How do you find the best stocks for The Wheel Strategy? First, let’s actually talk about this options trading strategy for just a moment, states Markus Heitkoetter of Rockwell Trading.
What is it? How does it work? Why is it so critical to have the absolute best stocks for this strategy?
What Is the Wheel Strategy?
Step Number One is where you sell puts and collect premium. If the stock closes below the strike price that you sold, you get assigned the shares for the strike price you sold the options at.
Step Number Two If the stock closes above the strike price that you sold, then you don’t get assigned, you still collect the premium, and you go back to step number one: sell puts and collect more premium.
Step Number Three is if you do get assigned, then you sell covered calls and collect more premium (if possible).
So this is the basic premise of the strategy. When we are selling put options and collecting premium, this is when we can often get blinded by the premium, and I’ll show you some very, very specific examples.
My Current Trades
You have to select the right stocks for this strategy because you might get assigned the stock at the strike price that you sold. Let me first show you the trades that I am in right now, then we will talk about how to find the best ones.
At the time of writing (March 5, 2021) I’m currently in positions with Apple (AAPL), VanEck Vectors Junior Gold Miners ETF (GDXJ), Lordstown Motors Corp. (RIDE), Riot Blockchain Inc. (RIOT), and Snapchat (SNAP). Now, you might also see, there is some red and there’s some green.
This is why I want to dissect all of these trades with you because I think it is important that you understand this options strategy.
So, we’re going to start with AAPL: I sold the 133 put and I collected premium for this. I recently had a great conversation with somebody, and he called this trade “the dead soldier” when I was assigned.
I own AAPL at $133, and if you look at the chart right now, you will see that this stock is underwater. Right now, I cannot sell calls, and here’s why.
When you’re assigned you sell calls, but only “if possible,” and here’s what I mean by if possible. If possible means if I can collect enough premium, which for me is at least 30% annualized. This is my criteria, your criteria here might be different.
I got assigned AAPL and I have not been able to sell any calls as of yet.
As you can see on this position right now, I’m down over $9,000. Now, keep in mind, I’m trading with $250,000 in cash with this account, which has $500,000 in buying power.
If I’m losing $10,000 on an account with $500,000 of buying power, this is only a 2% UNREALIZED loss for me, or a so-called open profit and loss.
This means only if I would sell AAPL right now, I would REALIZE this loss, which I’m not planning to do because I’m planning to sell calls against it.
This is why it’s referred to as “the dead soldier.” I really like the expression here, or as one of our Mastermind members said,
“Right now, Apple is like the boyfriend who is sitting on your couch playing Xbox all day instead of going out and trying to get a job right and earn some money.”
You get the idea.
So right now, this stock is down, and that is okay because AAPL is a stock that I don’t mind owning temporarily. I believe it’s a good stock and has a pretty good chance to go back up to $133.
Let’s take a look at a chart for AAPL over the past year.
You can see last February we had all the Covid stuff hit, but after this AAPL soared to new all-time highs, which was probably somewhere around September.
And ever since AAPL has been trading between $108 and as high as $144.
Do I believe that Apple has the potential to go up to $144? Absolutely. And if I didn’t believe this, I wouldn’t have traded the stock in the first place.
This is the first rule of The Wheel Club: Don’t sell puts on stocks that you don’t want to own.
I believe that Apple can go up to $144, but I also believe that Apple can potentially go down to $108, and if this happens, I will fly a so-called, “rescue mission.”
A rescue mission means that I’ll start selling more puts, meaning that I would own more AAPL stock at 108. The point of this would be to lower the average price per share for the initial shares I was assigned at $133.
I’m planning to do an article on how to “fly rescue missions” soon, because every now and then, you may have to do one when this happens, but today, let’s first stay focused on how to find the best stocks.
For now, just remember, don’t sell puts on stocks that you don’t want to own.
The next trade is for GDXJ. I previously sold the 48 puts. Now I was assigned the shares at $48 this week because it closed below the strike price when I sold the put.
Now regarding this strategy, I’m just giving you the highlights of the strategy here.
Now I was assigned and own GDXJ, and therefore I can move on to step number three of The Wheel Strategy and sell covered calls.
