The wheeling strategy is for you if :
- You have accumulated capital sizeable enough to create livable income
- Your goal is immediate financial independence with regular income
- You are inclined to / willing to spend a little time each trading day to track your holdings
STEP 1: The wheeling strategy begins with selling (also called ‘writing’) a covered put option. I have covered the step by step approach to strategize selling a covered put option here. Once you sell a covered put option, one of two things can happen:
- The stock goes up 🙂 ! If the stock gains in price, your put option loses value, so you can decide to buy your sold option back for much cheaper thus making a profit and you get to free your collateral capital to initiate another trade. Or you can wait it out until the option period expires and get keep 100% your premium earned and your collateral cash is automatically released.
- The stock goes down 🙁 ! If the stock plummets, you put option gets more expensive now to buy back. (If the investment story has changed and you are no longer interested in owning the stock, you can choose to buy it back at a higher price and hence incur a loss and free your collateral). But if you do not mind the drop and you get “assigned” the option, you basically end up buying the stock at the strike price . Even if this happens, you have still get to keep 100% of your premium earned on selling the put option. In other words the ‘effective buy price’ is lower than the strike price. ( Example: If the premium earned was $1 for a $10 strike, then your effective stock price is $9 )
STEP 2: If you end up buying the stock, its now time to wait until the stock goes back up until you can sell at a profit or you can sell “covered calls” on your position at or higher than your buy price to extract more income while waiting for the stock to go up
So with a wheeling strategy, you make initial income right away on selling the put option, then you potentially may get the opportunity to buy the stock at a cheaper price that current price, and then you get make more income off of it while waiting for it to go back up ! Sounds like a win-win situation to me, while also generating much higher returns on your employment in a given time frame than “buy and hold” or “dividend investing”.