The wheel strategy they teach you is backwards.

You should be selling options itm and let price come otm for max premium.

Selling the AUG30 16.50 call today @ 2.08






BREAK EVEN
The break even (what you are selling your shares for) @ expiry would be 18.58 (16.50+2.08)

You can also factor in your avg cost on the underlying here, so if you have an avg cost of 18, then you are gaining .58 on the sale.

MAX GAINS
1SD 16.25 = .25 otm @ expiry so max pnl of 2.08

Even if price does not reach 1SD down the theta takes its toll and you will still come out profitable. Ie if price on AUG29 is 17.50 the premium is about 1.05.

MAX LOSS
1 SD move up is 20.87 so the statistical max loss is 16.50-20.87+2.08=-2.29
This is only a theoretical loss depending on your avg cost if you held the underlying.
So if your avg cost was 18, you just sold @ 18.58 instead of 20.87. If you are naked then you realize this loss.

On the put side it would be the opposite.

 

Might as well sell a straddle as do that.

 

Selling an atm straddle? The price has dropped since posting but my sheet says I would have only collected $1.20 in premium with a straddle...more fees and more risk. I guess if you have no directional bias, otherwise its counter productive.

 

Price come OTM???

WTF is happening to ET??

 

Yeah relative to the 16.50 call you're selling lol. The strike doesn't move in or out of the money. It's just what it is and price makes it itm or otm.

 

What is the strategy if market continues rising? The wheel is for selling naked options.

 

You are doing the wheel strategy as advertised. You sold puts and were wrong and took delivery. You are selling ITM calls to get flat. You then sell OTM puts continually if you think the market is going up.

 

No...this is a strategic trade. Probably not suited for directionally challenged. The idea is to collect the maximum premium possible by selecting the deepest itm strike that will finish OTM...everything else is just collateral damage.

If we flipped to puts at the bottom of the triangle, we'd be selling 18.50 strike when price is at 16.50 and have price come towards our strike. With theta decay the price doesn't have to reach our strike to be profitable.

 

you are not doing the wheel then. The wheel is for people who want income as they are not good at directional trading.

 

Ooohh so I got to name it? How about the weighted wheel strategy. Since it is weighted directionally.

Any other suggestions?