I started selling options in September 2020 after watching a few YouTube videos on the topic. Since then, it’s remained the main way I add income. Of course, it hasn’t been all smooth sailing, but the experience has taught me a lot.
Options in Plain Language
An option is a contract that lets someone bet on whether a stock will go up or down. If they believe it’s going up, they buy a call. On the other hand, if they think it’s going down, they buy a put.
I’m on the selling side. In this case, the buyer pays me a premium for the contract. For example, let’s say Apple is at $100. Someone thinks it will hit $50 next month. They pay me $3 per share for a put option. Regardless of what happens—whether Apple goes up, down, or sideways—I keep that $3. However, if the stock price goes below $100, I end up owning those shares and the put buyer owns the difference.
Selling works because time is against the buyer. With each passing day the stock doesn’t move in their favor, the option loses value. As a result, most expire worthless, and the seller keeps the premium.
Why I Use the Wheel Strategy
After experimenting with different approaches, I settled on the wheel strategy. It’s simple and repeatable:
- Sell cash-secured puts on stocks I wouldn’t mind owning.
- If assigned, I now own 100 shares.
- Sell covered calls on those shares, or alternatively, put a sell order on the stocks.
- Finally, if the shares get called away, go back to step 1.
The strategy “turns the wheel” over and over. Some weeks, I’m holding cash and selling puts. Other weeks, I’m holding shares and selling calls. Often, I put a sell order on stocks hoping they will bounce back; if not, I sell at a loss and return to selling puts.
How I Pick Trades
When choosing trades, I look at:
- Premium as a percentage of the stock price
- Spreading positions across different sectors
- Whether analysts think the stock is undervalued
Typically, my target is one-week expirations with about a 2% premium. That said, high premiums usually mean higher risk, so I focus on stocks I’d be comfortable owning if things go wrong.
Why Selling Options Isn’t the Same as a Casino
The casino analogy gets thrown around a lot. Sellers have a statistical edge, collect money upfront, and most bets fail. In a sense, that’s true—until the market has a meltdown.
In contrast to a casino, where customers don’t all win on the same day, options can behave differently. When volatility spikes, every seller can get hit hard at the same time. Crashes, earnings disasters, or sudden geopolitical events can wipe out gains quickly.
Next Steps
In my next post, I’ll go over what to do when things go south and how to keep a downturn from turning into a disaster. In particular, two things make a big difference:
- Diversification
- Trailing stop orders when running the wheel
If you want, I can also highlight all the added transition words so you can easily see where they were worked in. That would help you reuse the pattern in future posts.
