 What's up, everyone? Lee Lowell here from smartoptioncell.com. Today's Saturday, February 11, 2023. As you can see on the screen right there, we're going to be talking about the wheel strategy today. Getting lots of emails from people. Lee, I need to know about this wheel strategy. I've been reading about it, been hearing about it. Can you explain it to me? Can you tell me what it is? How to do it? So, yes, we are going to be talking about the wheel strategy today. So if you don't know anything about it, you're going to learn a lot today. The wheel strategy is a variation on an options trading strategy that we love very much here at the Smart Options Seller. It's a variation right here. Here's our cheat sheet. I try to make these things up for you, the Smart Options Seller guide to the wheel strategy. And the wheel strategy is a variation on the put-selling strategy. If you know anything about us here at the Smart Options Seller, you know that our bread and butter is all about selling put options and how we sell put options, why we sell put options, why we love it so much. Such a high probability of profit by selling out of the money put options. But today, we're going to talk about the wheel strategy, which is selling put options with another leg to it, let's just say, put it that way. But before we get there, I want to make sure that everyone gets our free copy of the Put-Selling Basics e-book. It's all about selling put options, what it is, why we love it so much, why it's got such a high probability of profit. So go to our website, SmartOptionsSeller.com. You can see right up here, SmartOptionsSeller.com. Click on the free Put-Selling Basics link right here at the top, the header. And it brings up our free Put-Selling Basics book here. Scroll down a little, put your name and email address right here down at the bottom. You will then receive an email containing a link to read the free Put-Selling Basics e-book. Okay, so get that out of the way. Let's go back to our SmartOptionsSeller guide to the wheel strategy. So in this video today, we're going to talk about the wheel strategy, how you do it, why do people love it so much, and what kind of money can you make from it? And is it profitable? All right, so we're going to talk about that. So let's just scroll down here through our little cheat sheet here and let me move myself over here so you can actually see all the words on the screen. You know, no frills here. Try to make these free videos for you. So let's talk about what is the process? Well, the first step in the wheel strategy is a three-part process. Is number one, you have to sell a put option. Okay, so for those of you that may not know, selling a put option, there's a couple ways or a couple ways to look at selling a put option. Number one, when you sell an option contract, you as a seller are going to get money right off the bat because you're selling something to somebody and that person has to pay you. And who is that person? The put option buyer. Okay, they're buying the option from you, so they're paying you money. So the first step here is you sell a put option and you're going to get money. That's the first way that you collect the cash. Now, when you sell a put option, there's two avenues of thought. Number one, you just sell put options so you can collect the cash and that's how you're going to make your money, right? When you sell a put option, what you're basically doing is obligating yourself to buy a certain stock at a certain price by a certain date. Now, if you have no intention of buying the stock, you want to make sure that you sell a put option that's out of the money. So if the stock price is here, you want to sell a put option with a strike price that's way down here because the stock doesn't really have much of a chance or an opportunity to fall that far. Because if the stock falls that far down to your strike price, you will have to buy the stock. So here at the smart option seller, in our newsletters that we run, our goal is not really to buy the stock so much. We just want to collect the cash and move on and do the next trade. So we always sell a strike price. Here's the stock price. We always sell a strike price way down here. So the chance of the stock falling that far and the chance of us having to buy that stock is very slim. But in the wheel strategy, your goal is actually to buy the stock. So when you sell a put option, as I said, you're potentially obligating yourself to buy a specific stock at a specific price by a specific date. And that's the expiration date. All options have an expiration date. So in the wheel strategy, you really want to actually buy the stock. That's your intention. That's your goal. So you're going to sell a strike price. You're going to choose a strike price called at the money, which if the stock price is here, that strike price is going to be there as well. So that gives you a really good chance of buying or having to buy the stock at expiration. You don't know if it's going to happen. The stock has to fall below the strike price by expiration in order