(Event entry) What are your options trading strategies?

For this topic, the most effective and well known options income strategy will be the answer:

"The Wheel" 

Why "The Wheel"?

1. It only uses single legged options. 

This reduces trading commission and possible input mistakes.

2. Low maintanance. 

The ideal timeframe to sell options is around 45 days. This means that someone using this strategy only has to put in some work every 45 days cycle.

3. Not using leverage. 

This strategy uses zero leverage with the full collateral in cash/stock. This means wins and losses wont be magnified. As such, the capital is protected and losses would not be large. 

Pitfalls of "The Wheel".

1. Vulnerable to huge downward moves. 

One may get trapped if the underlying dips and options premium collected is lowered. 

The way to avoid this is to choose an underlying with strong long term prospect such that it can recover from the dip eventually.

This is also the only way to lose money in "The Wheel", in terms of monetary loss if one decides to lock in the loss by closing the whole position, or in terms of opportunity costs if one decides to hold until the underlying recovers.

2. Not using leverage. 

This pro is also a con. Not using leverage means the profits wont be as exciting as other strategies and capital requirement may be quite high. That is why this is a "income strategy" for protecting capital while generating some income.

How to execute the strategy:

Step 1. Sell cash secured PUT. 

Step 2. Wait for expiry.

If price is above PUT strike price thus not exercised, repeat step 1.

If PUT option is exercised, stock is bought with cash collateral, proceed to step 3.

Step 3. Sell stock covered CALL. 

Step 4. Wait for expiry. 

If price is below CALL strike price thus not exercised, repeat step 3.

If CALL option is exercised, stock is sold and cash is received, go back to step 1.

This is actually a very simple and clean process considering how complicated many other options strategies are. 

Many diagrams can be found on this strategy, but many over complicate this elegant process.

Made the following flow diagram to accentuate how clean the strategy is:

The key to this strategy is to choose underlyings with good long term prospect and strike prices that would not be easily breached.

Thats the end of this post, thanks for reading. [smile] [smile]