The Wheel Strategy: What To Do When You Get Assigned?

[@rockwelltradingservices]

Have you ever been assigned, then have the market crash? Let me know in the comments :)

[@thomasd5488]

I just started trading the Wheel Strategy, in August, 2020 so I have not experienced a "crash" However, I did get assigned in September during a market correction. I kept selling cc's until November when the stock finally recovered and I could have my last cc get assigned, for a profit. I have NEVER had a loss with the Wheel Strategy. Patience is a virtue.

[@sabriath]

Just a little clarification for those who may read this: 1. cost basis is only for your own records to determine where you can "jettison" and still be ok with your account. This is the absolute minimum position for you to make $0 flat for all combined trades, but it also means $0 loss. So if you were wheeling for 3 years and you were to sell at cost basis, you would have been better off putting your money in a savings account. 2. because of the cost basis for your own records, you should keep a secondary book of "adjust cost basis" which takes a far lesser amount to push your ACB down. Personally, I use 25% of all incoming cash toward a trade to go toward reduction of ACB. The ACB will let you know at what level to sell CC without stripping you of your profits from a long wheel event (as opposed to selling at direct cost basis, which will only end up giving you profit based on the last CC you sell, all others will be voided). For example, in this video, Markus sold 66, 173, 40, and 142 (I'm not going to include the Puts, explained later), the cost basis would be reduced to 145.79, but the ACB would be at 148.95, which would allow me to sell the 149C against the stock to collect higher premiums and very slowly "chase" the market as it falls, while still keeping 75% of the premium the whole ride. You can adjust how you see fit (Markus seems to use 0% reduction scheme and just sells at the same strike the whole time) 3. I consider the wheel to be separate entities based on a single starting Put followed by any number of CC (including zero) until you get assigned out. This means those extra Puts that Markus sold, for me at least, would have never reduced my cost basis on this particular setup, they would be entities unto themselves. These are just my opinions though.....I still prefer the PMWheel over the wheel....better utilization of cash and doesn't eat margin costing me interest.

[@joelinvirginia5198]

Great post Robert - I've just recently started the wheel and like you, I prefer to treat a single wheel trade as that starting put sell followed by either 1) buying back at 90% profit capture (I set a limit order buyback at 10% premium right after selling put), 2) expiring worthless for 100% profit capture, or 3) getting assigned and starting covered calls to eventually get called away. I like your idea of keeping 75% premium to help adjust strike on calls to keep that solid cushion. Certainly see what Markus is doing here, and it's certainly another way of looking at a "trade" - but had he been assigned on those put sales, for my brain, we're now dealing with THREE "trade" threads! I'm tracking annualized % return by trade, so things start to get messy for my own accounting purposes if I tried to bundle it all together as one trade "event". Question: What do you mean by "PMWheel"? Is that a different wheel-like strategy?

[@sabriath]

​@@joelinvirginia5198 (sorry for the length) It's a technique I developed after I designed the "wheel" strategy (before I found out that it was an actual thing, I used to call it "flipping stocks" and thought I was a genius when I came up with it years ago). It's an upgrade to the wheel and requires less collateral, which means more trades with the same capital. 1. you sell a Put spread instead of a Put on the weekly 2. if you lose on the Put, you buy a deep ITM Call (with very low extrinsic) a few months out and sell Calls weekly against it (poor man's covered call), if you are assigned, your broker will usually auto-exercise your further dated one to cover the position....roll your ITM calls if they get close and need more time. A few things you have to keep in mind is this is very mathematically more intensive than normal wheel and you have to track a "forward vestment" and keep that in cash. For example, let's use WMT as an example. Normal wheel: Sell ATM Puts weekly, usually around 1.95 for the 149 strike, giving you approximately 1.3% weekly. If assigned, sell Calls at strike possibly with reduction for around 0.80 against the 14,900 in value of stock for approximately 0.53% weekly PMWheel: Sell ATM Put spread for about 0.50 for the 149/150 strike, but you already assessed a "hold" of 3,500 for this "event" in your spreadsheet (even though you only need 100 for the collateral on the spread), which is 1.42% weekly. If you lose, you would say buy the February (77DTE) 120 strike for 29.70 or the Marth (105DTE) 120 strike for 29.90, and sell the weekly pivot where the draw will give you back the $50 you lost from the put spread (which is usually ATM on your first PMCC, and then that becomes your set strike with possible previously mentioned reductions)....if you were to do that right now, it would be the 150 strike for 1.42, giving you roughly 4% weekly (though this can vary ridiculously if the stock falls too much). If you can close the entire trade to gain at least 50% of the most recent Call's premium in profit, then I suggest to do it and start over. If you are unable to close the position because of the deep ITM position not being liquid, don't panic, just roll your recent call also ITM and let it auto-exercise in the next date. You lose out on dividends, but you only need 3500 to work a $150 stock, so technically if you had 15,000 to wheel WMT, then you could PMWheel at 4x with the same capital (and still have 1,000 left over). How you figure the hold is simply going about 60 to 90 days to expiration options and finding a 0.90 or better delta that has less extrinsic value than what you would get in the weekly ATM price....whatever that option costs PLUS the strike distance on the Put side, that's pretty much it. The bad side is you suffer the same problems you would holding stock...if it goes down, it could push your ACB out too far to make any money on. If it makes your deep Call surface to ATM or OTM, there are various things you can do to try and salvage it, like turn it into a full wheel (buy stocks below the strike), but you should probably "manage" the risk at the halfway point, possibly push the position deeper ITM as an example, or simply close at a loss. All these things would be exactly the problem you would have doing the normal wheel.

