The Options Wheel Strategy: Trades
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29-02-2024 7:31pm#1
Outside of my pension, which simply remains fully invested at all times, I use an Options Wheel Strategy and do all my trades via Interactive Brokers. I'm mostly in US stocks but do the occassional trade on the European markets.
Further information on the strategy can be found at https://steadyoptions.com/articles/the-options-wheel-strategy-wheel-trade-explained-r632/.
I'm going to use this thread to detail my trades. Feel free to suggest other stocks that you are using option trading strategies with.
At 5.55pm today, whilst Becton, Dickinson and Company (BDX) was trading at $235.26, I sold a single cash secured Put for April 19th expiry at a strike of $225 and received a premium of $2.60. The commission for the trade was just $0.05 meaning I received $259.95 in total.
This is my first trade in options for April expiry, with all previously open positions expiring in March.
If assigned, my cost basis will be $222.40 and I'll proceed to sell Covered Calls to supplement the dividend income - all part of the strategy, but something I also feel necessary given the dividend yield is just 1.7% based upon my cost basis of $222.40.
BDX have a few recent, and upcoming, new product releases which will contribute to growth in the coming years. They released results at the start of this month and increased 2024 guidance slightly - with EPS to now be in the range of $12.82 to $13.06.
The midpoint of that EPS guidance would result in a forward P/E of 17.2 - which is historically low for BDX. It's not a high growth company - with future growth estimated in the 5-7% range. Indeed, if it was high-growth, you'd be paying a lot more than 17.2 times earnings. Instead, it's a large, stable, company that's ideal as a long-term, or forever, hold.
A look at the 5-year chart should tells me that BDX is a stable company and often trades within a tight range - meaning it's an ideal candidate for selling cash secured puts when it trades to the lower end of that range and Covered Calls if assigned.
Irrelevant at this stage; but my last exposure to BDX was in November 2008 when I held 25 shares at a cost of $58.65 each.
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Today, at 14:38, whilst ASML.AS was trading at €882.80, I purchased to close a cash secured Put for March 15th expiry at a €780 strike, paying €0.93 and €1.10 commission - total debit $94.10.
I sold this 10 days ago at €7.80; again with €1.10 commission.
The max profit after commissions would have been €777.80 had I held until expiry and it expired out-of-the-money. The chance of ASML closing below €780 in two weeks time is slim but closing today allowed me to lock in €684.80/88% of the max profit in just 10 days. I'd prefer to close out the position and move elsewhere versus waiting another 14 days to eek out the final 12% of the max profit.
ASML is an excellent company with a wide moat, producing the best-of-the-best in high-end semi-conductor manufacturing equipment. Their equipment produces the best chips in the world; with those produced by the likes of machinery from AMAT not even coming close. They're definitely on my shortlist for opening a new position on any pullback.
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At 14:45 today, whilst BASF was trading at €46.97, I sold four cash secured put options for April 19th expiry at a €44 strike.
I took in €0.45 each in premium and paid €1.10 each in commission - so the net credit to my account was €175.60.
If assigned, my cost basis will be €43.56 and the dividend yield on the cost basis will be 7.8%.
Of course, if assigned, I'll sell covered calls to supplement the dividends. I may consider looking for a 1% premium for options 3 months out; adding 4% to the 7.8% yield.
If unassigned, it's a 1% return in 46 days. That's only about 8% annualised and normally I'd aim higher. However, I'll happily own a great company like BASF at a cost basis of €43.56. That's about 7% below today's price.
Many would argue that, should manufacturing experience a boom, chemical companies will be first out of the gate with good results.
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How do you handle recording and handling tax liability do you mind me asking?
Is it fairly simple/onerous/involved
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Interactive Brokers website gives some very good reporting tools so, if you know your way around a spreadsheet, it's not too bad after you download the data.
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At 17.14 today, whilst General Mills (GIS) was trading at $63.65, I sold three cash secured put options for April 5th expiry at a $60 strike.
I took in $0.60 each in premium and RECEIVED $0.30 each in commission - so the net credit to my account was $180.90.
If assigned, my cost basis will be $59.40 and the dividend yield on the cost basis will be 3.97%. This cost basis is 7.2% below the current price.
