I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
Over the weekend I began work on my magician’s trading plan that uses all resources at my disposal (emotional, financial, logical, creative) to effectively trade the market. The Magician card in the Tarot transforms ideas and abstractions into grounded reality, using objects representing all four suits of the Tarot (cups – emotions, pentacles – money, swords – logic, and wands – creativity).
I’ve been using a systematic approach to options trading with just one approach, the options wheel. The main options trade of the wheel is selling short puts, which provide a premium up front for taking on the obligation to sell a stock at a specific price, should the price of that stock be below the strike price of the option contract at the expiration.1 By choosing stocks (and ETFs) that look like their prices will stay where they are or go up, and choosing strike prices far away from the current price, the options wheeler limits the risk of assignment. Sometimes the wheeler will get assigned, if there is bad news about that particular stock, or in a general downdraft in a sector or in the broad market. Then she starts selling calls against the stock — options contracts requiring the seller to sell her stock at a specific strike price by a specific expiration — to make premium, and to eventually have that stock “called away.”
The systematic approach I’ve used works in the following ways:
Emotional – cups
In the version of the wheel I’ve been doing you almost never close out a put just because it has lost a lot (which happens when the underlying stock price goes down below the strike price). You hold on, waiting for the stock price to recover, which it often does. If the stock price doesn’t recover, you might roll the option out in time — closing that contract and buying a new one with a further-out expiration date — if you can do so for a net credit, which keeps you from taking assignment on a stock at a loss. If you can’t roll for a credit, you wait and take assignment if you need to. This teaches emotional equanimity, and has taught me to ride stock ups and downs.
The options wheel also usually provides slow and steady income over time rather than big payoffs. It rewards patience and diligence.
Financial – pentacles
The options wheel is generally considered a way of generating income rather than growth of your account. Of course the lines between these two activities are blurred.
If you have a brokerage account with options access that allows you to sell puts either without anything backing them (naked puts) or with a money market fund or other investments backing them (can be considered cash-secured), you can earn yield or other returns on those assets even while garnering put selling premium. If you earn 10% a year from your options wheeling, then add to that whatever additional yield you’re getting from your money market fund — right now, around 3.5% — to get a total return on the portfolio of 13.5%.
Now all of this goes out the window if there is a big market decline that lasts a long time. The options wheel isn’t great for a bear market, though it can allow you to make money via bear market rallies.
Swords – logic
Some people say the options wheel is purely mechanical. If it were, then you could just write a software program to do it, and let it go, and make money without any human intelligence applied. Of course, that’s what algorithmic trading does, not just with the options wheel!
But practicing the options wheel as an individual usually involves the application of human judgement. You decide which tickers to wheel and how to diversify across sectors. You decide what your rules are for when to enter, when to roll, when to take profits, and when to close at a loss. If you get assigned, you decide on when to sell calls on the assigned stock, and at what expiration and strike price.
I’ve learned more about diversification, chart analysis, and stock selection in two months of doing the wheel than I ever did with seat-of-the-pants buy and hold investing.
Wands – creative
Here is where I want to expand. The wheel is too risky on its own in today’s volatile markets. I want to take the best of the wheel – how it helps me learn to manage my emotions while managing risk, how it gives me regular injections of joy when I close a position at a profit quickly, how it’s teaching me better diversification, how it tracks P&L by ticker and across the portfolio – and add flexibility, opportunity, and a better risk profile.
The outlines of the plan
Initially I’m planning to add vertical debit spreads as a second and third approach to making money with options. I say second and third because you can buy a vertical call debit spread, which is bullish, or a vertical put debit spread, which is bearish. I’m especially interested in outlining rules for buying bear put spreads, as they give me a way to profit from stock declines, whereas selling puts for the wheel is a neutral to bullish bet.
To increase discipline and continue increasing my emotional trading equanimity, I am going to use lookbacks at recent highs to decide when to enter a new bullish trade with breakdowns below the 50-day moving average to enter a new bearish trade. I’m going to use average true range (ATR) based stops as exit signals. I haven’t figure out exactly how these rules will work. I put together a spreadsheet with Gemini’s help and it came up with some entry and exit rules so easily. But of course these were rather thoughtless!
The key is not to create perfect rules and spend an endless time backtesting to see which ones are optimal, but rather to enforce a discipline onto when you enter and exit trades.
I need to improve my rules around diversification. Last Friday saw me overweight in precious metals, base metals, and mining, as well as in energy. I’ve found that investing off of convictions doesn’t really work. It’s momentum, trend following, and chart analysis for me from now on. And diversification across market sectors and factors (e.g., across industries, across geographies, across business size, and so forth).
Using all my resources
I’m “fortunate” that I still have carryover losses from 2022 and 2023 so for now I don’t pay any taxes on earnings from options trading (which generally generates short-term gains, but in certain cases can generate long-term).
I’m also fortunate, without quotes, in that I’m technically oriented and have experience building software. I’ve been putting together a prototype trading tracker in Google Sheets and plan to turn it into a database-backed web application once I figure out the details of what I want it to do. That will of course involve using some coding support AI like Claude Code or OpenAI’s Codex or Gemini. I’m hoping it won’t be prohibitively expensive by the time I get to that! I mainly need the AI to set up the system and code repo for me and once it’s all structured and ready to go the changes shouldn’t be too huge.
Finally, I also have plenty of understanding of options, if not actual experience trading different setups, from the past few years of experimentation and learning. Along with that, my ability to absorb complexities and my drive to do so serves me well as an options trader.
Next steps
Today I’m continuing to build out the new trading spreadsheet that includes a sheet for individual tickers that I’m following, a ledger of trades (all types of trades on one sheet, and open and closed on the same sheet), and a dashboard. The individual ticker page includes calculations of important metrics like the 200-day moving average and the ATR. I had already built a very full-featured spreadsheet for the options wheel but it’s not easy to expand it into more kinds of trades. This is really fun, but also pretty demanding cognitively!
Nice to see futures in the green this morning, of course on the back of another announcement by Trump saying a deal is imminent. That doesn’t help my energy positions, but the rest of the portfolio should look a lot better today compared to Friday.
- Actually for most puts, the buyer of the option can exercised at any time not just at expiration. If the stock goes deep “in-the-money” before expiration, meaning the stock price is far below the put strike price, the put holder may elect to exercise early, thus requiring the put seller — the options wheeler — to buy the stock right then. ↩︎