Today I’ve very excited to bring one of our very own Option Alpha family members on the show, MACDDaddy aka Robert. He’s been a member for many years and someone I continue to seek advice from in many areas. During the show we’ll dig deeper into the “Wheel Selling” option strategy which has created some fairly long and in-depth forum threads lately and warrants a little more attention from our weekly podcast.
Key Points from Today’s Show:
- Our guest today is Rob, an Option Alpha member of many years.
- In building Option Alpha, Rob has brought a very objective thought process to the table which I humbly appreciate.
- Rob joined the Navy and flew for V23, a fleet of reconnaissance squadrons, running the com-center.
- Flying is all about discipline, being proactive, and having many checklists.
- His experience in the Navy and with checklists created the basis for his trading.
- Rob first started investing through AAII, American Association of Individual Investors.
- For the last 25 years, Rob has worked at HP and gained early exposure to the Internet and computers.
- He had an online brokerage in 1993, and has finally landed with his favorite, Think Or Swim.
- Rob went on a mission, and read 143 investment books, simply to discover that there is no holy grail.
- Overall, Rob’s mission is to retire and trade options full-time.
Rob’s Trading Journey:
- Rob has been trading options for 13 years and took the normal progression.
- He started out with the covered call, investing long with the strategies from fundamental investing.
- From there it just grew, and he continued with the goal to do one trade each day.
- Today he does three to four trades a day, and has created a strict trading routine.
- Rob spends 15 to 20 hours a week trading and researching, and see trading as his second job.
The Wheel Strategy:
- Click here to download the Wheel Strategy PDF Rob put together.
- The wheel strategy is one of the tools you need for different scenarios in the market.
- It provides a set of guidelines with steps where you get to make choices all the way through.
- You can make the strategy as simple as you want, or very complex.
- With the Wheel Strategy you can determine how much you want to be invested time wise.
- You can sell weekly, monthly, or every two months.
Example: Your first choice is to buy the stock or sell the out of the money put.
- Start the wheel with selling the out of the money put. That gives you money and a little bit of a cushion with the stock if it takes a bit of a downturn.
- Sell the put, it goes to expiration, and it gets put or expires.
- If it expires, sell the put again.
- It goes to expiration, expires worthless, sell the put again.
*This is the same thought process as a covered call in the sense that you have to like the stock, know the stock to some degree, and be okay with owning the shares.
The Steps if you get stock put to you:
- Don’t freak out.
- Decide if you still want the stock.
- Call your broker and ask about your choices.
* If you decide to keep the shares, the next thing you do is sell the call.
Choices When Selling the Call:
- How long do you want to own the shares?
- If you want to get out quickly, sell the call right at the money
– You will get the most money with the highest chance of it getting called away.
- If you want to make more money, go further out.
– the further out in time, the bigger the credit.
- If the call expires worthless, sell another call.
- Re-evaluate if you still want to own the shares, then sell the call again.
- If you get the shares called away by selling the covered call, you then go back and sell the put.
- This completes the wheel strategy.
*Overall, the wheel strategy forces you to buy low and sell high.
The Advanced Choices:
- If your account has the ability to own another 100 shares, instead of selling just a call you can sell a strangle.
- This brackets the stock that you own:
– If you get called away those shares go away and you receive the premium of the put.
– If it gets put to you, then you own 200 shares, and you would sell two calls.
Skewing the outcome:
- If you want to have it called away quickly, put the call at the money and sell the put that’s further down, at the 10 Delta.
- If it is already at a resistance point, you can skew it the other way so that the put is at the 40 Delta and the call is at the 20 or 10 Delta.
The Top-Down Approach:
1. Determine what the overall market is doing.
- most growth stocks are going to follow the market.
- if the market is going down, the stock will go down also, and vice versa
2. Look at earnings to decide on expiration and holding period.
– If you hold through earnings, go out further to expiration.
- Make sure that you get your position size correct.
- You have to have enough capital in your account to keep the lights on.
- Discipline and routine is key for being a successful trader: having a trading plan.
Free Options Trading Courses:
- Options Basics [20 Videos]: Whether you’re a completely new trader or an experienced trader, you’ll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
- Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an “edge” in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
- Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We’ll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
- Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You’ll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
- Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we’ll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
- Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can’t seem to get answered, then this section will help you.
- Portfolio Management [16 Videos]: When I say “portfolio management” some people automatically assume you need a Masters from MIT to understand the concept and strategies – that is NOT the case. And in this module, you’ll see why managing your risk trading options is actually quite simple.
- Trade Adjustments/Hedges [15 Videos]: In this popular module, we’ll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we’ll help you create an alert system to save time and make it more automatic.
- Professional Trading [14 Videos]: Honestly, this module isn’t just for professional traders; it’s for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.
Option Trader Q&A
Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air.
Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.
PDF Guides & Checklists:
- The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
- Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
- Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
- Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
- When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we’ll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
- 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.
Real-Money, LIVE Trading:
- EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
- VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
- DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we’ll discuss why I’m adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
- COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
- TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
- MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
- IBB Call Debit Spread (Opening Trade): We’ll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
- TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly – even still the drop in implied volatility helped generate a $330 profit for us.
- XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
- COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
- EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
- IBM Iron Condor (Earnings Trade): Shortly after the market opened you’ll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
- SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.
Thank You for Listening!
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