My squeaky wheel trade attempt

Discussion in 'Options' started by qlai, Jan 9, 2020.

  1. qlai


    Inspired by @BlueWaterSailor (and free comissions!) I tried to do the wheel trade the best I could. Below are the details. I got to tell you that when the stock went to 93 I started doubting very much I really want to own it and started calculating how many years I may need to be writing calls to get to a happy place :) Thankfully we are still in a bull market.

    My question is - I've put GTC order some time back to buy back the put at 0.05 (the minimum) but nobody seems to want it even though there are almost 6k OI. The next strike(99) has zero bid. Both 99 and 100 strikes have .10 offer. Why don't people want to sell it? Isn't it a good value? From my (naive) perspective, I'm offering a great deal because it's very likely the option will expire worthless(expires prior to earnings).


    Original trade: Opinions (and sarcasms) are welcomed!

    Nov 7 2019 - Sold2Open Jan 2020 100 Put @4.30 when price was 102, finished day at 98 -37%

  2. "No need for DDX, doctor; the problem is staring us right in the face..." :)

    As it happens, I co-host a group on Telegram that focuses on wheeling. If you're interested, PM me and I'll send you an invite. Lots of great info and good people there.

    If it's such a great deal, what are the reasons that you don't want to hold it to expiration? Those are likely to be the same as other people's thoughts on it. "I'm going to get $0.62 per day to hold a 3% chance of up to $10k worth of risk for the next 8 days - yippee!"... said no one ever.

    I generally avoid wheeling on tickers that I don't want to own. Part of that includes vetting the typical spread in that stock at 25-30 delta; unless it's a couple of cents at most, I'm not interested. Nickel-wide spreads - well, you see the result. Chances are that you won't get filled unless the price REALLY swings. When I want out of SPY or IWM, I know I'll get filled immediately and within a penny. I also know that I won't have to wait for years for the price to come back if it does go down and I'm assigned, and that the chances of these going to zero are, well, pretty much zero.

    For stocks or ETFs that I don't mind owning, there's literally no downside (outside of a black swan event.) If it tanks - well, that's exactly what it would have done if I was holding it... and I'm getting it cheaper than buying it outright at the time when I sold the option. If it stays flat or goes up, I get out at max profit or some fraction that beat the time vs. return curve. Even if I have to hold it for a couple of years while selling calls... how does this hurt me? It's just cash to stock conversion, which in itself is neutral - and I'm getting a decent return via selling calls plus dividends.

    Worth noting: premium selling kinda sucks right now - the low market volatility means that you're not getting paid much for your risk, and finding decent trades is a grind. When VIX goes back to 16 or more, premium will start getting really juicy. Fun times.
    qlai likes this.
  3. qlai


    I just assumed that same people that sell weeklies premium would be interested.
    I see.
    Well, I can't argue with you on your own turf, but there are stocks that go down hard and never reach prior highs ever again. Also, what happens when you write a call and you get assigned? Your wheel trade is over with a big loss, no? Just seems like a bull market mentality kind of trade.
    I think I have been permanently damaged by the tech bubble crash. Lol.
  4. Again, please take a careful look at the risk/return ratio. People are willing to take it on for $1+ a day, but not for half of that.

    That's why I cited SPY and IWM. They - obviously - don't. There are also companies that have been around for a long, long time and have been paying dividends all along. If you're wheeling on anything but that kind of stocks, you should be absolutely clear on why you're doing so, and aware that you're paying for doing it in increased risk.

    The wheel does work best in a bull market, but it's not a "mentality"; it's a strategy. One I wouldn't use in a bear market. If you're looking for a Holy Grail that will always work in all market conditions, you're going to be disappointed.

    As to assignment - you do understand that it's a covered call, yes? I'm already long that stock: if it gets called away, I'm simply converting stock back to cash. Why would it be a loss? There's nothing intrinsically negative to that conversion.

    This is your key problem regardless of any strategy you choose - "scared money don't make money". I recall having several exchanges with you in the past, and that's the characteristic that stood out for me: your fear of loss is disproportionate. Unless you fix that, you're guaranteed to lose - whether by bleeding out slowly, or by making irrational trades (like the one above, where you don't seem to understand even the basics of it but are taking it anyway.) If you can't fix it, then trading is a really bad thing for you to engage in - since it's all about rational risk management.
    qlai likes this.
  5. qlai


    So lets say my put was assigned and I own the stock at 100 - premium. The stock at 93. I sell a call at 95 and stock moves past that price and now I'm assigned again. I just booked a loss, didn't I? Or does the strategy assume you only write calls on stock above break even price?
  6. It's possible to make up any kind of numbers that "show" a loss. In reality, at least in my experience so far, assignment is very rare - if you don't want to be assigned, just roll it out for a credit. As it happens, I prefer selling puts to covered calls, so that's mostly what I do. Haven't taken assignment on anything I didn't want even once (amusingly, I've had assignments that I did want "stolen" out from under me by a last-moment rally.)

    But I'm going to run through a scenario - because I 1) want to review what I know, 2) show something more realistic than some made-up random numbers, and 3) show that your options with options (so to speak) are far richer than anything you've imagined.

    (Options are fucking awesome.)

    So, let's say we're trading AAPL ($310.40) - I picked it because it's got a relatively high IV right now due to earnings, which makes it look similar to a decent trade when the market vol is up/normal. The monthly that's between 30 and 60 days, 21 Feb, has the 29-delta/295 put going for $6.10; given that vol, let's say I squeeze at least another 0.30 out of it via price discovery. This gives me a break-even of 295-6.40, or 288.60. That's ~22 points before my terminal P&L even starts going negative.

