My Options Trading Unlocked – Newsletter 07 Nov 2023

Newsletter – Insights for Tomorrow’s Profits

7 Nov 2023

The Options Wheel Strategy : a story of Risk and Reward

Read on and find out that the wheel strategy isn’t just a strategy: it’s an ongoing options trading school with lessons in the delicate dance between risk and reward in the financial markets.

My goal is to share my journey and help you profit from options trading. I write about my thoughts on options trading and finance in general. I provide information about my trading and my insights, that could be helpful to you in options trading, especially focusing on applying strategies and what I anticipate in the stock market for the upcoming week. Every week I report on the status of my trading accounts.

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1. Thoughts and Opinions

“The Options Wheel Strategy : A story of Risk and Reward”

Reflecting on past experiences is a cornerstone of my growth in any endeavor, and this is particularly true when it comes to navigating the intricacies of the options Wheel strategy.

A thorough review of completed trades not only crystallizes lessons learned but also sharpens decision-making skills for future investments. By dissecting each step of a finished wheel strategy chronologically, from entry to exit, I try to gain invaluable insights into my intentions in relation to the market behaviour, my own trading biases, and the effectiveness of my tactics. An introspection, such as I make in the AMD example below, ensures that each trade contributes to my deeper understanding of the markets and refines our approach, transforming every outcome, whether a win or a loss, into a stepping stone towards trading improved trading and yes, mastery.

Here is the result up front:

• bought 100 $AMD shares around $108
• selling 5 CC for a total credit of $1437
• Selling shares at $99 (net result -$983)
• Total Net Result : $454.00 after 93 days

Here is the detailed overview of 3 month the wheel strategy from 02/08/23 to 03/11/23, on the $AMD stock:

Chronologic transactions and steps in the wheel in text :

• 02/08/23 : share price $108
  • I opened the wheel by buying the stock after it moved down from $120 to $108
  • Bought 100 shares at $108.03
  • Sold 1st CC with strike $112, exp 18/8/23 for $2.84

• 18/8/23 : share price $105.70
  • The share price didn’t bounce back as I expected
  • Closed 1st CC : expired worthless for $0 debit: Net result = $282
  • Sold 2nd CC with strike $112, exp 1/9/23 for $1.70

• 24/8/23 : share price $101.70
  • Closed 2nd CC for $0.33 debit : Net result = $133

• 29/8/23 : share price $103.80
  • Sold 3th CC with strike $110, exp 15/9/23 for $1.65

• 11/9/23 : share price $103.50
  • Closed 3th CC for $0.35 debit : Net result = $126
  • Sold 4th CC with strike $110, exp 29/9/23 for $1.94

• 15/9/23 : share price $101
  • Rolled call down to 106 CC for $0.90 credit, total credit received for CC $106 is $2.84

• 21/9/23 : share price $97.00
  • The share price continues to move down.
  • Closed 4th CC for $0.33 debit : Net result = $245

• 22/9/23 : share price $97.10
  • Rinse and repeat selling CC, lowring the cost basis of the shares.
  • Sold 5th CC with strike $106, exp 20/10/23 for $1.52

• 27/9/23 : share price $97.50
  • Wanting to add more credit and lower the cost basis even more
  • Capturing more credit rolling down to $102 and out to 27/10/23 for a extra credit received of $1.72, total credit received for CC now at $3.24

• 25/10/23 : $100
  • Rolled out the CC $102 with 1 week to 3/11/23 for $2.59 credit, next credit received now at $5.83

• 26/10/23 : $95
  • Rolled call down to 99C exp 3/11/23 for $0.78 credit, total credit received $6.61

• 3/11/23 : share price $110.66
  • After earnings the share price shot up again
  • CC $99 expires ITM and gets exercised -> for $0 debit: Net result = $651
  • Assigned shares to sell at $99 per share
  • Sold 100 share for $99 per share minus $40 fee : Net result = -$983

Graphic presentation of $AMD share price evolution :

My reflexions, take aways and Lessons learned:

• Opening the wheel: I didn’t start the wheel with a cash secured put (CSP) because of my (wrong) conviction $AMD was going to rebounce to $120 quite quickly. But that didn’t happen -> I could have opened with a CSP to start the wheel, but I consider this not really an error. More so because I was willing to hold this stock for a long period.

