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The "Wheel" Options Strategy - A Step By Step Walkthrough Of This Powerful Proven Trading Strategies - YouTube
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Let's continue our discussion about
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options trading strategies.
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And today we're
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going to talk an options strategy
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that is called "The Wheel"
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and I'll explain exactly what that
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means.
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But first, let's do a super
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quick review.
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If you're new options or just
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as a refresher, because it always
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helps. So first of all,
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when you are trading options, you
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can trade calls, and you can trade
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puts, and you can either buy options
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or you can sell options.
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When you buy a call, you have the
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right to buy 100
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shares of a stock at
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the strike price.
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When you are selling a call you have
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the obligation, not
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the right, the obligation
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to sell 100 shares
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of a stock at the strike
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price. When you buy a put,
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you have the right to sell
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100 shares of a stock at the strike
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price, and when you
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sell a put you have the
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obligation to buy
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100 shares of a stock at the
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strike price.
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So if you're unfamiliar and if you
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say, "Oh, this is too fast." Take
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a look at the Options 101 it will
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help you with the strategy
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here. So let's talk about the
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strategy, The Wheel.
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First of all, the idea here
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is to get paid
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while you wait
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to buy a stock,
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and this is actually the Warren
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Buffett's strategy.
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Warren Buffett is using this
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strategy that I want to show you.
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So the most important thing is,
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first of all, you need to find a
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stock that you want to
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own, right? I mean, this is what
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this is all about and here
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for today, for this example,
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I thought we can take a look at SQ.
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So SQ it's Square inc.
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It's a technology service, it's
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a payment processor.
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And as you can see, SQ
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has been in a really nice uptrend.
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It has been trading as high as
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$130, and let's just say
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for our example here, that
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you want to buy it when it
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retraces to a price
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of $100.
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You see it right here.
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So let's say you don't want to chase
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it, you want to want the stock
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to come back to you and
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you never want to buy a stock at
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the high, so it's always a good idea
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when you're buying stocks to buy
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it when they're retracing.
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Let's say we want to buy
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100 shares of
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SQ when they come
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back to $100 and
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we are bullish.
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This means we expect
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the stock to go up in the long
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run, right? So we have a longer term
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perspective on SQ.
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It doesn't matter, it could be
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Amazon, you could do Walmart,
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you could do Tesla.
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So let's just use this here for an
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example. Now, remember, as we are
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going back here, selling a put
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means that you are forced
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to buy 100 shares
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of a stock at the strike price.
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So in this case, we want to
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use 100.
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Let's switch to the trading
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platform. We're going to
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SQ and we are looking at an option
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that is around 30 days out.
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So right now, the August 21 is 37
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days out. So here we are looking at
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a 100 put, and as you can see right
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now, we are selling the
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100 strike price because
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this would mean that we have to buy
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the shares when they drop back to
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$100. So we sell
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the 100 put
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with an expiration of August
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21st for right now
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$3.20. And since options
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trade in 100 packs, this
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means that we are receiving because
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we are selling it, so we are
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receiving $320.
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Again, if you would like to know
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more about these basics here that
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are super important, I have a course
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for you it's called Options 101,
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I'll post the link in the
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description.
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So we are getting
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$320. Now let's take a look at this.
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The broker, for in order to
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do this, he requires only
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$1,000 in margin.
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So that is not a whole lot, right?
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I mean, it's it's only a little bit
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because I'm trading here on a margin
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account. So let's just write this
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down. Now, of course, if you
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don't have a margin account,
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so with no margin account,
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it would be $10,000.
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So a margin account in this case
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makes a lot of sense.
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Now, let's talk about two
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possible scenarios.
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So we're selling it for $320.
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And so after 35
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days when this option expires
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and I know technically it's 37 days,
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but I want to make the math a little
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bit easier here so this is why I'm
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using 35 days.
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So after 35 days, it
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could be that the stock is above
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$100. If this is the case,
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you still do not own
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the stock. So your profit and loss
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from the stock here is a whopping
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$0, but since
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you sold the option for $350,
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you're making
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$350.
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So this doesn't sound a whole lot,
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right? I mean, $350,
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but keep in mind that you made this
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in 37 days
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and you only needed
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$1,000 in margin here.
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So that's pretty good, because if
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you think about it, this means you
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made 35%
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in 35 days.
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Not bad at all, based on your
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margin, right?
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Based on your margin.
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And again, if you don't have a
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margin account, you made
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3.5% In 35 days.
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Again, it does make sense to have a
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margin account here.
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And if this has happened and the
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stock is in 35 days,
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still above a $100, so you don't
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have the stock, you keep the money
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and you can do the whole darn thing
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again. So you would do
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it again and you would sell it now
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at a slightly different strike
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price. What happens if the stock
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goes below $100?
