Stock Market trading is a gamble. Purchasing index mutual funds is probably the safest long-term investment but even that is not truly safe.
Option Trading using The Wheel is probably the safest and easiest way to make money in the stock market. It is still a gamble, but has the highest probability for consistent gains with minimal risks. More details will be addded to this page later. I have only been actively trading since mid-December 2021 but so far it is going well even though there has been a stock market crash due to Omicron, political upheaval and war in Ukraine.
The short description to “do the wheel” is: Sell a Cash Secured Put (CSP). Then, only after taking assignment, do you Sell a Covered Call. That way, you get a discount on the price of the shares.
This video explains The Wheel very well.
You should also watch this list of easy to understand videos from Khan Academy for basic lingo:
Khan Academy American Call Options
Each video is a few minutes long. You can learn the concepts of what is a long position, a short position, a call, a put, and a straddle. There are more complex moves like iron condors and whatnot, but the above is all you need to trade The Wheel.
Personally I think all anyone needs is The Wheel and that is what I focus on. I am experimenting with two other methods but will not know if they are successful for another 30 days. I’ll add notes about that once the results are in.
FinViz.com has some good filter optoins for finding stocks and has a nice visual for seeing stock status at any given time.
BarChart.com has some very good filtering options for finding stocks options meeting specific conditions.
Fidelity.com is the company I use for trading (selling) stock options.
You may want to check YouTube for more descriptions of The Wheel Option Trading Strategy if it is still unclear after watching the above video and the Khan Academy videos. Here’s a good link for search results.
Start with Selling a (cash secured) Put option on the stock that you would not mind if you ended up owning 100 shares of. Choose a Strike price below the current share price. You’ll get paid and if price never dips to the Strike price, you keep the money. If it does dip to the price, you buy the shares.
You want a 70% chance of staying Out of The Money.
Delta is the odds of being In The Money. So you want a Delta of .3 or less which means 30%.
That’s the chance of becoming In the Money.
Some people choose 30 to 45 days out. I like to do one to two weeks out.
When your Premium has degraded about 50% it is probably time to Roll your CSP. You can buy your Put and sell a new Put with a different Strike or later Expiration date and make a profit.
Eric recommends Buy back (or better yet Roll) your Sell Put contract a few hours before closes. Then you do not have to wait for the settlement period (usually from Friday evening until Monday morning). Eric waits and Rolls when he has earned 80% of the premium.
The stock market tanked this week and I made a lot of money Selling Puts. I sold some Puts on 18th and 19th that I was able to Roll on 21st for even more money. I had two Puts that were going to be assigned on 21st but rolled them both for additional good revenue. It was amazing that I was able to Roll them for a good one-week profit instead of having them assigned.
On Friday some other Call options that I Rolled from a 1 week to a 2 week expiration date for a very good profit... the stock crashed and now it is unlikely I will have to be assigned at all. So in one week I sold then rolled this one stock for a healthy profit.
So far the Selling of Puts has been much more profitable than the Selling of Calls but that is probably because Omicron crashed the market just after I started and the market has been bearish ever since.
Do not worry too much about being assigned on Puts. Instead Roll them a week or two which will generate more revenue and if the market bounces back you won't get stuck with the stocks.
So far from my option picks the Put Roll has been a better premium than if I owned the stock and was Selling a Call on it. However look at each stock option to determine which is best and see notes below.
First question is - do you purposely want to own this stock? If you do because it has great Call premiums, then do not Roll and let it either Expire or Assign. Skip the rest of the rules below which assume you do not want to own the stock.
If the Roll premiums are not very good and the current premium is very low, you may want to Buy to Close so you:
When it comes to Selling Puts always remember that the only thing you care about is your ROI on the money that is held as a security to purchase.
Thus if you can Roll one week and guarantee a better-than-average ROI, you always should. Do not Roll more than one week out, because the ability to get a good interest income every week gives you the power of compounding interest.
Calculate your ROI (Return On Investment) simply as Premium divided by Strike. So if you can get $0.30 on a $2 Strike, that’s a 15% ROI !!! In which case if you have a chance to Roll you should take it regardless of whether the Premiums are .15 and .45 or 1.22 and 1.52. To be truly accurate you should take into account the broker commission, but for general purposes this ROI calculation works great when comparing one opportunity versus another in option trading.
If you do not want to be assigned it is safe and smart to just put in a GTC Roll on your Short Puts. You never know when they might trigger due to some overly-eager bidder.
If your Short Call is below what you paid for the Stock and is close to expiration date and in jeopardy of being assigned, then you should definitely Roll out and up so if it sells you do not lose money. Sometimes you have to go out more than one week, sometimes going out to the next Monthly works best. Or Roll for Even money one or two weeks just so you are not assigned.
Next question is - does this stock no longer have good Call premiums? Or maybe the only good Call premium is right near the Strike price? If so then change your Strike setting to ideally make a Sell Call that barely gets assigned. Then on Wednesday before assignment set a GTC Roll for a high price. If it triggers, great; if it does not then let it ride and if it executes and your stock is sold for a profit... good riddance. If it does not execute do another close-to price Sell Call for next week. Continue until it sells.
Remember - placing orders costs nothing (on Fidelity). Place a GTC (Good Til Canceled) Roll with a high Net Credit that will earn you a good weekly ROI. Only cancel or change it when down to last few days before assignment.