for you to actually buy those shares of stock. So the first part of the three-step process is sell a put option on a stock you like. Let's make sure we all understand what's going on here. You want to sell put options on a stock that you're willing to own, that you're comfortable owning, and that you know is a good stock. You don't want to sell put options on these high-flying stocks that don't earn any revenue, that don't have any profits, because those stocks could really drop far. And the last thing you want to do is buy a stock where it's going to drop on you. So you want to stick to quality stocks. I'm going to show you a chart in a minute. We're going to look at a high-quality stock and just use an example. So you want to sell a put option on a stock you like, and you're going to use an at-the-money strike. Stock prices here, strike prices there as well. That's called an at-the-money strike. The other thing that you need to know right here where my mouse is, if you are assigned on the put option, that's the process of your broker actually forcing you to buy the shares of stock. That's called getting assigned. You're being put the shares of stock. You have to have the money to buy those shares of stock. And every option contract consists of 100 shares of stock. So you need to make sure that you have enough cash in your account to pay for at least 100 shares of this specific stock, whatever the stock is that you choose. If you sell two contracts, that's 200 shares. So you need to make sure you have the money. Alright, so let's just assume you have the cash in your account. You know, you got a stock. You like the stock. You're okay. If you buy the stock, you got the cash. The next thing in the three-part process is step two. You have to just wait to see if you get assigned. And that is just waiting until the expiration date, okay? No, however long the expiration date is. It could be one week, one month, three months, whatever you decide the expiration date for the option. You just have to wait it out and see whether the stock finishes above or below your strike price, okay? The only way that you're going to actually have to buy the shares is if the stock falls below the strike price at expiration, okay? So let's just assume again here that the stock actually falls below the strike price and you get assigned the shares and you have to buy the shares, okay? So now you have yourself 100 shares of this stock. And now what do you do with those shares? Well, part of the wheel strategy is step number three right here. Once you're assigned the shares, now you sell a near term or whatever expiration you decided. It doesn't have to be near term, but most people sell a near term, meaning near expiration, short expiration date, and at the money, covered call option, okay? What does that mean? What's a covered call option? Well, if you own 100 shares of stock, any stock, even if you're not doing the wheel strategy, if you just have 100 shares of a stock sitting in your account right now, you can and you are able to sell what's called a covered call. And what does that mean? Well, you can sell one call option contract against those 100 shares that you owned. What will that do for you? Well, as I said, when you sell something, someone will pay you. Now you're selling a call option and the call option buyer is paying you money for the right to take your shares away from you sometime in the future. So the first part of the process was you're selling a put, giving you the obligation to buy those shares. Now what you're doing is you're selling a call option, giving someone else the right to take your shares away from you. So it's a process. You're buying the shares first and now you're obligating yourself to sell your shares to somebody else. That's what's called selling a covered call. All right, so you got your three steps right here. Let's scroll down a little bit further. Now, if the shares are not called away, then that's fine too, because now you can sell another covered call option for a later expiration date and collect even more cash. That's one thing I didn't mention up here on the first step. If you sell the put option and you don't get assigned the shares, meaning the stock finishes above your strike price. You don't get to buy the shares, so you can sell another put option. So part of the wheel process is, you know, you sell the put first, you may or may not get assigned. If you're assigned, you sell the call option and the only way that you'll have to relinquish your shares is now if the stock finishes above your call option strike. So there's no guarantee that's going to happen. So you may end up owning the shares for a while and doing these repeated cycles of selling these covered calls and your shares may never get called away. So in the meantime, you're collecting all this income. The wheel strategy is all about generating this income stream. So right here, the process can bring in lots of cash through the generation of selling at the money puts and at the money calls. Think about how much money you can make. So here's a