I typically go through the following checklist while initiating a trade to wheel. These are aimed to maximize income and return while reducing risk of my puts being assigned. You will of course develop your own style as your progress in time, this might be a good way to start for beginners.
Step 1: Is the stock price down ? The premiums earned on selling puts are higher when a stock dips, since the risk is higher then for the stock to keep heading down. Any given day, there are always some stocks that are dipping while others are heading up. So it helps to have a sortable list of your favorite stocks to trade on a app of your choice and focus on stocks that are red for the day to initiate selling puts.
Step 2: Is the reason for the dip a good or a bad one? Take advantage of the good, avoid the bad. Read : ‘Good’ versus ‘Bad’ reasons for stock price dips
Step 3: Will the dip continue lower or the overall trend is still positive or bullish ? “The trend is your friend” is a common cliché. Since our goal is income from premiums and not be assigned, you want to target stocks that are in a uptrend, at least in a long term uptrend
Step 4: How low could it dip? Determine this by analyzing stocks major support lines provided for free on sites like Finviz.com and Stockcharts.com
Step 5: What is a good price for the stock in terms of value ? The biggest risk with selling puts if to get “assigned”, i.e. forced to buy underlying stock at the strike price if it stays under it by expiration (or sometimes sooner if it falls far lower quickly). If you are stuck with the stock, you do not want to overpay ! So think valuation, think analyst average price targets. I would avoid stocks trading higher than most recent price targets suggest or target a price lower than price targets if premiums are not measly.
Step 6: Is the premium worth it ? Once you decide on a decent strike price based on above steps, use this Annualized Return Calculator to see if the premium earned on your strike price is worth holding your capital hostage as collateral. Play with different expiration dates and strike prices, I personally enter a trade only if the return is least 40% annualized and 2-4 weeks range of expiration.
Step 7: Check if any major events are expected in the days prior to your option expiration date . Earnings? Lockup expiration ? I like to avoid holding covered put options around earnings day for example, since the stock can rapidly change either direction after the event, its better to play hedged option strategies around such days.
