Transcription
In this video, I'm going to show you exactly how to trade the wheel option strategy successfully. How I've managed to extract six figures in premium with this strategy and how I analyze a company to be viable for this strategy. So, let's go ahead and jump into it.
Remember, this is not financial advice. I'm just sharing what I'm personally doing for educational purposes only. Results may vary.
Now, I want to show you my account right here. As you can see, this is my current portfolio that I trade the wheel strategy with. And Robin Hood is a major part of this portfolio. Now, if you want to see me hit my 8 figure goal with this portfolio and you want to follow along my journey, be sure to be subscribed by clicking the subscribe button down below and also please hit the thumbs up button if you get any value out of this video.
So, I want to show you that this works. For documentation purposes, I'm going to log into my realized gain loss for the current year. As you could see, 318K in premiums. Obviously, results vary year-to-year, but currently I'm hitting my goals with this portfolio trading the wheel options strategy.
Now, if you want my free trade ideas, that's going to be my on my Instagram down below and my free newsletter, both down below in the description. Also, if you do want to work one-on-one with me and join my high level mastermind with 360 other high level traders in that mastermind, that'll also be at the top of the description where you can see this free training here and some of our client testimonials that I upload on a weekly basis.
But let's go ahead and jump into it. Let's talk. I'm going to show you exactly the three criteria for the wheel strategy, how I analyze specific companies to make sure they're viable for the current trading year because obviously companies vary year to year and I want to make sure that you are successful with this by applying the right strategy.
So number one is the company has to have a great chart. So let's go ahead and look at the Robin Hood chart for the past year and a half. I I like to look at the past year and a half to give me a good um overview of if the stock is upward trending and if it's continuing that trend. And as you can see, if we just draw a line from, you know, year and a half ago, from back here, okay, um right here, we'll just draw it from beginning of 2024 all the way until now. As you can see, that's a nice upward trending chart here on Robin Hood. A lot of companies don't meet this criteria and that makes it very hard to trade the wheel strategy. For instance, if you look at a company like AMD, wonderful company, they make great products, but if you look at their chart for the past year and a half, as you can see, this thing is just downward trending. Okay, so this is going to be very hard to trade the wheel option strategy on a stock like this. Okay.
Now, if you're wondering what the wheel strategy is, basically I'm going to go over um a brief overview and then we'll dive into the nitty-gritty, but if you see the diagram alongside of me, what we're doing is we're selling cash secured puts. I like to think of it as stock insurance. If you think of it like car insurance, right? We pay a premium every single month for our car insurance. And most of the time we don't use it, right? Because we're good drivers. But, you know, there may be one time that we use it, but all in all, we're probably going to pay more premiums for our insurance than our car is actually worth throughout our lifetimes. It's the same thing with cash secured puts. We are selling stock insurance to people that most of the time it's going to expire worthless. We keep the premium and we do it all over again the next month.
Now sometimes the puts the cash secured puts that we are selling they don't expire worthless meaning the stock goes below our put price. For instance let's just say um you know the stock is at 100 and we're selling an 80 strike put and the stock falls all the way down to 79. We are required to buy 100 shares, right? That uh we're getting put the shares. The person that bought that insurance is able to get out of their stock um for no more of a loss, right? Because they sold their shares to us at $80. Now, once I have those shares, I'm able to now I have that stock at a discount, a great company like Robin Hood, and now I'm able to sell covered calls against that share, those shares for income, okay? And and premium. So, collecting premium, right? Selling covered calls, and then eventually that stock will go back up past our covered calls, and we'll get those shares called away, in which case we will have to sell our shares at a profit. and collect that covered call premium for double the income. So, and then we just restart the whole uh wheel over again by selling puts until we get a sign, then selling covered calls until we get those shares called away and we do it all over.
So, number one, great chart. As you can see, Robin Hood fits that criteria. Number two is going to be great valuations. Either needs a PE ratio specifically under a 100 preferably or if they do have a PE ratio over a 100, they better have a lot of cash on hand. So, I'm gonna go dive into exactly how I analyze companies from an easy perspective so that you know, frankly, you could just kind of see what I'm doing with my analyzation of Robin Hood and you could apply that to other companies as well.