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Let's actually say that it goes down
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to $90.
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So let's say Square is plummeting
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all the way to $90.
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But you have a long term view,
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right? We expect the stock in the
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long run to go up, but
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let's say it goes down here.
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So in this case, the profit
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and loss from the stock, since now
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you lost $10 times
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100 shares, because again,
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so important that you understand
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selling a put means the obligation
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to buy 100 shares
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of a stock at the strike price.
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So this is where you would lose
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$1,000 on the stock.
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Profit and loss from the option, you
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still keep the $350
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you don't have to give this back
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again. So this means that now your
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loss would be reduced
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to $650.
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But, but, but, but, but super
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important you need to understand
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this. This is open P&L.
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Only, only if you would sell
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the stock right now, then you would
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realize the loss.
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So right now you're down on the
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stock.
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And now let's see what happens,
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what can we do now that we own
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this stock, this is
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where the wheel kicks in.
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So this would be here, the scenario
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for The Wheel.
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Now that we own the stock, we
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start selling calls,
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right? Because what does it mean?
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We can now sell a call and this
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means that we have the obligation to
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sell 100 shares of
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a stock at the strike price.
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And what we would do here is
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that we sell a call
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that is approximately $20
[422]
away. So we would sell a 110
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call with an expiration
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of September 18th.
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So here is, let's just see right now
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what we would get for a call
[432]
that is 30 days out
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and $20 above the current price.
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So you see here, it's right now
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$5.20 over $5.35.
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So right now for a call,
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we would get $5.
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So this means that we would receive
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$500 in a premium for
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the option. And now, again, the
[450]
question is what happens here
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after this option expires?
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So the first option, 35 days, then
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another 30 or 35
[458]
days, doesn't really matter.
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So let's see what happens.
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Let's say it goes down to $80, it
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keeps going down, what the heck?
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I mean, what is going wrong with
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this stock? But it can happen,
[468]
right? So now on
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this stock, you would lose
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$20 times 100
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shares, so this means
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your total loss on this stock
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is $1,000.
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But again, this is just the open
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P&L, you would only realize
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it if you actually sell it.
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Now, you made $500
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on the option plus,
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remember initially we received the
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$350.
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So plus the $350
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that we received earlier.
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So we make $850
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on the option.
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And again, this is where
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depending on whether you have
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a margin account or not, this
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would be 85%
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in 70 days.
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But let's just assume that you do
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not have a margin account that
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you're doing this maybe in a
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retirement account.
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So it would be 8.5%
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in 70 days.
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Not bad at all, right?
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So but let's talk,
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what else could happen here?
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I mean, there's four possible
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scenarios that I want to talk
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about so that you know exactly what
[527]
to expect.
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So now let's say the stock goes up
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to $100.
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So in this case, if it goes
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up to $100, so initially it
[536]
went down, but now it goes up.
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So on the stock, you would
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not lose anything.
[541]
And again, this is the open P&L
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because you are planning to hold the
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stock for a long time.
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So it's a whopping $0.
[547]
By the way, if you're enjoying this
[548]
thus far, is this helpful?
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If this is helpful, do me a favor
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and click on like really quick,
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because this way I know that this
[554]
is helpful and I'm going at the
[555]
right pace here.
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So if it goes up to
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$100, you're not losing
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anything on the stock, and again,
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here you have the
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$850 so you make this.
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This is why I love this
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strategy, and this is why I want you
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to consider this strategy.
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See, the stock didn't do
[573]
anything.
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In fact, the stock went
[576]
from the current price of $120
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all the way down to $90
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and then came up to $100.
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So the stock has actually gone
[584]
down but you have
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been making money.
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How do you like that?
[588]
OK. Now, let's talk about the
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the other two scenarios, because
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there's a possibility that the stock
[594]
goes up. So let's say the stock goes
[596]
up to $105.
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So if the stock goes to $105 what
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happens? You're making
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$5 times 100 shares,
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so you're making
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$500.
[608]
And again, this would be open P&L.
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So let's say that it is going in the
[612]
right direction, which is what we
[613]
want, we want it to go higher.
[615]
And so you're making
[617]
$500 on the stock.
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Open P&L, you're not sharing it yet.
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And here again, you are keeping
[623]
the premium that you received.
[625]
You always keep the premium.
[626]
I mean, you have received the
[628]
premium, nobody can take the premium
[629]
away from you.
[630]
This is being deposited in your
[632]
account. But now let's talk about
[633]
the scenario that I believe is
[635]
super important.
[636]
Let's say that the stock
[638]
is actually going up to
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$120. So here is
[643]
what's now super important.
[644]
Keep in mind, we sold
[646]
the 110 call because
[648]
what we said is when the stock went
[650]
down to $90, we
[652]
wanted to sell the
[654]
110 call.