This is where last Monday (March 1, 2021), there was enough premium available, so I sold the 48 call, and here is how much I made here.
I sold 21 calls for 70 cents, and yesterday I bought them back for 7 cents, I collected 63 cents for each share, $63 per contract.
$63 multiplied by the number of contracts sold, which is 21, this comes to a total of $1,323 in profits that I REALIZED. I was not “called away” so now I can continue to sell more calls.
GDXJ is another stock that I don’t mind owning. It is an index of the gold miners and it is highly correlated to gold.
As gold goes down, so does the mix of the gold miners. Gold right now is probably at a nine-month low, but in the long term, I believe that gold is a safe haven.
So especially when the market is going down, usually gold is going up. Right now, there’s a different focus. The focus is on the yield and bonds. But I’m overall still bullish on gold and therefore also on the gold miners.
This is why I don’t mind owning the gold miners at 48 because there is some good premium in this that can be sold.
In fact, I’m planning to sell more calls, and again for me, my criteria is I want to have more than 30% per year or an annualized premium.
This is how I was able, thus far, to make a little bit over $46,000 in just two months. Not too bad, I think I’m doing quite well here.
If a trade doesn’t meet my criteria, I’d rather wait another day, but for GDXJ, do I like owning it at this price? Absolutely. Do I right now lose a little bit of money on the stock?
Yes. But again, based on my account size, how much I’m losing on this stock is about 1% in an open P&L, and I would only lose it if I close this position right now, which I’m not planning to do because I am following The Wheel strategy where I’m planning on selling more calls.
The next stock I want to talk about is RIDE, which is the next stock that I own. RIDE is actually an electric carmaker, and I sold the 21.50 put.
I was assigned RIDE at 21.50 and right now you see that RIDE is down to $16. Right now, I’m underwater on the stock, but I think that this was a good stock here.
I sold the 22.50 call after I was assigned the stock and I sold 47 of them. I sold it for 30 cents.
So that comes to $30 per contract multiplied by the 47 contracts I sold for a total of $1,410 in profits. Now, I will keep all the premium and this did not get called away.
Now, again, I am down on this, but I still like RIDE, and here’s why. RIDE is about to produce cars, but they are not there with NIO and TSLA yet. NIO and TSLA, are already producing cars.
I want to just overlay this with TSLA so that you see how they compare with RIDE. The orange line went up above up, made a triple top, and is right here is going down. This week, Tesla, same as Ride, is not everybody’s darling.
But we know the story of Tesla, don’t we? I don’t know about you, but I like electric cars. I mean, there are so many initiatives going on a lot around electric cars.
This is why I don’t mind owning RIDE and selling calls against it. Do I believe that RIDE can go back up to these levels up here to 30? Absolutely.
Is this going to have to happen today? No, probably not, but that’s fine because I don’t mind owning RIDE, and this is where we’re going back to rule number one of The Wheel Club: don’t sell puts on stocks that you don’t want to own.
RIOT is the next one. It’s an aggressive trade, so I only took half of a position, and I sold the 27.50 put. I mean, super conservative.
RIOT stayed above 27.50 at the close so I collected the whole premium. I made $14 on each contract, so it’s not a whole lot here because, again, I consider this a fairly aggressive trade. 18 contracts times $14 which comes to $252 in premium.
Now let’s talk about the last trade here which is SNAP. I sold the 52 put, and I sold 19 of them. SNAP closed above 52 so I did not get assigned and kept the whole premium.
I sold 19 of these for $14 each for a total of $266 collected in premium.
Let’s see, where do I stand for the week? I realized $3,254 in REALIZED profits. Now, here is my plan. Now let’s talk about why these stocks are good and which stocks are not good.
How to Find the Best Stocks for The Wheel
My plan is to make $15,000 per month, and to make $15,000 per month, this means that I want to make about $3,500 per week.
I am 250 dollars shy of my goal here, but that is OK because overall I have achieved my goal. And this is where it’s very important that you look at the REALIZED profit, and the realized profit thus far for the year is $49,000.
Based on the $500,000 dollar margin or buying power, it would be around 10% based on the cash that I put in the account, which was $250,000.
