Playing around with an idea in my head lately and wanted some input. Maybe someone out there who is great with data could back test this idea. A popular strategy for large accounts is to take a percentage of capital and run the wheel on an ETF like Spy. Sell a OTM put and collect the premium each month and if assigned use the entry to then start selling covered calls against the position until called away and then rinse and repeat. Overall this mimics or closely mimics just being long the ETF but in theory provides a little larger return than just being long. Also known as the triple income strategy as during the periods when you hold the stock you're collecting the dividends as well. Of course there's downside risk but if you're long term want exposure to the broad market it seems like a solid strategy. And who wants to be long term bearish hoarding gold and bitcoin hoping there's another run on toilet paper. A miserable existence. Would it enhance this strategy to use ratio spreads for entry and exit instead of the usual short option. For example If I'm short the 1/22/21 SPY 370 put at 2.24 I collect the $224 if we stay above 370 by exp but if assigned by long basis starts at $367.76 If instead I put on the 1/22/21 1:2 ratio +1 370 p -2 368 p I collect a credit of $1.43 But if we end up under 368 and am assigned my basis is $364.32 as the 370 put would net me an extra $200 at expiration. Take the same logic and then apply it to exiting with the covered calls. This would give you a nice pop on the way in and way out. I'm probably missing something but would be curious to hear everyone's thoughts.
"ratio +1 370 p -2 370 p" One of your strikes is incorrect - pls fix and I can have a look at this as I trade the wheel myself. I assume you're selling 2 of the 368? If so, then your basis would be 364.57
Yes, these types of ratios are an option. I know someone who occasionally does these. I haven't traded these myself. Dissecting the trade, you are selling a short put (at 368) and using some of the premium to buy a debit put spread (370-368), so the strategy is better if there is a slight bearish move and less profitable if there is a bullish move. There is no right or wrong strategy - using this ratio or just going with the short 370 put would depend on the traders outlook on where he thinks the underlying will go in the next few days.
I started trading the wheel last week. In my mind, the wheel is nothing more than a dip buying strategy. So instead of being in cash(+VXX) and waiting for the dip, which is what I would normally do, I will try to generate some income in the meanwhile. I will sell ATM (or slightly OTM based on vol) 60DTE put every week, 8 in total. Cash secured but in a PM account so I should still have ability to do some maneuvering if I get assigned on all. On individual stocks or broad index?