your risk and assess each opportunity individually.

Yes if you know your risk then is ok. I do it on put so i know my risk. I try not to go over 10% on any single position so if i am wrong and the stock go burst i am down 10%. It will be very painful but i will still be in the game tomorrow

 

[Saltynuts]

When i sell a pltr 25 put i know my max risk is $2500 minus premium receive
But if i sell a straddle my risk on the upside is unlimited. And if a short sequeeze occur in pltr. I would be dead

But the "unlimited upside" risk should be priced into the call you sell, compensating you for that. And such upside risk should be limited anyways because you would have to be NUTS to go all in on one stock or even a few stocks. If you are writing options on 100 different stocks even a Gamestop type event would probably just be a small drop in the bucket.

 

[JSOP]

I disagree with this. First, this strategy does not hinge on the stock being in an uptrend at all; it only assumes that it is not in a very sharp downtrend. It will be profitable also if the stock moves sideways (e.g., NVIDIA) or even goes down as long as it doesn't go beyond your strike price minus the premium received; this happens the vast majority of times if you select the right strike price. Second, this strategy actually reduces losses when compared with buying the stock outright, because you collect premium and your losses are strictly smaller no matter how the underlying goes. (However, as you correctly point out, it also limits your gains when the stock is on a very rapid rise, but this is often not the case.) You can think of this method as using a smart limit buy order: you buy the stock when the price goes down by a certain amount, and you get a premium irrespective of whether your order fills or not. (Of course it is not exactly the same because you could cancel a limit order any time but once you enter the trade you need to buy the put back if you want out.) Your third paragraph does not make sense: the only time you will be buying stock is when the price has gone down by a lot, much below the market price when you entered the trade, not above as you seem to imply. This is a good time to buy the stock if you think it's a normal drop and it's not going to collapse indefinitely.

I don't think this is an inefficient strategy at all, as long as you find stocks whose implied volatility is high and overrated, or simply stocks you'd like to buy at a cheap price. I have been using a similar strategy since last year with good returns (70% in 8 months). Its main problem is that the drawdown can be big when the whole market goes down (e.g., in September) because even if the puts you sold are still out of the money, increases in volatility drive the sold puts' prices up faster, which results in a temporarily lower net account value. Thus you incur more risk of getting a margin call in those times.

Fine the strategy will help you a bit when the stock has moved down by less than the premium collected by selling the call but for that, you would need to like you said have a stock that has a high IV or use a low strike to be able to earn a high enough of a premium. Then if that's the case, if the stock has a high IV then chances are, it could still move a lot, down or up and assume that the stock moves up, then you are still cutting yourself off from a potentially huge profit by having the underlying being called away by the assignment and it would be even worse if you used a low strike.

So fine this strategy really hinges more on the stock doesn't move a lot while having a high IV, i.e. a mispriced IV, but even for option strategies that hinge on mispriced IV, there are far more option strategies that will exploit this lot more efficiently.

 

[winstonwee]

But the "unlimited upside" risk should be priced into the call you sell, compensating you for that. And such upside risk should be limited anyways because you would have to be NUTS to go all in on one stock or even a few stocks. If you are writing options on 100 different stocks even a Gamestop type event would probably just be a small drop in the bucket.

I certaintly do not agree on this. If you have a short straddle on gamestop when it is at $20. Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23. Of course it could be hindsight that we shouldnt sell straddle on gme at 20 strike.
Just not for me. I will stick to what i am doing and what has make money for me. I may loss a bit of extra premium but i sleep better at night
It is just me.

 

[777]

Hi


This is a topic that most are interest in. I am interested in as well
We all want and love to buy low and sell high but it is easier said than done. In fact it is extremely diffcult to be able to do that.
If you look at my portfolio I am always buying the stock at the high.
We can use some technical analysis or candlestick pattern or macd to time your trade but that is at best to me 50/50 maybe I wasnt good enough

Today market is at all time high most of the stock is at all time high so how do we buy low and sell high?
Today I present you a strategy that you can achieve a buy low and sell high

Wait for Stock to pull back a bit
Sell a Cash Secured Put for 1% premium
Roll the Put to a Lower Strike (not necessary step)
Get Assign the Stock (buy low achieve)
Sell Covered call
Roll the Call Higher (not necessary step)
Stock get Call away (sell high achieve)
Repeat the whole process on other stock






In Fact I have made over $5000 using this strategy in Jan 2021 and make over 50% last year trading this alone






Winston Wee
I welcome all feedback and comment and discussion

You do not know what you are doing.

Speak about this with as many believable people as you can.

Good you are posting, hopefully for input.

Best wishes.

 

[winstonwee]

You do not know what you are doing.

Speak about this with as many believable people as you can.

Good you are posting, hopefully for input.

Best wishes.

I would love to hear your comment

 

[Saltynuts]

I certaintly do not agree on this. If you have a short straddle on gamestop when it is at $20. Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23. Of course it could be hindsight that we shouldnt sell straddle on gme at 20 strike.
Just not for me. I will stick to what i am doing and what has make money for me. I may loss a bit of extra premium but i sleep better at night
It is just me.

"Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23."


Wait, what? you say ONE CONTRACT at peak 493 you would have lost 450 PER CONTRACT, which makes sense, but they you say or 45k? How do you get to 45k total when you say only one contract and the loss is 450 per contract?

 

[winstonwee]

"Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23."


Wait, what? you say ONE CONTRACT at peak 493 you would have lost 450 PER CONTRACT, which makes sense, but they you say or 45k? How do you get to 45k total when you say only one contract and the loss is 450 per contract?

options is trade in multiple of 100 shares you know that right?
1 contract of options = 100 shares when assign or exercise
so when you sell a straddle assuming you manage to sell the straddle for $23
and gme shoot to 493
you have lose $450 * 100 shares
$45000 just for trading 1 contract of GME naked call
you can sell it as 1 of the black swam or extreme event but GME give me a wake up call.
The short sequeeze on it is worse than a market crash.
market crash the market tumble 30% (when you have long position)
but a short sequeeze go up a thousand% when it is against you (that should serve as a wake up call)

and talking about diversification the more you diversified the more chance of a short sequeeze occur again. Imagine if you have a 100 stocks and 1 of this happen to be in for another short sequeeze, I couldnt imagine it