[@sfx1971]

Excellent comment, thanks Robert. I will look into using a cushion as you mentioned.

[@sabriath]

@beautiful boombap "CB vs ACB": Normally when you buy stocks below where you previously bought, it will reduce your CB to let you know where your break even is. Many people assume this translates directly into the option world and they think "well my CB is 27 now, so I can sell the 27 strike" on a stock that they previously head purchased at 28 and received 1.00 on it. This puts them at 0.00 advantage, which is not profitable at all. It's more difficult to explain, so I'll do a trade analyssis and see if you can follow along: (with full CB reduction, aka 100% ACB) WMT149P weekly 1.88, gets hit at 148 and you're holding shares stock is 147, CB is 147.12, so you sell the 148C for 1.01 stock falls to 146, CB is 146.11, you sell 147C for 0.98 stock sits at 146, CB is 145.13, you sell 146C for 1.20 stock falls to 140, CB is 143.93, you sell 144C for 0.38 stock rises to 143, CB is 143.55, you sell 144C for 1.32 stock sits at 143, CB is 142.23, you sell 143C for 0.81 143 gets hit and you sell out total credits: 150.58 = 1.88+1.01+0.98+1.20+0.38+1.32+0.81+143 total debit: 149 profit: 1.58 ($158) (with 25% ACB, brackets explained later) WMT149P weekly 1.88 as before gets hit stock is 147, ACB is 148.53, sell the 149C for 0.78 [1.35714] stock 146, ACB 148.34, sell 149C for 0.55 [0.28253] stock 146, ACB 148.20, sell 149C for 0.55 [0.28253] stock 140, ACB 148.06, sell 149C for 0.11 [0.05892] stock 143, ACB 148.03, sell 149C for 0.22 [0.11538] stock 143, ACB 147.97, sell 148C for 0.30 [0.15734] still holding stock at this point total credits: 4.39 = 1.88+0.78+0.55+0.55+0.11+0.22+0.30 total debit: 149 unrealized position at 143: -1.61 unrealized profit potential of ACB at 147.97: +3.36 This is quite an extreme case, and there are ways to mitigate, but the idea is that yes, stocks do fall sometimes and you don't want to be bagholding without collecting something from it....but if you cap your head at your CB, then the only profit you will walk away with is the strike difference to CB plus the last Call you sold, and that's it (above is 143-142.23+0.81 = 1.58). Instead, if you follow an ACB, then you retain a portion of your profits in an unrealized position until your Call is assigned (in the case above, it's 75% of all option sales regardless of stock value). Personally, I like to take the 75% and stick it right back into the same stock, since I am already waiting for the stock to hit my Call strike, might as well buy more below that strike price. The above brackets are the purchases of stocks I would have made, giving an additional 2.25384 shares, and if the 148 hits, that's a value of $333.56 (which cost $329.25)...it's not exactly what I do, but that requires a lot more explaining mathematically. If you reach a point where you have 100 shares from the adds, you can sell an extra covered position within the same event, which can really snowball your position. "Strangle cheat": I don't find injecting more capital into a trade results in bringing anything back...all it does is average down your CB and make you feel good about doing it every time when you see it win (since the stock doesn't have to "go too far" to the break even point). But at some point, you will do this to the wrong stock at the wrong time and you will sink your entire account trying to chase the CB as it falls...and then you'll be mad when the option strike you need to hit isn't selling for more than 0.01, and that's if you're lucky to even get a fill at all. I'm not opposed to the idea completely, but I treat it as a separate event entirely, so that I go in with the mindset that I'm not just double-downing on my loss to try and "get back to even" because then it's just gambling at that point.