So, we're going to look at Robin Hood, okay, right here on tradingview.com. It's a free website. You could use it. I like this tool. Now, if we scroll down, we go to PE ratio. You could see PE ratio is at 59. Okay, it's under 100. Great. That means we're not paying too much per share for this company. It's not overvalued. Okay. Um, obviously the S&P 500 average PE ratio is much lower around 26 27, but this is a high growth company, so the valuations are going to be a little bit more um stretched, right? Uh, so meets that criteria. It's under 100.
Now the next thing I want to look at is profit margins. Okay, so as you can see just last quarter net margin 38%. Okay, that looks good to me. A company with big profit margins means that they can weather a storm. Okay, meaning you know during any recessionary periods or black swan events, these companies will survive. So if we look at their investor relations document, okay, this was their last earnings report. I could see that. Okay, they're gold subscribers, meaning their recurring revenue. They charge $5 a month for gold and they have millions of users that pay for it, right? As you can see, 3.48 million users pay $5 a month to just use Robin Hood and get extra features. That's huge recurring revenue for for them. As you can see, this number is growing quarter over quarter, right? Double digits. So, that's exactly we want to see more paying customers. Okay. Um, another one is funded customers. Their funded customers are growing that we just want to make sure they're getting more customers, they're selling more of their products and services, and that they're going to be earning more down the line. As you can see, their um adjusted net IBIDA margins is 56%. Their earnings are a 50% 56% profit margin. Okay, that's also something we want to see. So, um, a very robust business. They earn a lot of money and their customer base is growing. Plain and simple, that's what we want to see.
What are some catalysts ahead of Robin Hood that could grow them even more exponentially to make sure that stock price is going to keep going up? Well, number one is their Robin Hood social that they just announced this year. Okay. Um they're releasing this probably later this year in 2025 by the time you're watching this video. Could be way later. Could be um could be already here, right? This is this is going to unlock hundreds of billions of dollars for them because not only is it free promotion for them to get more users on the platform, but they could spin this into an advertising platform just like Facebook, Instagram, WhatsApp, and uh YouTube, right? So, that is amazing. Robin Hood social.
Number two, they're, you know, getting a lot of people to transfer their retirement accounts over to Robin Hood. Help your retirement with an instant 3% instant match with gold. So, if they transfer their retirement account over to Robin Hood, they get a gold subscription right now. They're earning recurring revenue. Robin Hood is willing to match their deposits up to 3%. So, that is pretty huge. Yes, they are paying out money to those clients, but they're getting their money over on the platform so that they could be long-term users and use the uh Robin Hood Gold service. Okay, so that's another growth um aspect.
Another one is their Robin Hood blockchain. They're trying to get all crypto investors onto their platform and use their own Robin Hood blockchain. So, that's another huge growth catalyst. So, these are just three catalysts that are coming up this year that are going to grow the platform. This is exactly what we want to see.
So, now we determined, okay, Robin Hood is more than good, right? They're more than quality as far as far as their valuations and growth as a business. Um, the last thing we need to find out is if they have great premiums. We're going to be selling put options. We want to make sure we're making I don't know, for me, I like to hit a 3 to 5% monthly target. So, that's my goal. So, I'm going to go over to the options chain and I'm going to show you exactly how I analyze uh if the premiums are good.
So, let's go ahead and get into it. The first thing I do want to talk about as a option seller is cash management. Okay, so this is something that most people don't talk about and hedge fund managers do it. Warren Buffett does it. We always say we always see Warren Buffett shoring up cash or selling off um a large portion of shares. Well, why does he do that? Well, he does that in anticipation of a stock market crash or pullback. Okay, so the VIX is the fear and volatility index and these are the levels I follow of cash to have.
Currently, if we take a look at the charts, okay, we're going to go to the charts. As you could see, the VIX right now is at in the 14s. That's that means there's little to no fear in the market. When the VIX is all at all-time highs, like right here when it shot up to 60, right? You could see that the overall market went all the way down and that was actually the bottom. So, you want to be fearful when others are greedy and greedy when others are fearful. So, when the VIX is high, that is good for us as option sellers. People are fearful. So, we want to be greedy and start selling options. But when uh fear is low and people are greedy, we want to be fearful and have more cash on the sidelines.
So, let's go back to the VIX cash allocation levels. You'll see we're right here, VIX between 12 and 15. So, essentially, I could have 40 to 80% cash sitting on the sidelines. Right now, I have about 25%. I'm very, very aggressive and bullish. But to keep myself safe, I try to follow these cash allocation levels because you know there you never know when the VIX is going to spike again and the odds of it spiking are much higher when VIX is trading under 15. So just be aware of that and just know, hey, we don't want all our cash allocated to cash secured puts in Robin Hood uh when the VIX is low because the stock could go down. when the market comes down, it usually brings individual stocks with it and Robin Hood is not immune to stock market crashes. Okay, so that's just something to take a look at.
