Do you know what the wheel trading strategy is? The wheel trade is described completely with their strategies. Both wheel trading for beginners and experienced traders get benefits from. The wheel trading option is an income generating option for traders. Wheel trading is a combination of exploiting features of both calls and puts. Also, it is a “perfect” solution to the well-known risks of shorting calls, even when covered.
What Is The Wheel Trading Strategy:
We also know the “triple income strategy” is the options wheel strategy. It is a method where a trader continuously sells cash-secured puts until assignment. At this point, they start selling covered calls against the assigned shares. They repeat the process by selling more cash-secured puts once the covered calls are assigned.
This strategy is named “the wheel trade” as it cycles between selling puts and calls, much like a wheel’s rotation. Because a trader utilizing the wheel constantly sells options, they’re always generating income from calls, puts, and potentially even long stock.
How To Trade The Wheel Strategy:
It’s necessary to understand that you should only sell options on stocks when you use the wheel strategy. Also, you want to hold a price you’re comfortable with owning the shares.
Sell A Put Option:
The first part of the options wheel strategy involves selling a cash-secured put. By selling the put option, you receive the price as a credit, which you get to keep should the option expire worthless. For this reason, traders choose out-of-the-money put options, as they’re highly likely to expire worthless, allowing you to pocket the entire premium.
Sell A Covered Call:
At any Strike price, you can sell the short put. Many investors use this for income-generating, proxy limit orders and will often sell options at a price they believe is a key technical support level. You essentially get paid to initiate a long equity position in the underlying security at a price you’d be happy to buy shares. The right way to potentially delay assignment while collecting additional premiums. The premium increases the profit if the stock’s price recovers or lowers the net stock cost basis if assigned.
Repeat The Process:
If the stock price surges above the covered call’s strike price by expiration, the call option exercises. This means you have to sell your 100 shares at the call option’s strike price, finalizing the options wheel cycle as your stock position becomes flat. Using the proceeds from selling the stock, you’re now ready to begin the process again by selling another cash-secured put, thereby setting the options wheel into motion again. The continuous cycle of selling put options until assignment, then selling call options until assignment, forms the basis of the wheel strategy, offering multiple opportunities to earn income using different instruments: puts, calls, and long stock.
Conclusion:
Any options trading strategy, it requires a solid understanding of options and risk management. Though this particular strategy may be too technical for less-experienced options traders, the beauty of the options market is that there is something for everyone. Whether your view is bullish, bearish, or even neutral, you can profit using options at risk levels that suit your financial situation. Moreover, here some trading platforms in 2024 that you use for trading.