Ordinarily, you wouldn’t be getting reasonable premiums for a big stable company like GIS with a cost basis so far below the current price. However, I do have earnings to contend with in two weeks time – so there is risk there. They beat earnings every quarter last year and I’ve got a nice cushion should they not meet expectations or guidance disappoint.
If unassigned, it's a 1% return in 29 days – or about 12.6% annualised. This return is in addition to the ~3.2% interest on the cash held in the account in preparation to purchase; if necessary.
After a surge in pricing during 2022, crop prices, which represent a large input cost for GIS, have been dropping by a significant amount. Of course, a large portion of this cost will be hedged so they won’t see an immediate benefit – but it does represent a bit of a tailwind going forward.
With earnings rising 19.4% between 2021 and 2023 and dividends rising 15.7% during the same period, and considering the lower input costs mentioned above, I'll happily open a position in GIS at a cost basis representing the lowest price that GIS has traded since 2021.
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I sold three MTCH Mar08'24 32 Puts on February 7th, just before market close, whilst MTCH was trading at $34.82.They were sold at $0.41 so I took in $120 premium for the trade, less a little commission.
MTCH is a little lower now than it was then but has remained well above the $32 strike - so these are about to expire out of the money.
Today, at 16:38, whilst MTCH was trading at $34.15, I sold 5 MTCH Apr19'24 cash secured puts at a $30 strike for $0.41 each; paying $3.45 commission. I took in a net total of $201.55 for the trade.
My cost basis, if assigned, will be $29.60; which is over 13% below the current price.
If unassigned, it's a 1.35% return on capital at risk in 42 days - or about 11.75% annualised (excluding interest earned on the cash held in the account to purchase; if necessary).
My other position expiring today is 10 CHWY Mar08'24 14 puts; originally sold at $0.20 each. I'm undecided as to whether to reopen a position there as it's got earnings to contend with in 2 weeks time.
With Chewy being a high growth stock with an associated elevated P/E, earnings can have a much more profound impact on price versus the likes of GIS; for which I opened a position earlier this week. That being said, you can go significantly out-of-the-money and still get decent premium for option sales so I'm still considering opening a new position.
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Snowflake (SNOW) is a cloud-based software services play with exposure to lots of potential AI-related growth.
They're a high-growth company who released results at the end of February. These results included a weaker than expected outlook and an announcement of the retirement of the CEO, effective immediately.
Whilst investors are disappointed at the departure of the CEO, the guy was 65-years old and will remain at the company, as chairman, whilst the previous leader of the companies AI business takes over as CEO. I'm not sure I'd place as much weight on him stepping down as the market has.
Its target set a couple of years ago required 30% annual growth in the coming years but, whilst product revenue grew 70% in the year ended January 2023 and 33% in the year ended January 2024, they're only forecasting 22% growth in the coming year. This, for sure, isn't good and is the reason the stock is down about 30% since earnings 8 days ago.
However, I believe they are underestimating growth going forward. Their platform operates on a basis of 'pay as you use' and they've enhanced some products that reduces consumption, giving lower costs to customers. This should aid in attracting new customers - and they ended last quarter with 9,437 customers, an increase of 22% from the prior-year period. The number of individual customers that spent over $1 million on their platform increased even faster - 39% year over year to 461.
They also have a metric called performance obligations; which now stand at $5.2 billion, representing 41% year-over-year growth. This is the value of contracts to which customers have committed, but not yet spent. For sure, not all customers will meet their obligations - but a large proportion will.
They are predicting $3.25 billion product revenue in the coming year - but, with performance obligations of $5.2 billion and attraction of new customers, I can't help but think that maybe they are setting guidance very low which will, of course, aid the new CEO in exceeding expectations.
With the above in mind, today at 18:47, whilst SNOW was trading at $161.74, I sold 1 SNOW Apr19 cash secured put option at a $135 strike at a premium $1.35 and paid $0.80 commission - taking in $134.20 net.
If assigned, my cost basis will be $133.66 - a massive 17.4% below the current price and about 42% below the price before release of the latest results.
