I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Wednesday Wealth, I write about money management, retirement, estate, and long-term care planning.
I’ve been enjoying running the options wheel for a few months now, and have managed to book regular profits, with a bit of a bobble when I overloaded on precious metals and energy stocks (again! I keep doing that and ending up a bag holder).
I seem to have — like many people — a tendency to follow euphoria. And I did that with semiconductor short puts recently. Now about 15% of my options portfolio is in $TSM, $MRVL, and $INTC. The $MRVL position is doing especially poorly, but it expires on 8/21/2026 so all I’m doing is waiting to see if I get assigned. If I do, then I’ll run the other half of the wheel — selling covered calls.
Using bear put spreads with the wheel, for downside protection
This morning, perusing an interesting thread on r/optionswheel, I came across a very interesting trading approach:
I’ve gotten to where I just sell credit spreads with the long strike just being a way to amplify gains before taking assignment. Then it doesn’t really matter nearly as much. I’ll even roll the short out and reenter the long if I don’t want assignment immediately.
And they continue with more details, when someone asks “Don’t the protective puts end up eating a big chunk of your profits over time?”
I sell on portfolio margin and just add another couple spreads to make up the difference. I would rather have more protection and be slightly over leveraged than risk all the allocated cash….
[Essentially], I may sell a 5 lot on Amazon, 30 delta, 5 strikes wide. If threatened, I will sell the long position for profit to further reduce my average entry, and then I will run the wheel. I have zero problem holding AMZN shares so it is a win win. It’s a terrible strategy for high beta stocks or catching falling knives. So I would stick to mag7 and the like.
I really like this approach. I’ve dabbled a bit in credit spreads, and like the opportunity to benefit on the long put side if the underlying comes under pressure.
I’m going to consider whether I should modify my wheeling to use this approach to downside protection.
Starting off with covered calls
Another alternative to a straight options wheel is to start with what’s usually the second part of the wheel, selling covered calls:
Ideally, I start off owning a stock and writing cc’s. I am buying when it is down from its ath by 5-20%. And it is preferably a stock that pays dividends. And only sell the cc’s above my cost basis. Eventually it gets called away. At that point, I start writing csp’s at or below the price it get called away. If the stock drops even more, I either buy more and writing cc’s or do a csp.
I’ve been considering this right now, especially with $SPY trading around its 50-day MA, where it has often bounced before. But its IV is rather low right now (IV percentile of just 29%) so the premiums aren’t too compelling. $QQQ on the other hand has an IV rank of 70% but the chart looks much worse, because of the semiconductor stock weakness.
On trying to time a short put entry
The entire thread is about whether and how to time short put entries. In general, commenters say “don’t bother” and this makes sense in a probabilistic game of selling puts. Charts might tell you a little bit about whether a stock has run too far or fallen too much, but you’re likely better off just continuing to sell puts on tickers you like when the premiums make it worth it to you.
Here’s what one experienced wheel trader writes:
No, opening a short put after a stock has rallied too high doesn’t make sense.
But opening on “red days” doesn’t make sense either, as this may be the start of a red week or further price erosion . . . Red days are a foolish indicator, as the price may recover or it may keep going down.
Besides, what do you do when a stock is on an upward trend? Wait until it drops to open? Think of the profits missed waiting on the sidelines . . .
Long upward trending with room to move higher, or the stock trading in a range, is a much better way to ride that trend or collect theta decay than to “time” the market, which is what waiting for a red day means.
Opening 30-45 dte is what many do to have a strike farther OTM.
Again, the most important thing is to be good with holding shares of the stock as a good quality stock will be one that behaves and doesn’t move around a lot, and if it does drop it will recover faster. Often within the 30-45 dte timeframe of a trade.
Experienced traders use fundamental analysis to trade quality stocks and simple trend analysis to choose those that “behave” rather than guessing or gambling on red days . . .
Me and the options wheel
I really love selling puts as an income generation approach. But I haven’t locked in my process yet.
Some mistakes I’ve made –
- Overloading on certain sectors in times of euphoria (precious metals & energy, then semiconductors)
- Not remaining exposed when I felt scared – thus missing out on earning premium in the places in the market where things were doing well
- Playing around with “cut your losers short” rules when I would have been better off to wait for assignment and then run the other part of the wheel (selling CCs)
But some potential problems are just the nature of the wheel. Using bear put spreads on margin could be a way to address that. I’ll consider it.