You might be wondering about my unrealized profit, but I’m not worried about that at all because as you can see, even those stocks that are down under right now are making me money, besides Apple, who is the “lazy boyfriend on the couch.”
But it’s OK if one stock does not make any money.
It’s super important that you understand the difference between realized profits and unrealized profits. We are doing good thus far. Now let’s take a look at some stocks that are good and some that are not so good.
So how do you find the very best stocks now? First of all, I want to make sure that I have my minimum requirement, which is I want to make at least 30% per year.
This is where I’m using my tool, the PowerX Optimizer, that shows me all of the options that right now give me at least 30% per year. And one of the stocks that popped up today is APHA.
The question is, do we want to own APHA at the strike price? Honestly, I don’t even know what these guys are doing so far seems to be a little bit all over the place.
If you look at my account, and you look at all the stocks that are traded, Apple, AMD, Dropbox, GDXJ, Halliburton, Hasbro Toys, IBM, Nordstrom, Monster Energy Drink, you get the idea, but you see, these are all known stocks.
So how did I find these stocks, and what are the best stocks for The Wheel strategy? Well, the first criteria are, I must be willing to own that stock. For me, in order for me to be willing to own the stock, it means I must know the stock, who they are, and what they do. In other words, I must know the story.
So what is the story of AAPL? Well, we all know it, right? I mean, Apple sells phones, computers, watches, tablets, & all sorts of cool stuff. They are doing really well because they have been doing it for many, many years and they don’t have too many competitors.
They do have the market share. It is established, and therefore I believe it is a super-solid company. I know who GDXJ is, and I know what these guys are doing. I know that RIDE is an electric car manufacturer that has 100,000 pre-orders for their truck that they are producing this year.
Then there’s Snapchat. We all know Snapchat. My kids are using Snapchat. They practically live on Snapchat, so I don’t think that Snapchat is going away. With all of these stocks, I know the story.
Not only do I need to know the story, but the story must make sense.
For example, a stock that always comes up is PTON. PTON for me is a bad example. Do I want to own PTON? No, and here’s why.
I do believe that Peloton did really, really well during the pandemic because everybody was staying at home and they have these cool bikes, and as you see, they were soaring during the pandemic.
I mean, they come from, $15 and went to $150 in less than a year. However, what is their business model? Well, they make bikes, really expensive ones. I think they said that they are releasing a cheap bike right now for about $2,000 and you have a personal trainer built in, but for me, this is a super-easy business model to rip off. I don’t know if you can patent it.
And if a company like Bowflex, who has been doing exercise equipment for a long, long time, or Schwinn, who has been doing exercise bicycles, or some others decide to take these guys on, I believe that they can. This is why I don’t want to own the stock.
This is very subjective because you must want to own the stock. Maybe you have way more insight on PTON and say, you know what, I believe that they will remain the only company who is producing these.
And that is all fine. But the story doesn’t make sense to me. I think that they can easily be ripped off.
Snowflake (SNOW) is another company that doesn’t make sense to me. I still don’t understand what they’re doing. It was probably the most-hyped IPO of the year. It started at $240, went up all the way to $320, and their price has been all over the place.
They are currently trading below their IPO, so I don’t know, but again, for you, it might be different.
Now, here is another thing. There must be enough premium.
Let’s take a look at GDXJ. Right now, it’s trading at 45.61, and markets are closed. But we can see there is there some premium in the 48 strike? And you see right now the last traded price, last traded price was 0.37.
So this is where I like to use my tool, the PowerX Optimizer. Does it make sense for me on Monday to possibly sell again? I bought 2,100 shares at 48. The strike price that I want to sell is 48, right now it is trading at 0.37.
With an expiration of March 12, and you see, for me, my criteria are it must make me more than 35% and it does so therefore I am OK selling it.
Now, if I’m selling it, I will collect $777, which is not bad at all because keep in mind, what is my goal? My goal is $3,500 per week and this is on five positions.
This basically means that each position needs to generate $700 because seven hundred times five is $3,500.
I hope this helped. Read about “Flying Rescue Missions” with the Wheel Strategy here.
Learn more about Markus Heitkoetter at Rockwell Trading.
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