Now, the next thing is the cash secured puts. Let's go ahead and talk about it. What is a cash secured put and how does it work? Well, if we sell a cash secured put, let's just say um for instance, Robin Hood is trading at 115. In fact, it is today trading at 115. We're going to go all the way down here to the 110 strike and sell a 110 put because the odds of it going down there are like 30%. So 70% odds the stock is going to stay above 110. Okay, so we sell that put, maybe we collect a few hundred bucks or 500 bucks, right? And we wait 30 days and in 30 days the stock trades all the way down to 111. That's good because that means our 110 put expires worthless. It didn't go below that. So then we keep that money and we do it all over again. We sell, let's just say we sell another 110 put and we collect 500 bucks and let's just say at the end of 30 days the stock falls down to 105. Well, now we will be forced to buy 100 shares at 110 and we got paid to do it. Okay, now the good part about that is that we got the stock at a discount because the stock was trading at 115, right? and it went all the way down to 105, but we got it at least at 110 for a slight discount. Okay, so that's exactly how we do the cash secured put and then eventually, you know, we get assigned the shares and that's totally fine.
So I typically sell a 20 to 30 delta cash secured put. So meaning 20% chance it has of going in the money or finishing below our strike price by expiration. And with a 20 delta, you get paid a little less because I'm taking on less risk, right? I'm getting further down away from the stock. A 30 delta, I'm taking a little bit more risk because I'm going closer to the stock, so I'm going to get paid more uh for that. Okay. Um I like to go 30 days out to expiration. Enter on a red day, preferably. And I will show you exactly how I do it.
So, let's go ahead and log into the account. Remember, this is not financial advice. I'm just sharing what I'm personally doing for educational purposes only. Results may vary. But if we take a look at the account, as you can see, I have a lot of cash secured puts. I have a large portfolio of different stocks and positions, but right now I have about 162K in cash secured puts on Robin Hood.
Now, the stock's trading at 115, and I'm going to show you exactly what I would do. So, right now, I'd go out probably 35 days. Typically, I go out 30, but there is no 30-day expiration, so I'm going to just go out 35. Okay? And I will go to the anywhere from 25 to 35 delta typically. Okay? Now, I like Robin Hood at 110. Okay, I like Robin Hood at that strike. If I wanted to be safer, I'd go to 105. This 105 strike, which is a 27 delta, meaning it has a 27% chance of the stock going below 105. Okay, which is a very low probability, but it could happen. And then I would have to buy 100 shares at 105. Now, if I sell this 105 strike, I would click on the bid right here, 370, okay? and I would basically collect this much uh premium 370 which is a potential ROI of 3.73% in 35 days. So that's a very good ROI there if the stock stays at this price. Okay. Um now again the risk is if it goes down to 105 or 104 or 103 I will have to buy 100 shares at that price but I get to keep this premium.
Now for me I'm very aggressive. I like Robin Hood. So, I would sell the 110, which I have right now in my portfolio as you could see, the 110s to collect a potential 5.2% ROI in 35 days. Okay? Um, if the stock stays at this price. So, those are the decisions you have, right, that you can make for yourself to see kind of what would achieve your return goals. So, I like both of those strikes and I'm comfortable with that.
Now, if we go back to the stock, okay, let me show you exactly what this means. Now, if I sell the 110, I get to sell a strike that's all the way down here. Now, the stock would have to go from today's prices, okay? It would have to go down another 4% for me to get assigned, okay? Almost 4 and a.5%. So, I'd get a 4 and a.5% discount from today's prices. And from all-time highs, I'd get a 10% discount. Now, if I went safer and sold the 105, the stock would have to go down from all-time highs about almost 15%. Okay? So, a 15% discount and I got paid to get assigned the shares, right, at a 15% discount. So, either way, it's a win-win because I'm getting a stock at a cheaper price and I got paid to do it. So, that's exactly how the wheel strategy works on the cash secured put side. So, yeah, that's basically it.
