Today I am proud to announce that I have launched my course on Gumroad. This course is called The Wheel Strategy : How to Triple Your Income While Limiting Downside Potential. This course is a 50 page book outlining the strategy and teaching you how to use it and start making money. You also have the option of getting an additional trade tracker or an hour of coaching if that is something you are looking for. Today I will be giving you a brief primer on the Wheel Strategy and how to utilize it.
What is the Wheel Strategy
This strategy composes three particular phases in order to create the ‘triple’ income part. The first is a cash-secured put. If you are looking for a primer on cash-secured puts, check out my post on getting paid for your watchlist. This cash-secured put is our entry into our positions. We are hoping to roll our trade a few times to generate some premium and reduce our cash basis. As our cash basis drops, the stock looks more and more advantageous.
Eventually we will be assigned our stock position. Once we are assigned we immediately begin the second phase of our trade, collecting dividends. As I mentioned with the cash-secured puts, we are reducing our cost basis which in turn increases our dividend yield.
If we look at Coca-cola’s stock as we are writing this, we can see it had a close of $48.50. It also has an annual yield of 3.38% because it pays 1.64 annually. 1.64/48.50 = 3.38% However, if we are able to reduce our cost basis to $47.00 then we now have a dividend yield of 3.49%. This quick increase is what most money markets are paying at traditional banks.
As the second phase of our trade is running we also begin the third phase of our strategy. This involves selling covered calls. If you are looking for a primer on covered calls, I would check on my post on getting paid for your portfolio. The benefit of selling covered calls, is that we are able to increase our returns while capitalizing on low volatility stocks. We look to sell contracts that are 25-45 days to expiration so that we can take advantage of time decay. Below is the option chain that goes along with KO’s current stock price as of this writing.
We can see here that we can sell a covered call at a strike price of $49.50 with a last price of $0.59. This gives a $1 of stock growth that we can take advantage of as well as our initial premium. For holding this contract for 29 days we will receive $59 dollars assuming we get the same price as the last price. This gives us 1.22% return over 29 days or 15.31% annualized if we assume we actually paid $48.50 per share. If our shares get called away then we have a 2.06% return over 29 days or a 25.95% annualized return.
As you can see, these trades can be extremely when executed correctly. The three phases really work to drive profitability over the long term.
The other benefit of the Wheel Strategy is the reduction of downside risk. Since we are generating premium as soon as we enter our trade, we can never go to $0. For example, if you buy a stock outright and it comes out that they are cooking the books, they may declare bankruptcy. If they declare bankruptcy then their shares could go to $0.
When we go and sell our options contracts we are generating premium from the initial contract. Since we did that we can not go below the initial premium. The real downside elimination happens as we continue to roll our trades. If we can build $0.50 of downside protection each time we roll our trade, it will take 10 trades to eliminate all downside on $5 stock, 20 for a $10 stock, 40 for a $20 stock so on and so forth. The longer we can roll and build income, the more downside protection we generate. After our cash-secured put phase, we also generate income through dividends and our covered calls. The longer we are able to operate in this phase, the greater cash flow we will receive from our security. This further eliminates downside risk with the increasing cash flow.
Choosing the Right Securities
The hardest part of any trading strategy is choosing the right security. In my guide, I go over how to set up a stock screener so you can find dividend stocks that are reliable and have lower volatility. You can also check out the Dividend Kings and Aristocrats list to find companies that have steadily increased their dividend. The goal is to find securities that we want to hold long term and don’t mind being assigned or called away when the price is right. We should not be getting emotionally tied to our securities when utilizing this strategy.
Either way, it is important to utilize proper risk management techniques and trade management to ensure you stay profitable. There are various types of market risk and pinning risk that we can face and we want to make sure we are aware of all these possibilities. All of these topics and more are covered in my book.
Get the Course
You’ve made it this far, I hope you have learned something about the Wheel Strategy. If I have peaked your interest, then head on over to purchase the course. I am running a limited time and quantity discount until August 15th of 50% off. This is the lowest price that my course will ever be so go ahead and pick up your copy as soon as you can. I am only selling 25 copies of the book, 25 copies of the book and tracker bundle and 5 copies of the bundle that include coaching at this discounted rate. If you have any questions feel free to leave them below!