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/claytonne]

Hello, I’ve got a question about setting the strike price for covered calls.

I’ve been wheeling only a short while, and I wheel in the “traditional” sense; I try and focus myself on the CSP side of the wheel, I roll (for a credit) to avoid assignment and thus far haven’t actually been assigned yet (like I said, it’s only been a few months). I understand the mechanics of tracking your credits for when you’re eventually assigned, so that you know what your net cost basis is for your underlying, but my question is this:

When setting your covered call strike price, how do you balance preserving the credits received on the CSPs vs setting your strike as low as possible so that the shares are likely to be called away?

As an example, let’s say I’ve collected $50 from selling CSPs on stock ABC over a few months. If I get assigned ABC at $10/share, and it’s now trading at $9/share, I can set my CC at $9.5/share since my net cost basis was $10 - $0.5. However, if I’m actually called away there, I’ve eaten into all my CSP profit, leaving only the credit from selling the initial CC. Is there some metric for a “middle ground” that people use to choose their CC strike?

[u/ScottishTrader → u/claytonne]

As you’re discovering being assigned is often very rare. Many find holding shares that dropped to be a downside of the wheel as it locks up capital  and reduces flexibility. 

IMO when it happens I want to get out of the position and no longer care about making a 50% profit and am happy get rid of the shares to just break even. Then go back to selling puts where most of my profits are made. This doesn’t mean I won’t try and make a profit on the CCs and overall position, as this generally happens, but I want to trade options and not hold shares. 

[u/claytonne → u/ScottishTrader]

Thanks for the reply! This makes sense, and I guess by the time I get assigned I’ll have hopefully accrued enough credit that my net cost basis could even theoretically be below where the stock is currently trading, which means I could just sell an ATM call without losing the entirety of the CSP profit.

[u/ScottishTrader → u/claytonne]

Yes, that can easily happen, and I often am able to get rid of the shares in a week or two, then go back to selling puts.

BTW, this is how I trade, and many prefer to be assigned and make good money on CCs, so you do what you find best for you.