little flow chart of what the wheel strategy is all about. Number one, you're going to sell the put option. If you get assigned, you're going to buy the stock down here. And if you buy the stock, if you're assigned, you buy the stock, then you sell the covered call. Okay, now you're either going to relinquish the shares or not, whatever, then you just rinse and repeat. So that this is why it's called the wheel right here. Okay, you got the wheel. You sell the put, you get assigned, you buy the stock, you sell the covered calls, and you rinse and repeat. All right, that's how the wheel works. And as I said, there's no guarantee. Number one, you're going to be able to buy the shares when you sell the put option. There's no guarantee you're going to have to sell your shares with the covered call. It all is going to depend on where the stock finishes at expiration. Okay, so let's look at an example here. Scroll down. Now we're going to look at Pepsi Co. Pepsi, all right? Symbol is P-E-P. One thing I want to mention here is that when you sell, when you do the wheel strategy, it works better on an uptrending stock. Because number one, if the stock's downtrending, you're going to get assigned the shares. But if the stock keeps trending lower, you're going to be holding on to an asset that's decreasing in value. So the wheel strategy is really meant for stocks that are moving sideways or going higher. Okay, if the stock keeps dropping on you, that's not really a good thing. I mean, yes, you can sell covered calls but you're not going to get a lot of money for them and it's not going to relinquish your shares. You're just going to end up owning something that keeps going down in price. So you want to try to focus on stocks that are either flat or moving higher. Okay, so we're going to look at Pepsi here for a minute. Let's just go to the chart and I want to show you why you want to sort of concentrate on uptrending stocks. Now, here's a daily chart of Pepsi. Here's a symbol PEP. Okay, now obviously you can see Pepsi has been moving higher over time. This is about two years worth of time on my charts going back to March, February of 2021. Bottom left to top right stock is trending up. Pepsi would be a great company to perform the wheel on. Now, this is not a recommendation. This is just an example. I'm just showing you this. Okay, so a stock like Pepsi would be perfect. Just slowly goes up over time. Perfect, right? Now, if you look at a stock like Intel, okay, so this is Intel and you can see over time, Intel has just been going down, down, down, down, down over the last two years. If you got to sign the shares of stock and it keeps going down in price, it's $27.80 now. If you had bought the shares at $55 or so, you'd just be holding on to a losing asset over time and it's frustrating and it doesn't work great with the wheel strategy. Whereas with Pepsi, you sell the put, maybe you get assigned at $145, $140 and you sell the calls and you can sell them out at $150 and you repeat the process. Now, you sell a put for $155, you get assigned, sell the calls at $165. So, an uptrending stock is going to work better for you. All right, so let's go back to our cheat sheet here. Now, our example here, and I'm going to show you the option chain. We're going to sell, as part of the first step in the wheel, an April 175 put option for $4.70 per contract. Now, let's go to our interactive brokers option chain here. Okay, so here's the option chain, here's Pepsi, got my tab up here. We're looking at the April 23, April 21, 2023, expires in 69 days. Here's the put options on the right-hand side. Now, remember, you're looking at at-the-money strikes. So, Pepsi last traded roughly $176 yesterday, Friday, February 10, 2023. So, we go here, here's the strike-com, $175 puts are the most at-the-money strikes. $175 put is the closest to $176, that's called at-the-money. So, here's how it went out yesterday. $465 bid at $480 offer. You can probably sell these for $4.70 per contract, somewhere right in the middle. We always shoot for something in the middle. Okay, so we go back to our cheat sheet here. We're going to sell this $175 put for $4.70 a contract. That means you're going to get an actual $470 in your pocket, right? You got to multiply the contract price by 100 because there's 100 shares in each option contract. That amounts to $470. So, someone's given you $470 for your obligation, your future potential obligation to buy 100 shares of Pepsi at $175 each. Now, if you get assigned, you now buy the 100 shares at $175 each. That's a $17.5,000 investment. Okay, you need to make sure that you have $17.5,000 in your account ready to go at that time if you get assigned. Let's just, you know, we're making assumptions here that you have the money and you can pay for it all good. Now, once you're assigned those shares, here's the next part of the wheel. You're going to sell a covered call. Now, obviously, we don't know whether you're going to be able to buy the shares to begin with. So, we have to make an assumption here of what you can sell the covered call