• Timing and Patience: Understanding the best times to sell covered calls can make a significant difference. Patience is key, and rushing into a trade without the right premium or strike price can lead to suboptimal outcomes. For some CC, I’ve tried to anticipate on a share price movement before selling the CC.

• Strike Price Selection: The importance of choosing the appropriate strike price is highlighted. It’s a balance between attractive premiums and the risk of having the shares called away. Although I tried to use conservative deltas when opening CC, the move after earnings was too big. Decision-making (strike price, rolling,…) regarding the covered calls, is at all time all based on the share price in relation to the cost basis of the acquired shares. Tracking the cost-basis in an efficient manner is paramount.

• Dividends: Dividend is a part of the wheel strategy lowering the cost basis of the shares. I was unable to profit from dividend because I didn’t realize at the start of the wheel if $AMD is paying dividends, which it doesn’t. This is a clear error in my mind.

• Market Sentiment and Trends: Recognizing how market conditions and sentiment affect option premiums and the likelihood of shares being called away can guide future decisions on when to enter trades. I Was really convinced that $AMD would rebounce quickly to $120 but that never happened.

• Continuous Learning: The strategy reiterates that continuous learning and staying updated with market news is vital for staying ahead in the game. I do believe that understanding technical analysis can definitely help for determining strike prices. The wheel startegy with CC and CSP is absolutely a great way to learn the ins and outs of options in all its aspects (delta, theta, intrinsic and extrinsic value,…)

Conclusion

In conclusion, the wheel strategy provides a fantastic framework for investors looking to enhance their returns through options trading. It’s a method that capitalizes on both the ownership of stock and earning premiums through selling covered calls. However, as with any investment strategy, it comes down to the fundamental principle of risk and reward.

The wheel teaches us that risk cannot be eliminated, only managed (the down move was not expected). Each step, from selling cash secured puts to buying stocks, and then selling covered calls, intertwines risk with the potential for reward. The premiums collected provide a buffer against downturns in stock prices, but they also limit upside potential. It’s this trade-off that we as option traders and investors must navigate thoughtfully.

What’s crucial is not the absolute avoidance of risk, but the informed management of it. Through careful selection of strike prices, attention to market conditions, and disciplined following a predetermined set of rules, the wheel strategy can absolutely offer a balanced approach to generating income while engaging with the stock market.

Remember, the wheel doesn’t reinvent the market’s dynamics: it simply offers a structured way to engage with them. And, as every seasoned investor knows, the true reward comes not just from the profits earned but from the knowledge gained through the disciplined practice of any strategy. So whether you’re rolling out of a put or into a call, the real triumph is in the strategic control of risk and the steady accumulation of small wins over time. The wheel isn’t just a strategy: it’s an ongoing options trading school with lessons in the delicate dance between risk and reward in the financial markets.

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2. Overall Market Overview (Week from 30 Oct – 03 Nov 23)

When I prepare for trading or following the market and my positions, I focus on two aspects : the general trend of the market with the indexes, mainly the SPX and the volatility of the stocks with the VIX. The reason why is clear: the general trend of the market and stock volatility are essential for options traders because they directly impact options pricing, influence trading strategies, and offer opportunities for risk management and profit generation in the dynamic world of options trading.

And then again, I don’t want to over-analyse too: but basically the SPX trend and VIX levels are not far away.

The SPX index closed 165 points up this week (3,9%) from 4193 to 4358. One can argue that the trend is still downwards, with lower highs and lower lows, although the lower high is not that clear any longer.