    But assume it does - right away. And I don't care. Why? Because I've looked at the chart for AAPL, and it's had exactly one drop of 22+ points in the past year - and recovered from that within ~20 days. There are no guarantees in the market, but that's a pretty strong hint.

    But let's say it goes down and stays down. And I don't care. Why? Because AAPL has enough liquidity that there are LOTS of offers on strikes way below mine - and IV is inversely correlated to price, meaning that as price drops, IV rises (and premium along with it.) Unless it drops at least 30 points, I'll be able to roll it out to a further expiration for a nice credit (which will also give it more time to recover.)

    But let's say it drops, and stays down, and they catch Tim Cook in bed with... OK, let's not go there. But: AAPL drops 30+ points and I don't feel like fighting for it (which I could do, and quite effectively; see the ROKU saga in my journal), so I'm put the shares. And I still don't care. Why? Because AAPL is going to go out of business some day - but that day has not yet come. And lots of people are absolutely batshit about the company, and other traders know this, and that stock will come back up at some point. Damn near represents the American economy, all by itself. That's why they say "as American as AAPL pie", right?

    So: 310-30=280, and I've paid 295 for it. Boo-hoo, I'm an entire $1500-$640 ($860) down. How, exactly, am I worse off than someone who bought 100 shares at $310.40 (and lost $3040 in that move)?

    Meanwhile, let's say that I'm not going to wait for it to recover at all - I'm all wound up about losing that humongous wad of money! - and I sell a 30-delta call on it right away. Given that after an insane down move like that the IV is going to be at or near 100, my handy-dandy BSM calculator tells me that, given a current price of 280, the 45-day 360/30-delta call will go for $15.40. I.e., $1540 in my pocket that day.

    So, following your scenario, someone calls it away from me immediately... I do a happy-happy joy-joy dance, pocket my $40, and SELL THE HELL OUT OF SOME PUTS. Because now, AAPL is really low, the premiums are sky-high, and I expect it to bounce like a jack-in-the-box. That's around $17.50 for a 30-day/30-delta put, by the way.

    But let's say no one is stupid enough to do that. And the stock happens to be back to $310 at expiration, which means I get to keep my $1540 - and sell another call. Probably at a much lower IV by then, but $600 for a 30-day/30-delta 325 call (that BSM calculator again) seems reasonable. Now I've got $2140 in pocket and a strike that's 40 points above my price and stock that has probably paid dividends by now ($0.77/share, so that's another $77.)

    Hmm. That sounds good - which is not good, since we're looking for awful terrible no-good outcomes. Let's keep going.

    Let's say AAPL closes above 360 at expiration, the first time out. And some meanie somewhere forces me to take $360/share from him and give him my stock... let's see: that's 640-29500+1540+36000, or $8680 in pocket and flat in the ticker.

    Dude, this sucks. Where is my bad outcome?


    More realistically (the most common result by far): my naked put hits 25% profit within a day or two of me selling it - i.e., well above the ROI/day for this trade - and I buy it back. That's $160 in 1-2 days. Somewhat less often: it hits 50% profit within a week or two, and I make $320 in 5-10 days. A lot less often: I hold till right before expiration, and make almost all of it back (I don't like surprise assignments, so I don't hold through expiration.)

    So: yes, black swans happen. Yes, you can get whacked to hell by another market crash, or Apple going out of business, or a nuke on NYC. Maybe lose that entire $30K. These are all outliers, though - way out there - and meanwhile, life goes on, there are bills to pay, and there's money to be made.

    But it's not for those who let fear run their decision process. Even options, awesome as they are, can't fix that.
    Last edited: Jan 10, 2020
    nooby_mcnoob likes this.
  7. qlai


    Perhaps I don't understand all the intrecacies, but all of this sounds to me like a fancy averaging down technique which relies on stock/index bouncing back pretty quickly and reaching new highs.
    I don't think it's fair to say this. We are talking risk and draw downs. Selling the hell out of puts and rolling them down and out doesn't seem like a prudent way to deal with a draw down, but you sound like you know what you are doing. I'm not ashamed being fearful of a strategy where I don't understand the edge (of course, just because I don't understand/trust it, doesn't mean it's not there for those who do).
  8. Wrong. It doesn't have to bounce, either quickly or slowly, and there's no averaging involved whatsoever. What it relies on is the ticker not going down over the long term. I.e., it's a technique for the bullish market: something I've already made clear.

    Which is true for every single trade - all trading - and which further reinforces my original point. If you're afraid of risk and draw-downs, then trading is not for you.

    There is NO "edge"; it's a myth. Looking for one is another guaranteed route to losing money. So is being fearful (emotional) instead of cautious (rational). If such an "edge" appeared for even a second, it would be arbitraged away immediately; there are a lot of very smart people out there constantly looking for any inefficiency or advantage, and they have much more money, far more resources, far better access, etc. that any retail trader does.

    Wheeling is simply a technique for a specific type of market, with a specific mix of risks and rewards that I, and many other people, find acceptable and appropriate for their situation; it's not something that can be plugged in and expected to produce. It takes effort, smarts, adaptation, and a continually-honed, healthy perception of risk. When any of those things are missing, you're headed for a cliff.

    I'm not any sort of a trading guru - but I am absolutely clear on a number of mistakes that will wreck any trader. You're making some of them, and will not listen when advised about it; all I can do is wish you the best of luck and withdraw from the conversation. Cheers.
    Last edited: Jan 10, 2020
    qlai likes this.
  9. qlai


    Since BlueWaterSailor checked out and I was bothered by above statement, I wanted to say to other readers that above statement is categorically false. Anyone who've traded profitably and/or was around profitable traders know this for a fact.
  10. qlai


    Well, I got filled. I am assuming that if I had a meaningful position, I would have to lift the offers to get out or wait until expiration.

    #10     Jan 13, 2020