If unassigned, it's a 1% return on capital at risk in 42 days, or 8.7% annualised (in addition to the ~3.2% interest on the cash held in the account in preparation to purchase; if necessary). This is lower than some may be happy with but reasonable considering the 17.4% cushion to the downside.
I usually aim for premiums of 1% and sell options 1 month out - so it's usually 12% annualised on top of the interest. However, having closed my ASML option and locking in most of the profit early last week, I'm selling options for April expiry early - with us being 6 weeks, as opposed to 1 month, out, the annualised return is lower.
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I've not done any trading yet this week.
I've got five short, cash secured, put positions set for expiry this Friday; all looking set to expire out-of-the-money.
WFC: Wells Fargo has had a significant run-up in price this past month. I doubt I'll be opening a new position here for now.
BNTX: Pharma stock heavily involved in mRNA tech. These are the guys responsible for the Pfizer Covid vaccine - they developed it and collaborated with Pfizer for their clinical trials and distribution networks. They have a ridiculous amount of cash on their balance sheet. They report earnings next week and I'm watching closely for an opportunity to open a new position. They're in a volatile sector but that balance sheet should provide a floor to the price that, famous last words, can't be too far below current pricing.
DE: Deere has been a relatively stable position in my portfolio. The recent lower crop prices together with higher interest rates deterring farmers from upgrading machinery are worrisome - but it wouldn't be available at current prices in their absence. I suspect I'll reopen a position here at some point in the near future.
NKE: At a strike of $97.50, Nike is the closest to the money in the list. They also report earnings next week, 6 days after expiry of my current options. At some point this week, I might go ahead and roll the options out to April and down to a lower strike. I'll take on the earnings risk; but will be paid to do so.
KHC: Kraft-Heinz is what most would consider the big stable company of the group. I have quite a few of this style of company in my watchlist but rarely sell options in them - premiums tend to be lower than the more volatile companies like those list above. However, sometimes money is pulled out of the big, 'safer', companies chasing returns in the likes of NVIDIA; so they're good to have on the list in case an opportunity arises. In the case of KHC, they had a significant drop last month after earnings - a drop that I felt was overdone. People rushed to buy protection and I was happy to oblige by selling 6 KHC Mar15th 32.5 Puts at $0.33 each.
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First trade of the week.
My short, cash secured, puts on BNTX look set to expire worthless tomorrow. They're at a strike of $80 - BNTX hasn't traded that low since before COVID, when their balance sheet and prospects looked nowhere near as good as they do now. However, they did trade low enough in recent weeks that I was able to secure decent premium at such a low strike.
Today, whilst BNTX was trading at $93.08, I sold three cash secured puts for April 19th expiry at an $82.50 strike. I took in $1 premium each and a negligible credit of $0.90 when it comes to commissions.
If assigned, my cost basis will be $81.50 - about 12.5% below the current price.
If unassigned, it's a 1.23% return on capital at risk in 36 days - about 12.5% annualised.
They have earnings scheduled for next week but, as I stated above, they have a ridiculous amount of cash on their balance sheet to provide some cushion in addition to the 12.5% cushion I already have to the downside.
As with any biotech company, it's all about the pipeline and success of ongoing trials - but it's comforting to know that they're spending €2billion on research and development, about 10% of their market cap, annually - yet have enough cash to continue at this rate for more than 8 years (without considering profits yet to materialise).
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All options set for expiry today are to expire out of the money.
I've opened a new position on NIKE (NKE).
Whilst NKE was trading at $99.56, I sold two cash secured Puts at a strike of $89 and for April 12th expiry for $0.90 each - taking in $178 in premiums after commissions.
This is another position that I'll have earnings to contend with next week - but that's the reason I could go so low with the strike. These options will expire in 28 days and the premium represents 1% return on capital at risk - or 13% annualised.
If unassigned, my cost basis will be $88.11 - or 11.5% below the current price. If any earnings/guidance shock leads prices that far lower, I'll take assignment and begin selling covered calls.
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BNTX reported earnings this morning. They were expected to be significantly down as covid vaccine sales continue to plunge. They ended up being worse than expected.
However, as I said before, they're sitting on a significant pile of cash, almost their entire market cap, and there are high hopes for their pipeline, which is shifting from covid to cancer treatments.
