Have been looking at the wheel strategy for a few months now but would like to make it more formal by recording the trades and fine tune the strategy. There are a number of good videos about the wheel strategy online although it seems that most of them make it way too complicated than what it is.

Which stock or instrument to use? Not sure yet. I've run the strategy on AAPL and was assigned 100 shares a couple of weeks ago. Overall, I'm in the green and if the price stays above 144 by next week Friday then the short Call (at 144) will result in the sahres being called away.

I have this idea that combining futures swing trading with the wheel strategy might have some potential. But to start simple, I'll go with MES and adjust the approach as it progresses.

I have accounts with both IB and Tastyworks but will use Tastyworks since it's a bit more user friendly.

Therefore, to get going:

Instrument: MESZ1
Current Price: 4477.50
Expiration: Oct 29 (will aim for 8-12 DTE)
Short Put: Not sure how far will be optimal but will go with 1 STD according to the Tasy platform for now which is 4365
Bid/Ask: Is a bit of a problem with the options on futures. It's now 9.00 / 13.25 so not great.
Price: 11.00 (it sat for 1 hour at the mid-price of 11.25 but couldn't get a fill so dropped it to 11.00)
Total Est Cost: $52.98 (after commissions and fees)
Buying Power: Reduced by $1,035
Delta: 0.17
Theta: 1.235
PoP: 87%

@PK007

As you ask this question, could you may just kindly give a more simple brief overlook how you understand this specific hedge strategy from your point of view.

This really just in short, but with clear numbers and targets as you understand it. So people who are not aware what the "Wheel Strategy" is will easier jump into this question instead loosing time to first find out about what it is.

Example: (Buy this here, sell this there, buy here this paper/s, sell it there, add this leg now and so on)

In Options-Hedge strategy trading we have many names for various strategies and this confuses many, specially when there are not the classical names you can find in most, even very sophisticated books about option trading, are used. I even could talk about "Christmas Trees" strategies, but this would be confusing for members who want to jump into the thread.

Your choice if you want to make such a few word post with numbers. I will read in the background and jump in as soon as I think it is going to expand knowledge. You may even show a brief idea on any chart or on any Option/Hedge analyzing picture with your legs, what you have in mind in general.

Symple

Symple 

@PK007 As you ask this question, could you may just kindly give a more simple brief overlook how you understand this specific hedge strategy from your point of view. This really just in short, but with clear numbers and targets as you understand it. So people who are not aware what the "Wheel Strategy" is will easier jump into this question instead loosing time to first find out about what it is. Example: (Buy this here, sell this there, buy here this paper/s, sell it there, add this leg now and so on) In Options-Hedge strategy trading we have many names for various strategies and this confuses many, specially when there are not the classical names you can find in most, even very sophisticated books about option trading, are used. I even could talk about "Christmas Trees" strategies, but this would be confusing for members who want to jump into the thread. Your choice if you want to make such a few word post with numbers. I will read in the background and jump in as soon as I think it is going to expand knowledge. You may even show a brief idea on any chart or on any Option/Hedge analyzing picture with your legs, what you have in mind in general. Symple

Apologies Symple, the post wasn't suppose to come through as a question. Just a normal post. Must have pushed the wrong button somewhere.
I'll elaborate a bit more the what the Wheel Strategy is in a separate post.
Thanks

What is the Wheel Strategy?

Very simple actually.

Step 1:

Choose a stock or instrument you won’t mind owning. In this case a went with the MES. But as mentioned in the first post, I also own 100 shares of AAPL. That’s also a position I don’t mind being in.

Step 2:

Sell a cash secured put against that stock or instrument. It’s basically selling a naked put. I’m using 8-11 days date to expiration (DTE). Today is the 20th of Oct so it will be a put expiring next week Friday the 29th for example. Cash secured means you must have the funds in your broker account to be able to buy the stock/instrument if you get assigned. For stocks, that will be for 100 shares.

Now, 2 things can happen:

Step 3.1:

The price of the underlying stays above your put strike price at end of day on the 29th. You therefore just keep the credit you received and nothing else. In the example in the first post, I’ll just keep the $50 as credit.

Step 3.2:

The price falls and closes below your put strike price on the 29th. (You can also be assigned the shares early but that’s a lesson for another day).

