How The Wheel Strategy Generates Income Again And Again

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed How The Wheel Strategy Generates Income Again And Again. Here’s an excerpt from the episode:

So the first trade is often just the beginning of a repeatable process. All right, here’s an example. So these are open trades on vol.

So one of the first trades we did was we sold an $8 put on Blue Owl, asset manager that we think is very discounted and has a lot of kind of hysteria and bad publicity surrounding it, which we think a lot of it’s unwarranted. We collected 60 cents per share. Every option has a hundred shares in it.

The option expired and it expires on July 17th. So 81 days at entry. So the effective basis if assigned is $7.40. So that would be our break even.

The annualised return on this trade is 36.5%. And the capital required is $740 per share. So that’s one trade. If the stock’s below eight, well, we ended up owning Blue Owl at $740.

If the stock’s above eight, we just made 36.5% annualised in 81 days. Fantastic, fantastic solid return. And we could do it again.

Leg two. So you don’t necessarily have to wait for the put to be exercised. You can do it kind of at the same time if you want to do the wheel.

So we also bought a hundred shares of Blue Owl at $10.27 and concurrently sold an $11 call where we collected 35 cents of premium. That option expires on June 18th. So that was 44 days to entry at expiration.

So if the stock expires above 11, this trade will have made 90.3% annualised, very high rate of return because it’s a very short trade, right? You’re talking about 44 days to expiration. The capital required is $992. That’s because it’s a hundred shares at $10.27 minus the $35 premium.

So same underlying stock, two different strategies. One, you’re selling a put. One, you’re doing a covered call.

You’re collecting premium on both. And if the put sits, if the stock’s below eight at expiration, you’re going to buy more of Owl and you can sell more calls. If the call sits at 11, we’re ready to sell the stock into strength.

We don’t have to wait for assignment to start running. We can layer both legs when the math makes sense. And what’s cool about Blue Owl is there’s a lot of volatility, so it makes sense to do it.