It's down in about 6% in premarket, trading at $88.xx. I've still got high hopes for the company and will continue to hold my position; short three April 19th 82.50 Puts - still well out of the money.
General Mills reported earnings this morning and the stock is moving upwards. My short puts at a $60 strike will very likely close out-of-the-money on April 5th - though I'll likely just take profits and close out the position there.
Nike are set to report tomorrow but I've also got decent cushion to the downside there with my short puts at a strike of $89.
I've also opened a position in CHWY, but that's just a straight stock purchase. They are set to report earnings after the bell and options pricing suggests significant volatility with a potential large move in either direction.
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CHWY had a big run-up in price today prior to the post-market release of earnings.
I decided to take profits and sold up. As I stated before, the options pricing of calls and puts expiring in two days time suggest a major move in either direction after earnings - whether that materialises or not is a different question.
I may come to regret this decision in the coming minutes - but if taking profits too early and opting for the slow-and-steady approach is the worst decision I make with CHWY, it won't be too bad.
I did have a limit order in to sell 10 puts for expiry on Friday at a $14.50 strike for $0.16 each - but that didn't hit so I'm completely out for earnings.
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After buying CHWY at $17.10 earlier this week and selling yesterday before earnings at $17.61, I had some regrets about taking profits early when it spiked in excess of 10% further after the bell.
The spike was short-lived and it lost all it's gains in post-market trading. It's now down ~8% today. It was the usual story of numbers that beat expectations followed by guidance that disappointed. It's without doubt a volatile one and not for the faint-hearted - but I still like it's long-term prospects.
With that in mind, I went ahead and sold 15 cash-secured puts for April 19th expiry at a strike of $13.50 for a premium of $0.14 each. I took in $210 in premium total and paid $10.50 commission - for a net credit of $199.50.
My cost basis, if assigned, will be $13.37. CHWY was trading at $16.30 at the time - meaning my cost basis is a whooping 18% below the current price (and 24% below the price at which I sold yesterday - albeit, my trades earlier this week involved 1,000 shares and opposed to the 1,500 these options would expose me to).
If unassigned, it's a 1% return on capital at risk in 29 days - about 12.5% annualised. As usual, this is in addition to interest earned on the money held in account to purchase if necessary. The markets are quite high at the moment but if I can get about 15.7% annualised return whilst having so much downside protection should markets turn, I'll be very happy. If CHWY doesn't drop by more than 17% in the next 4 weeks, I'll take full profit on the short puts and consider a new position.
For tomorrows expiry, the only position I have, which looks set to expire worthless, is Schlumberger Limited (SLB). I'm going to hold off on re-opening a new position there until I see some sort of pullback.
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Thanks for posting this. I was interested in doing this but the bookkeeping looks to be excessive. For shares you pay 33% of profits (with 1270 allowance) but with options you are paying PAYE & PRSI and it appears you can't claim for losses (worthless expiry and not assignment)?
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If buying options, worthless expiry with no resulting assignment is a loss. However, I short options so full profit is achieved if they expire out-of-the-money and no assignment occurs.
I'm in a non-standard situation where I pay National Insurance as a trans-border worker so my tax situation is slightly different to most here in that I don't pay PRSI.
My trading losses and gains for the year are totaled and I pay the required income tax. I can offset the losses against the gains but cannot carry forward losses between tax years.
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Lovely, thanks for the explanation.
Tl;dr - stick to calls/leaps or do this outside the country as you pay less tax.
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Well I'm Irish resident so the only less tax I pay in Ireland is PRSI. I'd still trade as I currently do if I did have to pay it.
It also works out better, if you do happen to make a loss, if you have other unearned income such as dividend income or rental income as that can be offset within the same tax year.
If the first half of the year were loss-making for me, I'd consider switching to a strategy where I capture lots of dividends by buying shares close to their ex-dividend date and selling in-the-money, or only slightly out-of-the-money, covered calls.
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Today, whilst Rémy Cointreau SA (RCO.PA) was trading at €90.70, I sold three cash-secured puts with an April 19th expiry and an €85 strike for €1 each; paying €3.30 commission. My net credit for the trade was €296.70.
If assigned, my cost basis will be €84.01 - about 7.4% below the current price.