Step 4:

You now own the shares or the futures contract and can therefore start selling covered calls. Again 8-11 days out. A covered call is just selling a call above the current share price (out of the money – OTM) when you also own the shares/instrument already. Which strike should you choose? It needs to be close enough to the current share price in order to earn a reasonable credit. But not that close that the shares are called away and you make an overall loss - see "drawbacks" below.

Now, 2 things can happen:

Step 5.1:

The share price stays below your call strike price at expiration. You keep the credit and still owns the shares. So, you can do it again every week and keep all the credits you receive.

Step 5.2:

The share price moves up above the call strike price and the shares are called away at day of expiration. You still keep the credit for the short call, so it lowers your cost base even more. You now have nothing and can start all over again.

So, what are the benefits of the wheel strategy:

1. When you sell the cash secured put, you keep the credit, even if you get assigned the shares, therefore it lowers your overall cost base.

2. After you get assigned the shares or futures contract and sell the call, you keep the credit and it lowers your cost base even more.

The drawbacks:

1. If the share price drops, you get assigned the shares, but it keeps going lower, you might not be able to select a call that is close enough to the share price ((where you can get more credit) but also far enough so when the shares get called away (close above the strike price of the call at DTE), you don’t lose money overall.

UPDATE: I sold the 100 AAPL shares and closed the call yesterday. Not sure if that was the correct decision, but will prepare a P&L table to show the complete list of trades from start to finish which will make it easier to understand the concepts explained above.

MES Trade Update:

The 29 Oct Put lost almost all its value and decided to buy it back for $2.25 + $0.52 costs.

I then sold the 5 Nov 4475 Put (1 SD out) for $50.00.

You might ask why not keep the short 29 Oct put until expiration? I want to get short on next week's put and capture a reasonable amount of credit but also don't want to hold 2 short puts and risk being assigned 2 MES contracts.

Summary of the trades:







Interestingly, you would have made a lot more if you just bought the contract on 19 Oct and sell it on 26 Oct, but the whole point of the wheel strategy is to try and remove some of the pressure to be 100% correct directionally.

Note: To calculate the ROI, I used the margin requirement for 1 MES contract from Tastyworks and it's not annualized. Realistically, you won't put all your money on only 1 trade so just take that into consideration.

Would be interesting to see how others calcuate ROI on option trades?

MES Trade Update:

Like last week, rolled the put to the following week to get a decent credit.

MES Trade Update:

The same

MES Trade Update:

The same

Now that I have more data, thought it might be a good idea to populate it on a chart.

Note, in order to show monthly numbers and not to make it too complicated, I will calculate the Profit/Loss and returns at the time when the last weekly option is closed for the month. This is to avoid trying to calculate realized/unrealized numbers exactly at the end of the month.

November in this case, is only until the 16th and will change as the month progresses.

Massive Disclaimer:

Being a qualified accountant myself, I know how easy it is to make financial results look better than what they really are. In this case, a 15.8% return looks too good to be true.
You must consider the following (I touched on it in my earlier post):
1. The return is only calculated on this one trade strategy using the margin requirement of 1 contract of the MES. It is extremely unlikely that you will put all your money into this one strategy. I definitely don't recommend it.
2. The wheel strategy WILL lose money if the underlying (in this case the MES) has a significant drop, lower than the short put strike and keeps on going lower. What is likely to happen in such a scenario is that I will get assigned and might not be able to sell covered calls, with reasonable premiums, but still a good distance away from the underlying price. This has happened to me before.

One of the main reasons to record the strategy in this journal, is for me to learn. It’s more an experiment and for others to join in and make recommendations on how to manage the strategy better. When I do get assigned eventually, there are a few different variations of the strategy that might be useful to explore. So, it will be useful to have everything documented.
I'm definitely not an expert in this strategy.

PK007 

Would be interesting to see how others calcuate ROI on option trades?

PK007 

The return is only calculated on this one trade strategy using the margin requirement of 1 contract of the MES.

but you said...

PK007 

Sell a cash secured put against that stock or instrument. It’s basically selling a naked put. I’m using 8-11 days date to expiration (DTE). Today is the 20th of Oct so it will be a put expiring next week Friday the 29th for example. Cash secured means you must have the funds in your broker account to be able to buy the stock/instrument if you get assigned.

Since you must have the cash required to buy the stock/instrument if you get assigned, shouldn't the return be calculated based upon that cash amount that you have tied up?