[655]
And again, what does it mean when
[657]
you are selling a call?
[658]
It means, now you have the
[659]
obligation to sell
[661]
100 shares of a stock
[663]
at the strike price.
[665]
So let's talk about this.
[666]
So if it goes up to $120, it doesn't
[668]
really matter because you have
[670]
to sell it at $110.
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So you only make $1,000
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and the shares are gone.
[677]
You now have no more shares.
[679]
Your account is "shareless,"
[681]
if you want to call it this way.
[682]
So if it goes up,
[684]
now it's perfect
[686]
because you made the $500
[689]
plus $350, so
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you made the $850 plus
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an additional $1,000.
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So think about it this way,
[697]
the stock only went up to
[700]
$120 here, so pretty much
[702]
of where it is right
[704]
now.
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So it means that the stock came down
[707]
and came back up.
[708]
So now the stock is up there, and
[709]
what do you do right now?
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So this is where the wheel keeps
[713]
turning. Do it again.
[715]
Since now you're "shareless,"
[717]
what do you do?
[719]
First you would sell
[721]
a put $20
[723]
below the current stock price and
[725]
earn a premium.
[727]
Let's see what happens here on
[729]
your account.
[730]
Once you get assigned, then you're
[732]
selling a call. So this is why it's
[733]
called The Wheel, because
[735]
it keeps turning and turning and
[737]
turning, which I think is
[739]
pretty cool. So you can sell
[741]
a put again and start it all over.
[743]
This is a super powerful
[745]
strategy that can make you a decent
[747]
return because let's think about it.
[749]
So if you can make
[752]
8.5% in 70 days, so this
[754]
means 8.5
[756]
divided by 7 means that
[758]
you're making 0.1%
[760]
times 360.
[762]
This means if you can achieve this,
[764]
it means that you can make 43%
[766]
per year. How do you like that?
[768]
Not bad! Not bad, right?
[769]
I mean, for me personally, I like
[771]
to make at least 60%
[773]
but it's a great strategy
[775]
here. So let's do a quick summary,
[777]
because I think it's very important
[778]
that we do this here.
[780]
First of all, it's a powerful
[781]
strategy that can deliver
[783]
30% per year
[785]
rather safely.
[788]
And by safely we say, "Hey, you can
[790]
never know." It might be that the
[791]
stock keeps going down, down, down,
[792]
down, down. Of course, then you have
[794]
to keep doing it and you're you open
[796]
P&L might show a larger
[798]
loss and you hope that eventually it
[800]
goes up, right? So secondly,
[802]
it is super important that
[803]
you pick the right stock.
[806]
And what is the right stock?
[807]
The right stock is one that goes
[809]
up in the longer run, right?
[811]
But you see, yes, you can do
[813]
this almost forever and keep
[815]
the premium, and you make more
[817]
money when the stock goes up.
[818]
So if you enjoyed this
[820]
video, and if you're intrigued by
[822]
the strategy and want to learn more,
[824]
I'm thinking, I'm thinking about
[826]
doing a course on this,
[828]
on The Wheel, right?
[829]
As well as covered calls
[831]
and a poor man's covered call.
[833]
So it's basically three in one.
[835]
I haven't decided yet, but if you
[837]
are interested in learning
[839]
more about the strategy and
[840]
attending this course then put
[842]
your name on the waitlist.
Rockwelltrading.com/blueprint
[846]
is the waitlist and there's
[848]
absolutely no obligation.
[849]
I just want to see if you're
[850]
interested in this, because if you
[852]
are, then I'll send you an email
[854]
when I decide to hold this
[856]
course, if I'm holding the course,
[858]
which I don't know yet.
[859]
And if there's not enough interest,
[861]
then no worries, no harm, no
[863]
foul. Anyhow, hope that you enjoyed
[865]
this video and if you did, do me a
[867]
favor click on like, make sure that
[868]
you subscribe to this channel, and
[870]
please share this video.
[871]
I think it's pretty good stuff.
[872]
If you agree that this is good
[873]
stuff, share it with everybody who
[875]
might find this interesting and go
[877]
on the waitlist, no obligation
[878]
whatsoever. I just want to see if
[880]
there's interest so that
[882]
I spend the time of putting this
[884]
course together, of giving you the
[885]
exact rules, what stocks to
[887]
look for, what criteria they have
[889]
to meet. Secondly, when
[891]
it does make sense to trade The
[892]
Wheel, what days you should
[894]
enter, right? Do you enter on up
[896]
days or on down days?
[898]
So all of the good stuff.
[899]
Anyhow, and there's probably
[901]
some videos popping up right now and
[903]
click on any that interests you and
[905]
I'll see you in the next video, or
[907]
in the class if it happens.
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