[@sabriath]

@beautiful boombap There are a few different things you can do. One might be to sell a LEAP (or LEAP-like) Call spread at your natural position. For example, WMT 149 tanks to 129.38, and can't sell shit at the 149 level....but you can sell a 130+ DTE 150/155 Call spread for 0.58. If it falls, you can calculate the necessary for the strike width and buy that many shares and sell another spread (meaning, say it falls again to 100, you can buy 10 shares at 100 and sell another 150/155 Call spread at an even later date, $1,000 is better than $15,000 in a CSP or another failed CSP, if stock reaches the 150 by the time this spread comes up, you can sell the 10 shares to cover any losses from the spread). If stock ever returns, you can use your outside leg as a PMCC until you run out of time, selling weekly's as normal at your regular position.....or you can close the entire thing for a major profit. Another thing you can do is just sell the far dated and wait.....or just wait for the next opportunity and collect dividends in the meantime (you really should only be doing the wheel on div stocks). Or you can cut your losses. And finally, only as a last resort and you REALLY like this stock and feel it will return, an "all-in" for it.....is to switch from the normal wheel into a PMWheel. For example, if the WMT 149 tanks again to the 129.38 zone, you can sell your 100 shares at 129.38 and buy 3 contracts at 160+ DTE 90C position for around 39.90 (leaving you $968 left to put somewhere else). You can then start selling 3 weekly of the 137 strike for 0.07 or better ($21+ a week). This is a very ballsy play and puts a hard floor to your position....stock falls to 90 or less by your far contract and your position will be $0 (90 is the new bankruptcy line, not 0).....so don't take this decision lightly. If you need more time on the far contract, you can move it out for nearly no money difference (deep ITM is almost no extrinsic and is recovered in the weekly sales as long as it stays in range). If you get hit, it's ok because 137-90 is 47 and 47x3 is 141 plus the 9.68 you had leftover is 150.68. When you do ACB on this, total credits should be divided by 3 before the reduction is used (because the reduction is a % of the per-credit basis action). There's a few others in my toolbox, just have to dream a little.

[@larryh.5101]

The PUT options shouldn’t be counted since they are a separate trade and not based on your existing holdings. If you were assigned you would have more shares. The premium that you receive from selling calls on you existing shares should be all that counts. What you are doing is no different that covering your loss using the same stock but not the same position.

[@jaskamakynen7766]

Thanks to Markus if my sold puts get assigned I can only shout "yippee-ai-yey!" :D. The wheel strategy rocks and you're a great teacher!

[@rockwelltradingservices]

😊 You are welcome! I am glad that this helps! Keep learning!

[@gregbabin365]

This makes me much more comfortable with the strategy

[@TBradFashionModel]

I see it more clear with this video. I am in a "Disasterous," TLT trade, down -$90K but will sell premium until I am above break even.

[@michaeloneillire]

Love your videos and your enthusiasm Markus. I've learnt a lot over the last couple of months.

[@rockwelltradingservices]

Awesome! Thank you for supporting this channel! 😉

[@marvinmuhlethaler8297]

Good video! I wouldn‘t use this approach necessarily as buying more puts is basically doubling down on a losing trade. The answer for me is a select a strike where I am good owning the stock i.e. dividend stocks

[@rockwelltradingservices]

Thank you for sharing your thoughts here. ;)

[@Bekseju]

Greeting from Korea! Thank you so much for sharing your knowledge and experience, Markus. I'm following your Wheel strategy but am not sure when I should close a trade due to FOMO. I get assigned and sell calls but what delta should I choose for the strike? I would not sell the calls below my strike price but how far above should it be? If it is low and the share is called away with a small profit I feel regretful that I could have got more. What is arithmetically the besty thing to do in the long run? Thank you.

[@rupulstilskin]

I'm still not clear - why you continued to sell puts on TQQQ even after being assigned early? Can't you be assign again for selling additional puts?

[@widjaja101594]

Collecting more premium allows him to lower his cost basis. Even if he gets assigned again at $100, he lowers his average stock price. For example, he was first assigned at $150 and if he was assigned again at $100, then his average would be $125 per stock. He sold two puts at $100, so his average would actually be about $116 if assigned. If he needed to continue selling calls, he could just sell all ~$116 calls to breakeven on the stock, rather than $150. And that would allow him to keep all of his premium. If he didn't care about his earned premium and just wanted to get out of the trade, then he could sell even lower calls.