If unassigned, it's a 1.178% return on capital at risk in 25 days - or 17.2% annualised in addition to the 3.2% interest on cash held in balance to purchase; if necessary.
RCO has struggled this past year with slowing sales and inventory issues but I feel the price drop of late is overdone. I expect the US inventory problems will be easily resolved. For sure, the slowdown in Asian sales represents a risk - but that's the risk we're being paid to take.
Post edited by marathonic on0 -
During the last half hour of trading yesterday, whilst Lululemon Athletica (LULU) was trading at $387.86, I sold 1 cash-secured put for April 26th expiry at a $365 strike for $3.65; paying $1.04 commission and taking in a net $363.96.
LULU has beat earnings consistently every quarter in recent times. In the latest quarter, revenue growth was 9% in America and 54% international. Their international business represents just 21% of sales and they are expecting significant opportunity for growth in these markets.
For the coming quarter, they are guiding for revenue growth of 9-10% and EPS growth of 3% to 5%. For the entire year, they expect growth in both in the 10-12% region. This is lower than expected and is the reason shares have tumbled almost 19% since earnings.
With guidance of $14.00 to $14.20 EPS for the coming year, the forward PE range is 27.4 - 27.7. If I'm assigned shares at the $365 strike, my P/E based on cost basis will be 25.4 - 25.8.
According to the CEO, brand awareness last year in the U.S. went from 25% to 31%, and China went from 9% to 14%. I believe that the lower than expected guidance is a short term issue and growth in the coming year(s) will exceed the 10-12% guided.
Share Price at time of trade: $387.86
Strike of Option: $365
Premium after commissions: $3.64
Cost Basis If Assigned: $361.36
Downside Protection: 6.83%
Return if unassigned: 1% (32 days)/11.4% (annualised)
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APTIV (APTV) are a technology company providing vehicle components and software related to autonomous driving (automated parking and similar), advanced safety (in the future, expect cars that are almost impossible to crash), infotainment systems and similar.
They sell to the major global OEMs in every region of the world. Their ten largest customers accounted for approximately 54% of their total net sales for the year ended December 31, 2023 - and none individually exceeded 10% (not too exposed to any single customer). Their customers include the likes of GM, Ford, Stellantis, Volkswagen, Tesla and BYD.
They beat earnings estimates every quarter last year and revenue has been steadily rising.
Fifteen seconds before the market closed today, my limit order hit and I sold three cash-secured puts for April 19th expiry and took in $255 premium.
Share Price at time of trade: $76.59
Strike of Option: $72.50
Premium after commissions: $0.85
Cost Basis If Assigned: $71.65
Downside Protection: 6.45%
Return if unassigned: 1.18% (23 days)/18.8% (annualised)
I'll likely open one further position for April expiry in the coming couple of days and then it's time to move onto the May expiries.
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Closed out my four cash-secured puts on BASF, paying €16 + €4.40 commission = €20.40.
The initial credit to my account was €175.60, 23 days ago, and there are also 23 days left until expiry. Therefore, I decided to lock in 88% of the max profit in 50% of the time to allow me to concentrate more on my other positions and my upcoming trades for May expiry.
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Closed out my five cash secured puts on MTCH (April 19th expiry/$30 strike), paying $10 + $1.48 commission.
I took in $201.55 for the trade on March 8th and they're for April 19th expiry - so that represents 94% of the max profit cashed out in less than half the time.
I'm almost certain they will expire out of the money but I'm best closing it out and concentrating on new positions instead of trying to squeeze out the final 6% profit.
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Sold three cash secured puts on Shopify (SHOP) at a $69 strike for April 26th expiry. The net credit was $211.65 after commissions.
Share Price at time of trade: $77.45
Strike of Option: $69
Premium after commissions: $0.70
Cost Basis If Assigned: $68.30
Downside Protection: 11.8%
Return if unassigned: 1.025% (29 days)/12.9% (annualised)
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Sold two cash secured puts on Global Life (GL) at a $100 strike for April 19th expiry. The net credit was $200.60 after commissions.
