The Options Wheel Strategy: The Complete Guide to Boost Your Portfolio an Extra 15-20% With Cash Secured Puts and Covered Calls by Freeman Publications

The Options Wheel Strategy: The Complete Guide to Boost Your Portfolio an Extra 15-20% With Cash Secured Puts and Covered Calls by Freeman Publications

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THE WORL D ’ S M OS T BORI N G, Y E T RE L I A B L E ,
OP T IO N S S TRA T EGY
So what is The Wheel Strategy, and why is it so powerful? To begin with,
you’re not going to experience the stereotypical rollercoaster of emotions
that many investors associate with options. In fact, the Wheel is a
straightforward strategy that anyone can execute with just an additional two
or three hours per week to dedicate to a portfolio.
With the wheel, you can expect safe and continuous gains no matter the
volatility or unpredictability in the stock market. What’s more, the gains
you can earn will outpace traditional dividend investing. Currently the
average dividend yield on an S&P 500 stock is just 1.48%, with the average
yield for a Dividend Aristocrat stock just 3.5%. The Wheel can generate
annual returns far greater than that, without additional risk.
The Wheel is also referred to as the Triple Income Strategy or “Buy and
Hold on Steroids.” This is because there are three income components in
the strategy.
Income #1 - You collect the premium from selling cash-secured
puts
Income #2 - You collect the premium from selling covered calls
Income #3 - You collect cash when your covered call gets assigned
and you sell your shares
As you can see, The Wheel requires you to sell cash-covered puts (CSPs)
and write covered calls (CCs). Let’s examine these in more detail.
EXPLORING THE WHEEL
To understand The Wheel, you need to fully understand what cash-secured
puts and covered calls are.
The cash-secured put (CSP) is a great way to get paid to enter a trade.
Here’s how it works. Let’s say you wish to own a stock but would like to
generate additional cash upon entry. You sell (write) a put that is exercisable
at a print that is close to the price at which you would like to pay to buy the
stock. Because you are selling an option, you collect a payment, called the
premium. Because the put is close to the money (meaning close to the
current market price of the stock), the premium will be significant. If the
put finishes in the money (ITM), you’ll be required to buy the stock.
This is fine because you originally wanted to own the stock. However, if the
put finishes at a price that makes it worthless, referred to as out of the
money (OTM), you can repeat the process - write another CSP and collect a
premium once again. Eventually you will be buying the stock, and then be
able to wait for your investment to mature. However, cash-secured puts are
a great way to boost your investment returns in advance of that purchase.
Once you own the stock, you can begin to sell covered calls (CC). A CC is a
two-part trade where you own the underlying stock and write a call against
it, typically at an OTM strike price. Because you’re writing an option,
you’ll collect the premium on it. If the option moves ITM at expiration, you
will be “assigned” and have to sell your stock. (No problem – just sell
another put option on the same stock and repeat the process!) However, if
you write the call at a price that is well outside the money upon the option’s
expiration, you get to keep your stock as well as the premium.
The CC can be used as a speculative strategy as well. You can buy a stock
and write a call that is close to the money. If the price of the stock rises to
ensure the option finishes ITM, you get to keep the premium and sell the
underlying stock for a profit. It’s hard to make this speculative strategy
work over the long term because you can’t predict market moves, but the
covered call can be a great way to earn additional gains on existing
portfolio holdings.

The Options Wheel Strategy: The Complete Guide to Boost Your Portfolio an Extra 15-20% With Cash Secured Puts and Covered Calls by Freeman Publications