for. So, in our example, we're going to sell a 180 strike call for $360 per contract. Let's go back to the option chain here. So, let's just assume that, you know, you're assigned the shares and you're looking at an expiration 69 days in the future. Now, this could probably be maybe the June expiration at that time. You know, we won't know until April whether you have to buy the shares. So, let's just assume we're just going to use the same numbers in April that we would probably get in June, you know, moving forward. So, we, you know, we go down the strike home and you can sell a 175 or 180. It all depends on where Pepsi is at that time, but I'm just assuming it's gone up a little after you've been assigned at 175. So, let's just use the 180 strike here. Okay, and its value is roughly $3.60 a contract. Okay, so we're just making some assumptions here. Let's go back to our cheat sheet. So, let's get rid of this. Why is that making, give me a second here. This is coming from Interactive Brokers, this sign right here. Anyway, so we're selling the call at $360 per contract. Okay, you're going to collect another $360 on top of the $470 that you got. Now, I just want to move back here for a second. Whenever you sell the put and you collect the money, you want to know what your cost, your potential cost basis is going to be. So, you always take the strike price and you subtract out what you received for that option. So, in this case, buying the shares, your actual cost basis is $170.30. Okay, you take the strike price, minus out the premium that you received. So, now your cost basis for the 100 shares you bought is actually $170.30, all well and good. So, you sold a 180 call and you collected $360. So, what's the cost basis if your shares are taken away from you? You take the strike price of $180 and you add, now you add the premium that you got. So, now your cost basis, if you sell the shares is $183.60. Okay, so just we need to know, because when we're going to figure out our return on investment, you know, how much you're actually making, which is the last line right here. Return on investment, you have your sale price of $183.60, your initial cost basis of $170.30, you made $13.30 profit divided by your cost basis buying the shares. That just gives you a 7.8% return in, you know, a couple months. We're assuming three months here roughly. All right, so that's the wheel strategy. That's how you figure out your returns. That's how you figure out your cost basis. So, the wheel strategy really is great as long as the stock is cooperating with you by, you know, moving sideways or going up. So, you really can collect a lot of money here. And if the stock cooperates, you could just keep repeating the process. You sell the put, hopefully you get a sign and you buy the shares and now you're selling at the money call. So, look at all this money you've collected. You've collected, in this case, $830 between selling the put and selling the call option, $830. And your return is 7.8% in roughly three months. If you annualize that, multiply that four times, you know, that's roughly, you know, be close to 30%, high 20%, 30% return, annualize. As long as you can, you know, repeat the same trade over four times in a year. All right, so that's really all about it. That's the wheel strategy. It's a different take on the way that we do it. You know, we sell way out of the money strike prices, so we don't really have to worry about buying the stock. We just collect the cash and keep moving on. But for those of you that really want to employ the wheel strategy, you have to make sure that you're doing these at the money. Or you can choose whatever strike price you want. Let's go back to the option chain here. You know, if you don't want to sell the 175 puts, you can sell the 165 puts. You can still get maybe $195 for those. And, you know, the chance of Pepsi falling down to 165, who knows if that'll happen. But if you really want to do it right, you really should choose the at-the-money strikes. Okay? So that's how you do it. Let's go back to our cheat sheet here. There's the, you know, the flow chart. And that's it. I hope that this is giving you an idea of how the wheel works, why it works, how much money you can get, your return on investment. It really is a good strategy as long as the stock cooperates. And you can really make a decent amount of money. All right? So that's it. I hope it's been helpful to you. Leave me a comment here. If you like this strategy, leave me a comment. If you like the video, give me a thumbs up. Email me. Email me at my website. I'll always answer. And once again, don't forget to get the free Put Selling Basics e-book. If you want more information about what else we do here, our services tab right here. We got two newsletters, our Put Selling Newsletter and our Put Option Credit Spread Newsletter. The two newsletters that we run. And we have our coaching as well. All right, that's all for me today. I hope it's been helpful. I hope everyone has a great trading week ahead and a great weekend. This is Lee Lowell, signing off.