Now, what happens if I get assigned? Okay. Well, now I get assigned the shares. The stock fell below my put price and by expiration it um you know expired in the money. So I will have to buy 100 shares. Now how do I what do I do next? I will sell covered calls. So a covered call is basically we're selling a call option to someone that is above our cost basis. So if I got to sign today at 115, I'm going to try to sell the 120 or 125. Right now, if the stock goes all the way past 120 or past 125, I'm going to be forced to sell my shares at that price. So, I get appreciation on the shares and I get a covered call premium. So, it's a double income. Okay?
So, I like to sell the 30 delta covered calls 20 days out, typically 15 to 25 days out. Um, and then I like to enter in on a green day. So, let me show you exactly what I would do. Let's just say that. Yeah, I got a side at 115 today. All right, I had to buy 100 shares. I'd probably go out like let's just say 21 days. All right, and I would go to that 30 delta. Now, the 30 delta is the 125 strike. Okay, I would collect 266 in premium potential premium. All right, if I sold this against my shares, that's about Yeah, it's about a what? 2% return. So, that's a 2% return there in 20 days potential return. And uh I would also collect $10 in appreciation on my shares if the shares went all the way past 125, which is another like, you know, probably 8%. So 8 + 2, that's about a 10% potential ROI if the stock goes past 125. So you could see how much more I can make on the covered call side with stock appreciation. So, that's why I love the wheel strategy because I can make both uh premiums on both sides of the market, whether I'm selling puts or whether I'm selling calls against my shares. Okay, so that's how the covered calls work. And that's basically how to execute the wheel strategy.
Now, I do deploy an additional strategy that I talk about a little bit here on YouTube. In fact, at the end of this video, I will link my master class to LEAPS options. But what I do is I buy leaps call options maybe once sometimes twice a month. Okay, when it meets my criteria. Now that's how I supercharge um you know the ROIs, the potential ROIs by buying these LEAPS options. But you have to get into them at the right time.
So what I do is I buy a LEAPS call option which is a long equity anticipation security or a call option that expires in 365 days or more. I buy a 70 delta. stock has to be at middle or the lower ballinger band when VIX is above 15. So there has to be some fear in the market. I don't want to be buying these call options when there's no fear in the market because then any type of fear that comes in the market, the market's going to crash and these leaps call options are going to be uh going against me. Okay? And then I sell once the stock is above the middle Ballinger band.
So I'm going to show you exactly how I do it on the chart. So like right now I would wait until the stock went down to like at least this level right here like a 106 maybe even the one one to anything below yeah this mid Ballinger band line. So 108.99 anything below here I'd be buying. Okay. Now, I bought a leaps call option right here when the stock was at 97 and then the next day the stock popped up to 115 and I sold and I made a 30% ROI in overnight. Okay, now that is not usually how it happens. Usually, it takes a little bit longer and sometimes, you know, the stock goes way against you like sometimes if you were buying it here, right, and then you didn't get out here and you waited, you know, it went against you for a couple weeks until it popped back up. So that's why I go so far out in time.
Now that's the strategy. You know, I wait for typically the lower Ballinger band or somewhere below the mid Ballinger band. I buy and then I wait for the stock to go back up towards this upper Ballinger band. Okay? So I'm going to show you exactly what I would do. I would go out 490 days. So January 15, 2027. And the reason I go so far out in time is because sometimes it'll take a few months before the stock goes up to profit on these leaps, right? And let's just say, you know, you you bought at that lower Ballinger band, but then a tariff crash happened or some type of black swan event and it took the market six months to recover, right? You're if you went out only four months, you'd lose all your money on those call options. But if you went out two years or a year and a half, you'd have plenty of time for the market to rebound and for you to be right. So that's why it goes so far out in time just for a t for a black swan event and less theta decay because these options were paying for them, but they they decay away every single day that goes by. Like for instance, this 70 delta option decays about $3 per day. But if I went out like 70 days, these ones, this 70 delta option would decay about $8 per day. So almost three times more per day of theta decay. So we don't want that.
So I would go to the 105 strike. I would pay about 3,800 bucks to buy this call option which controls 100 shares. So it's going to move as if I had 100 shares. All right. It's actually going to move for every dollar.7. That's why it's called a 70 delta. But um what's cool about it is that I paid 3,800 bucks to control 100 shares. But if I wanted to buy 100 shares today, that would cost me 11,500. So I get about a 3x leverage on my money by buying the leaps call option. And this is something I deploy uh that's definitely more technical. So if you want to watch that master class, I'm going to link it right here. Watch that video because it's going to show you exactly step by step how I do the leaps option. I look forward to seeing you in the next one. Give this a thumbs up and take