Vocabulary:
CALLS
PUTS
Premiums
Dollar Cost Averaging
Share Price
Options
Strike Price
Intrinsic Value
Extrinsic Value
Cash Secured PUT
Exercise/Exercised
Expires Worthless
Expiration
The Wheel
Delta
Gamma
Theta (Time)
Vega (Volatility)
This strategy allows you to buy low, sell high, and get paid while you are waiting.
Combining both Cash Secured Puts and Covered Calls is a great way for investors to buy low (using cash-secured puts) and sell high (using covered calls) and maximizing the income and capital appreciation of the stock or ETF. This is sometimes referred to as the Wheel Strategy.
This generates an income while the investor waits for both the purchase and sale of a security. Using Cash Secured Puts instead of Buy Limit Orders, provides a better risk/return profile and is the preferred method to acquiring stock. Likewise, once a security is acquired, selling Covered Calls instead of Sell Limit Orders also provides a better risk/return profile when attempting to sell the stock at a higher price.
Another benefit of owning shares is that you will earn the dividends collected while you are holding.
For growth stocks that do not offer dividends, or companies that provide low dividends, this can be used as an income strategy
Use the premiums to continually reduce the cost you paid for the shares or simply collect as profit each week/month
e.g. 100 shares of XYZ were purchased at $20/share or $2,000
We collect a Covered Call of $100 for one month; we can reduce our cost factor to $1,900
If we can collect $100/month we would have our money back within 20 months; excluding taxes on our premiums
Once we have recouped our cost, everything we receive will be pure profit
No Position
Collecting premiums to potentially purchase shares at a lower price
Purchasing at a lower price
Using your premiums to offset your purchase
Using premiums to purchase securities (shares of the company or other securities)
In-Position
Collecting premiums to dollar cost average down, for profit, or to offset prices falling
Ability to sell your position at a higher price and keep your premium
Ability to hold on to shares for over a year to reduce taxable rate on sold position to 10%
Closing Position
Locking in profits through allowing a covered call to be exercised and your shares be taken away
Opportunity to start the wheel again to grab shares at a lower price
Step 1: Sell a PUT
Step 1b: Buy 100 shares of a stock instead of Selling a PUT
Step 2: Sell a CALL
Step 3: Use profits from Sold Calls/Puts
Dollar cost average (DCA) into more shares
Recoup initial investment
Cash Secured Puts
Towards other investment strategies
***Note: For every 100 shares you own, you can sell one option contract.
How to purchase a Cash Secured Put
How to select an expiration date
How to select a Strike Price
Opening a Cover Call
How to select an expiration date based on your time
Using the 2% rule, 2% profit per month, to determine our strike price
Closing your position Early vs Allowing to Expire
Rolling your position to a later date and/or higher strike price
You have heard me say 2% per month (0.5% per week) over and over. There are two ways to calculate your 2%.
Based on the original cost of the shares. This allows you to get farther out strikes (OTM - out of the money) so they will not be called away or you receive a great payout for the difference between your strike and cost.
Based on the current price of the shares. I believe this is the best way to calculate because if prices do fall, you are making more premiums weekly/monthly based on its move up.