“The Options Wheel Strategy” by Freeman Publications covers the cycle of using cash-secured puts and covered calls together. I have personally used this strategy to some extent.
The book details the options wheel, selecting the right stocks, and positioning your wheel alongside your more extensive portfolio.
After using the wheel for six months, I am not a massive fan of the system. However, it is the perfect strategy to safely get your feet wet in the world of options trading.
1) The most critical part of using the wheel strategy is running it on stocks you would like to own.
2) I used the wheel on good stocks but didn’t want to own them. This caused me to dislike the strategy immensely. However, I would have had a much better time if I had wanted to hold them.
3) Prepare yourself for the costs. When you run the wheel, you’ll need to own the stocks (covered calls) or have the cash to purchase the stocks (cash-secured puts).
4) The options wheel is excellent because it teaches you the importance of time decay. Options are like hot potatoes; you don’t want to be the one holding the bag. However, “selling” and “buying” options have a different time decay effect on your holdings.
5) Find and use only a few good stocks. Running the wheel on tons of stocks can confuse you. Run it on a few reliable stocks where you understand their behavior.
I find that the wheel ties up a lot of your capital for not a large return. However, if you want to own the underlying stock, then it is free money.
Options premiums are much higher on volatile stocks; however, if you own them, they will quickly become a nuisance.
Keep an eye on your cost basis because it is the most vital part of running the wheel. If your cost basis is lower than the stock price, you’ll have the ability to print money indefinitely. Good Luck!
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