[@rockwelltradingservices]

Yes, that is correct. But as I said in the video: It brings down my cost basis 👍

[@rockwelltradingservices]

widjaja101594 is correct! Thanks for commenting. 👍

[@MrDomemi]

I guess it's the same concept of you holding a certain stock and buying more of it in case it plummeted, indeed to lower your cost basis.

[@rockwelltradingservices]

Kinda.... the key is to choose the right stocks, otherwise this will be a disaster. I did a video on this. Check it out: kzbin.info/www/bejne/aqDHknevnqaMhbc

[@Alex-ej3ju]

Markus please do a video on taxes! What’s the best way to prepare for taxes? Been doing the wheel all 2020, and now have to sell so many positions to pay the bill. Please help!

[@alibaba4697]

you are the best on youtube... what percentage per year are you making? .. god bless you and thank you for sharing your knowledge .

[@rockwelltradingservices]

Thanks, Ali Baba. My goal is to make 60-80% per year. Sometimes, I'm overachieving my goal, and sometimes I'm underachieving it. But 60-80% is my sweet spot. Does this help? 👍

[@beregesh]

markus ..just loveeeeeee your videos..(btw.. you are the most handsome mentor in option traiding:))

[@seangreen8262]

With the wheel strategy, it appears that you are always in trade, be it CSP or CC? The trend doesn't seem to matter?

[@rockwelltradingservices]

Hi Sean, great question. I prefer trading stocks that are going sideways or slightly up. I don't like to trade stocks that are in a downtrend, because that's when you need to pay close attention to the trade. This strategy is perfect for markets that we're seeing right now: Choppy, sideways with a slight upward trend. Does this help?

[@86753091974]

Love your channel! I looked at the chart today of TQQQ and it has never got above $105 before $130 in dec in your example (was higher before). Is that due to fees in the leverage? Very curious

[@opheliaartemmys5162]

Im sorry im super noob at this but YOu only get assigned if you are planning to get exercise right ? Thanks for the videos

[@rockwelltradingservices]

Not really. I made a video in which I explain everything in more detail. Check it out: kzbin.info/www/bejne/sJbOoHV6iq2HiJo Let me know if this helps. 👍

[@petkuscinta9797]

This is different to other rule of waiting till stock drops to -30% to launch rescue mission with stocks. But then I realised TQQQ is not aa stock but INDEX that follows NASDAQ. Lesson learned here. The more monay traders have at their disposal that they actual do not need to make living the more certainty there is they never loose money even when -50% crash happens. Traders that would sale 80% of whole capital would struggle to do it and it often is the case with home traders.

[@rockwelltradingservices]

Awesome insight.

[@mtan9623]

Nice video! How do you pick a strike price when selling CC?

[@thomasd5488]

@ M Tan "How do you pick a strike price when selling CC?" That depends on what your goal is. Do you WANT to get rid of a dividend stock, asap, after the ex-div date, because you want to free up capital to buy the next dividend stock that has a ex-div date coming up? Then place the strike price one strike ABOVE your cost basis. You will collect a higher premium for it, while having a higher chance of the call being exercised. If your goal is to try and keep the stock, but make weekly premium selling cc's, then place the strike much further above the current price of the stock, and sell weekly options. Less time in the market reduces the risk of your stock going higher than your strike. But you will collect a smaller premium for it. It is always a trade off between looking for more premium, or more upside stock appreciation. Knowledge is power, IF you apply that knowledge.

[@stevenporter9114]

how is the nasdaq tanking going to effect how you use the wheel?

[@TheWcytube]

Hi Markus, are there any extra fees (then the regular fees selling options)or penalties if you get assigned on a cash covered put sell ?

[@rockwelltradingservices]

Hi Cyrille, it depends on your broker. Most brokers do not charge a fee, but please double-check with your broker. 👍

[@TheWcytube]

@@rockwelltradingservices TY

[@rockwelltradingservices]

Hi cyrille wendling, thanks for watching. And thanks for your feedback. Much appreciated. "See you" in the next video 👍

[@ken6679]

Hi Markus. How do you select your strike price when Selling a Call after your Long Put has been assigned. Thanks a lot.

[@stevenporter9114]

Can you do a video on what to do as we get hit from inflation?

