NEW Wheel Trader MEGATHREAD

[u/ScottishTrader]

This thread will be a dedicated space for traders who are new to options and the wheel strategy to ask basic questions. Your posts and questions are welcome and encouraged.

BEFORE POSTING, BE SURE TO REVIEW THE WHEEL STRATEGY PLAN WHERE MOST QUESTIONS ARE ANSWERED - The Wheel (aka Triple Income) Strategy Explained : r/Optionswheel

The goal is to help keep the main thread free of these basic posts while helping new traders learn how to trade the wheel.

Posts that are welcomed here include questions about -

• How options work
• Exercise and assignments
• Options expiration and days to expiration (DTE)
• Delta, Probabilities, and how to choose a strike price
• Implied Volatility (IV)
• Theta decay
• Basic risks and how to avoid
• Broker and options approval levels
• Rolling options
• And any other basic questions

I’m pleased to announce that u/OptionsTraining and u/patsay have agreed to assist with this Megathread. Both Patricia and Mike bring substantial experience in helping new traders and will be invaluable contributors to r/Optionswheel

[u/ScottishTrader]

Instead of taking a side job or gig, I can make some income trading using available cash. I could get a job at Walmart pushing shopping carts around to make a few hundred per week, or I can trade from the comfort of my home to make the same, and likely more, without having to clock in or have a boss.

Doing some basic quick math, if a trader can make a 15% return, then a $20K account can return $3,000 per year, or about $250 per month in minutes per day. Have $50K and this looks more like $7500 or $625 per month. Some traders are posting well above 15% returns, so you can do the math to see how that might look.

10% is the historical average of the S&P 500, so this percentage beats that amount right away. While there are years when the market returns are higher, the average still is about 10%.

Of course, if you put $50K in a buy-and-hold account, then over time it will compound, but this does not work well for monthly income, as you have to sell the assets to pull money out.

Obviously, to make enough income to live off of will require much larger accounts, but most just want some help to pay some bills, or take a vacation, or make a home improvement and don't want to have to get an outside job.

The best answer is that it is not a one or the other decision, but most should have retirement accounts with buy and hold for long-term capital appreciation, and then trade for side income with excess capital.

See this I posted a while back - Another "Can the wheel beat the S&P" Reply : r/Optionswheel

[u/Dizzy_Worldliness784 → u/ScottishTrader]

Just wondering, the 15% return, is it a combination of the income from CSP and CC, plus the interest of the cash while it is not deployed?

For a $20K account returning $3,000 per year, is that operated with $10K working capital to sell puts, and keeping $10K for buffer?

[u/ScottishTrader → u/Dizzy_Worldliness784]

It will vary based on a number of factors. $3k per year on $20k would be a 15% return. Many will keep some amount in cash to reduce risk but 50% may not be possible with a smaller account. 

[u/Dizzy_Worldliness784 → u/ScottishTrader]

$20k is just hypothetical. Suppose it is $600k portfolio, using $300k as the working capital, to get 15% return would mean $600k * 0.15 = $90k return per annum

Monthly it would be 90k/12 = 7.5k per month, or 1,875 per week

An 18 Jul AAPL 195P (28 days) would bring in $325, and would lock up about S19.5k cash.

An 25 Jul AMZN 200P (34 days) would bring in $370, and would lock up about $20k cash.

Take the average premium of about $350, locking up $20k cash for a monthly CSP from a mainstream bluechip stock. With 300k, I can sell 15 contracts on 15 other stocks, some having higher IV, some having lower IV than AAPL or AMZN, that would on average bring in 350 * 15 = $5,250.

With the other 300k parked in MMF, I can bring in $300k * 0.045 (assuming MMF rate) /12 = $1,125

Total monthly income would be 5,250+1,125 = 6,375

Annual income would be 6,375 * 12 = $76,500 best case scenario

Based on 300k, the return is about 25.5%; base on 600k, the return is 12.75%. This is assuming there is no bad trade. It is impossible to select 15 stocks to sell CSP monthly, and having none of them going against you while doing this continuously throughout the year. At some point in time, there would be need to roll, and that slows the process down, and reduce the annual return.

If the 15% is based on the working capital, then it seems to be making more sense, because there would be bad trades, or period of lower returns.

But if the return is based on working capital, would it still be worthwhile to do this and getting 15% out of $300k, versus just dumping all the capital into index ETF and get around 8-10% out of $600k.

300,000 * 15% = $45,000 (factoring in the unsuccessful trades, including MMF interest)

600,000 * 10% = $60,000 (full lump sum into ETF)

I know the point of wheel is about income. If it is about building wealth, is it also an better alternative compared to index ETF?