Share Price at time of trade: $115.65
Strike of Option: $100
Premium after commissions: $1.00
Cost Basis If Assigned: $99
Downside Protection: 14.4%
Return if unassigned: 1.01% (18 days)/20.5% (annualised)
I miss out on a dividend for this position as it goes ex-dividend before expiry - but it's only a $0.24 per share dividend. I do not have earnings risk to contend with before expiry.
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Might want to look into Ecopetrol for a possible layup.
Ex-Divvy of 80c on 4th.Should see quick dip AH and following few days (with possible reversal if oil spikes).
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Thanks for the tip. I don't see any options plays of interest but will add it to my watchlists.
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Sold two cash secured puts on Lamb Weston (LW) at a $90 strike for April 19th expiry. The net credit was $140.60.
They have earnings being announced tomorrow so a lot of the premium achieved is attributable to that.
Lamb Weston is a world leading brand in high quality frozen potato products, sold in over 100 countries. Their biggest customer is McDonalds.
They have a relatively low dividend but I'd always plan to sell Covered Calls if assigned to ramp up the returns. Besides, I'd prefer they pay down some of their debt load versus paying a more meaningful dividend.
They beat earnings in all recent quarters so let's see what tomorrow brings.
Share Price at time of trade: $102.21
Strike of Option: $90
Premium after commissions: $0.70
Cost Basis If Assigned: $89.30
Downside Protection: 12.6%
Return if unassigned: 0.78% (16 days)/17.9% (annualised)
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Tough earnings for Lamb Weston and it's down significantly in pre-market.
It reported $1.46b revenue versus $1.63b estimates and EPS of $1.20 versus $1.40 estimates.
EPS guidance for the coming year were reduced from a $5.70 - $6.15 range to a $5.50 - $5.65 range.
Shares were down over 16% in pre-market on release of earnings and have trimmed that to less than a 12% loss now; 30 minutes before market open.
I'm disappointed, obviously, but will keep my position open and take assignment if it comes to it. Right now, in premarket, shares are trading below my $90 strike but above my $89.30 potential cost basis.
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Still licking my wounds from the Lamb Weston trade that went against me, hard, after earnings. They're now trading a little over 10% below my potential cost-basis with 2 weeks until expiry of the options.
I do feel that it's oversold and should come up closer to my cost basis before assignment - allowing me to sell Covered Calls at strikes above my cost-basis in an attempt to rescue the position.
For todays expiry, I've just got General Mills (GIS) expiring worthless and allowing me to take full profit.
As per my post on the 'Share Picks 2024' thread, I purchased some shares in the MMM spin-off Solventum (SOLV) on Wednesday as I felt it was undervalued; potentially through new owners dumping their shares to ramp up their MMM position.
At the time, the options weren't trading on IB so I decided to just purchase outright. Today, I've sold three Covered Calls against that position for May 19th expiry at a $75 strike for $2 each. That brings my cost-basis down to $62 if the shares remain in my portfolio and gives an overall max profit of $13 per share if they're called away at the $75 strike.
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This weeks trades so far:
Monday: Sold two cash secured puts on Lamb Weston for April 19th expiry at a $75 strike; taking in $110.60 premium total. I'm well underwater on my April 19th $90 short puts and this trade will either have me double down and reduce my average cost significantly or, if it stays above $75, will knock $0.55 per share off the cost basis of my $90 shares. I think the drop is overdone and am happy averaging down.
Tuesday: Was assigned the 200 shares of Lamb Weston associated with my short $90 puts early. The shares bounced 3.4% and I sold two Covered Calls for May 17th expiry at an $85 strike for $1 each, taking in $200.60 premium. Overall, the April and May options premiums have been ($0.70 + $0.55 + $1) * 200 = $450 and there's a dividend of $0.36 per share with an ex-date of May. 2, 2024. If the shares are called away next month at $85 each, my overall loss will be $90 - $85 - $2.61 = $2.39 per share.
Wednesday: Today, I re-entered a position I've not been in since February - Airbus (AIR). I miss out on a dividend of €2.80 with an ex-date of Apr. 19, 2024. For this reason, I've worked out my figures based on a price of €161.06 versus the €163.86 it was trading at at the time of the trade. I'll post a separate post with my thoughts on this trade.
Post edited by marathonic on0