SPX Chart – SPX 4358 $

Market outlook for next week : I must agree with the saying nobody knows anything.

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VIX Chart – VIX USD 14.91

The VIX dropped from 21.25 down to 14.41, a huge drop with plenty of volatility coming in this week.

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3. TOCF Portfolio Weekly Recap & Trading Plan

In order to optimize my time and provide the most value to you, I’ve made the decision to refrain from duplicating content from the Discord channels in my newsletter.

My focus needs to be primarily on improving my trade management skills and sharing my experiences with you. Rest assured, if you’re curious about any specific trades I’ve made, you can always find that information in the Discord channels.

When there is a particular trade I feel warrants a comprehensive analysis, similar to what I’ve done previously with UNH, I will definitely include all pertinent details and figures in the newsletter.

a. Results week (30 Oct – 04 Nov 23) & currently open positions:

Here is an overview for all accounts of the positions and results of last week :

The November profit target is set at $1350. This week was a strong week closing options for a total profit of $1034. Closing the profitable wheel strategy on $AMD, however minimizes this week’s total profit a $51 profit, you can see the distribution above. The profits of the previous closed covered calls are accounted for in those closing weeks (see the results of the $AMD wheel above).

The profits (or losses) are always the sum of the results of the closed positions during that given period. The open unrealised P/L is ($3715.00).

c. My Trading Plan for upcoming week:

At portfolio level :

• The MX account is in euro en the TT accounts in USD.
• Theta level has fallen considerably by closing plenty of positions this week. So this is an action point for the coming week, look for opportunities to bring back up the portfolio theta.
• I have been aiming to keep a descent delta/theta ratio. I have corrected the spreadsheet in a way that holding long stock is now also part of the calculation making the Spy B weighted delta correct for the whole of the positions. The sum of the SPY Beta Weighted Deltas of my three accounts is $27 (meaning if the SPY goes up $1, my portfolio value will down up $27 and vice versa)
• I am aiming for a 1:2 ratio (or lower) with neutral delta/theta. My positions have made a nice recovery and after adjusting some positions where required, the delta/theta ratio is at 0,65 at the moment. A bit too high, due to the recent loss of portfolio theta down.

Most of my open positions are in the red. This has improved this week in the good direction, as for most other investors, market was up nice : the unrealised P/L is down to $(3715).

At individual stock level :

• Hopefully, It looks $PYPL and $LYFT have started their recovery. I will keep selling CCs aggressively of these stocks to bring down the cost basis.
• $FSR, next to PYPL, is my biggest option, and still my biggest problem child at this moment. I need recovery above $5.

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4. Weekly Watchlist

I will keep my attention to the open positions and I don’t intent to add any more given my current, relatively high allocation : AAPL, SOFI, AMD, MARA, LYFT, ORCL, UNH, SMCI, FSR, PYPL, IWM, MSFT, GOOGL

5. Other stuff – info & links

• Trading Options Wheel Strategy:
  • After the update of the Options Wheel Strategy Spreadsheet, also the strategy page was updated: https://www.tradingoptionscashflow.com/the-options-wheel-strategy-explained/
  • Updated DEMO video is published also today : https://youtu.be/oPGIx11PGfA
  • If you bought the earlier version, drop me an email and I’ll give you a free download of the updated version at no extra cost.

• A permanent project is to improve the page My Approach to a methodic Options Trading Strategy and Profit Goals. I am really hoping to exchange some thoughts with you all on this topic, so leave me your thoughts in the comments of that page!

• In case you missed this tweet – get your FREE pdf:

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I hope that providing some insights in my trading and my thoughts, will trigger some thoughts and maybe ideas that will help you with your trading and helps to become an even more profitable options trader. Don’t hesitate to contact me to talk options.

Thanks for reading the TOCF Newsletter, a great weekend and happy trading!

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Let’s generate cash flow together !

P&K

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Please do leave your thoughts below in the comments.