[@concatto]

Hi, a newbie here, after assignment you have now owned 100 shares of TQQQ. Next, you sell a covered CALL, but I don't understand why you have to buy a CALL since you already own 100 shares. Did I miss something?

[@rockwelltradingservices]

Yes, you are correct: Once you OWN the shares, you just sell a call to create a covered call. You don't need to buy a call.

[@MoeTheAbnormal]

So in total, how much money did you make and how long did it take for you to make this amount? Also doesn't this mean you needed $15,000(-$66) in your account in order for this to be a cash-secured put. Great videos btw Mike, you are an excellent teacher!

[@billestep6804]

What’s wrong with all in on a faang like fb or apl instead of splitting up your account. Just want get your opinion. Great videos.

[@rockwelltradingservices]

Hi Billy, great question. What you are describing is INVESTING, and there's nothing wrong with it. But I am a TRADER, and I have found SHORT TERM TRADING more lucrative than investing. Making sense? 👍

[@inerlogic]

Hey Markus, i just got assigned at $110 while the stock was on its way down to $106 14 110 calls (today) will get me $14, we'll see what it looks like tomorrow... but with your strategy here, you're just lowering your cost basis, if i lowered my cost basis to 105, it doesn't make sense to sell a call at 105, because then i've spent all that time just to break even, shouldn't my goal be to sell at $110 where i was assigned and keep the gains?

[@302gloria]

How to calculate cost basis?

[@302gloria]

Never mind I got it.

[@rockwelltradingservices]

Awesome! Thank you for watching! :)

[@prw956]

You said you would explain the couple of Put sells you made in the middle of that,... but you didn't come back to it. But let me take a stab at "why". 1. The premium of the put at that moment was far better than the calls and as long is you didn't get assigned it would mean better money coming in 2. Even it you did get assigned (again) on those puts you would be buying TQQQ at a much lower price than the original $150 when you were assigned the first time. This would cause your cost basis to "average-down" even more,...probably even a greater "jump" than what the premium sales were generating. This would also mean you now have a larger total number of shares, which means that smaller upward movements in TQQQ would have a greater effect. (100 shares raising by $1 = $100, but 200 shares raising a $1 = $200)

[@rockwelltradingservices]

Hi PRW, yes, you are absolutely correct: I'm selling additional puts to collect more premium and to lower my cost basis if I get assigned. 👍

[@alicegiang8327]

I am in Canada and our broker fee is $10+1.25. For one contract. But I get a promotion for a year of free trade. Yet when I get assigned I must pay $30. ( my others broker is even more expensive. They charge $75 for being assigned or call away) If I keep letting my underlying stock assigned. I will be paying thousand and hundred of dollars. One think u did not mention is that your commissions. I know the US broker cost less than $1 per trade

[@23nikeel]

Hi Markus I can understand why you sold the 155 call for $2.10 but why did you then (a) buy it back and (b) why only for $0.37? To me it looks like doing the opposite - selling on one hand and buying with the other. Thanks for your help and great vids!

[@rockwelltradingservices]

Hi 23nikeel, when you sell something for a higher price than you buy it back for, you're making money. I received $210 when I sold the call, and then I spend $37 when I bought it back. So I still had $173, and that is my profit for that trade. Is this making sense?

[@23nikeel]

@@rockwelltradingservices hi Markus yes thank you for that explanation, quite helpful! It's thrown up 2 more questions please - how come the option selling price was $210 one day and then just $37 the next day? That's an 82% drop in a day! What was the reason for the dramatic drop in price in just a day? And secondly if the initial trade was sent out as an alert as part of your alerts service, would all the subsequent trades you placed also have been sent out too as alerts? Many thanks for your kind help.

[@rockwelltradingservices]

Hi 23nikeel, the decrease in option premium happened because the stock moved away from the strike price. That's very normal. And yes, I did send alerts for all of these subsequent trades. Does this help? 👍

[@23nikeel]

@@rockwelltradingservices yes that's a great help, many thanks!!

[@rockwelltradingservices]

😀👍

[@sailingsaramin]

yes!

[@rockwelltradingservices]

Awesome! Thank you for watching! :)

[@thumperbumper8428]

Lots of recycling of videos going on...

[@rockwelltradingservices]

Well, we always shorten the original 45-min Coffee with Markus Show into a shorter 8-12 min video so that you don't have to watch the whole CWM episode. The idea is to make it easier for you to find the content that you're looking for. Making sense? 😀👍