I've been playing around and reading about options trading. Have done some wheeling and PMCC as I look for a strategy that I am comfortable with. Here's what I've come up with:
Sell Puts, using margin. Be smart about stock selection (Topic for another time). Sell ~30 DTE Puts. I do this based on my work schedule and when I've available to be at the computer and watch the markets as expiration nears.
Take the proceeds from the sale of the Puts, and buying more dividend producing assets in that account, thereby increasing my dividend income AND increase my equity value, which would in turn, increase my margin availability. I only plan to use 50% of available margin and maintain a cash balance to cover if I have to buy back an option, or roll. I do not plan to get assigned.
So in summary:
Sell Puts -> Use premium to buy more dividend equities -> increase margin availability – > repeat
Just for reference: This is a small account. About $20k. The equities I plan to buy and hold for dividend income and margin collateral are mainly EPD and SCHD.
Fairly new to options so I anticipate some good critiques 🙂
My current "Wheel" strategy. Critique please
byu/Main_Squirrel_2530 inoptions
Posted by Main_Squirrel_2530
4 Comments
The recommended way is this. Sell puts at 45 DTE, exit when one of the following 2 happens: [You are in 50% profit, You reach 21 DTE]. Then find the next best put based on your stock selection criteria and invest the money there.
If you reach 21 DTE and it drops a lot and want to take assignment instead as you expect a recovery, then you can wait till the 45 DTE and if not recovered take the assignment and then sell CCs on it above your cost basis (strike you sold the put at minus the credit you received)
In rare cases you might be assigned before expiration. In such a case you should know, if you want to keep the stock (if you have enough cash to pay it). If yes, you can sell a covered call to get more cash. Be aware of the size of the dividend. If you own a covered call at the ex-date of the dividend you might be assigned and get rid of the stock. This will happen with high yielding shares.
In my opinion, the wheel is a bad strategy, but it is especially so for small accounts.
The main thing is that since you are using the “I don’t mind holding” mantra as your only hedge, it is imperative that you get ticker selection correct. For that to work, you need to be able to diversify your idiosyncratic risk of stock selection by doing many tickers. Precisely what you can’t do.
On that vein, it’s more important to mention the tickers you are wheeling rather than the mechanics. Those hardly matter for your performance 🤷🏻‍♂️
For selling naked puts, assignment is never a desired outcome. Sell at approximately 45 DTE, manage by day 21 or when you hit 55% max profit. Regarding the ETF’s you buy with the income, that’s a good strategy but SCHD is complete garbage. Much better off buying SPY.