Tuesday, March 21, 2023

10 Best Stocks For The Wheel Strategy


Why I Love The Wheel

The wheel strategy is what I like to call the consistent money machine. It’s a system to enter stocks cheaply and profit on stocks you own.

The basic methodology is very straight forward:

  • to enter a stock you sell a cash-secured put option at a strike price you want to own the stock. You keep selling put options the same stock until you get assigned and receive the stock shares.
  • Once you eventually get assigned the shares, you sell covered call options on the assigned stock until it is called away and you have to sell the shares.

The best part is you collect a premium everytime you sell puts. Once the shares are assigned you collect more premium selling calls on your position.

The Wheel Strategy Example on Stocks

Here is my history of the wheel on AAL. One of the best stocks to run the wheel strategy on.

Here is my history of the wheel on AAL

That’s because I look closely at choosing the Best Stocks for the Wheel Strategy. What I want to see is stability in price. Which brings me to the list of characteristics I want to see in a stock before I run the wheel strategy on it.

  1. Stable and predictable price movements: Stocks that have stable and predictable price movements are ideal for the Wheel Strategy. Too much volatility can potentially make your average cost much higher than the current stock price in case of a crash. For that reason I want to find strong support in a stock.
  2. Strong fundamentals: Stocks with strong fundamentals such as a solid balance sheet, consistent earnings growth, and a competitive advantage in their industry are often good candidates for the Wheel Strategy. These stocks are less likely to experience large price swings and are more likely to maintain their value over time. For this exact reason I love SPY (S&P 500 Index Fund), QQQ (Invesco QQQ Trust) and other blue chip companies (A blue chip company is a large, well-established, financially stable, and reputable company that has a long history of steady growth and a proven track record).
  3. High liquidity: Stocks with high liquidity have a lot of trading volume, making it easier to buy and sell options on the underlying stock. This is important because the Wheel Strategy involves selling options, and you want to be able to do so quickly and easily when you need to.

Here’s one of my favorite stocks to run the wheel on – Apple.

Here's one of my favorite stocks to run the wheel on - Apple.

Notice the volume of 94. That’s a great volume on the day. The even more important figure I look at is open interest. I’m using Robinhood by the way. You can get gift stock using my link if you like. As for open interest, notice the 6,266 amount. That means there is millions of dollars of liquidity. ABout $6,000,000 just on this strike price for the day. That means it’s safe and liquid should you want to adjust your wheel strategy by closing or rolling it.

SPY is a special case for the wheel strategy. It is my favorite by far for many reasons. For starters the SPY ETF has high liquidity and a tight bid-ask spread, making it easy to buy and sell options at competitive prices. It also has a historical uptrend and low volatility, making it a stable investment choice.

The SPY ETF is an excellent choice for investors who want to take a slow and steady approach to the Wheel Strategy. The SPY ETF tracks the S&P 500 index, which is comprised of 500 of the largest publicly-traded companies in the US. This means that by investing in the SPY ETF, an investor gains exposure to a diverse range of industries and sectors, including technology, healthcare, finance, and consumer goods. In fact it includes every sector of the economy. This diversification is particularly beneficial for investors using the Wheel Strategy, as it helps to spread out the risk of their investments. By having exposure to a broad range of companies, an investor can minimize the impact of any single company’s performance on their overall portfolio.

Although I enjoy selecting stocks, conducting research, and utilizing tools like Optionsfy to identify undervalued opportunities for implementing the Wheel Strategy, I must admit that having a diversified ETF that provides a reliable source of consistent premiums is always a positive for me. Let’s talk about Stock Selection.

Stock Selection For The Wheel Strategy

The primary vulnerability of the Wheel Strategy lies in the stock or ETF position. If the price experiences a significant drop, you may have to purchase the shares at a loss once the put option is assigned. Then if the stock price keeps going even lower you might not be able to sell a covered call with a strike price higher than the stock’s cost basis. This is why you need to carefully pick the right stocks as once you are under your cost basis there really isn’t a lot of fixing you can do. You can roll the option to a lower strike price and a further date, but the best way to profitably run the wheel strategy is to pick high quality companies to begin with.

My favorite companies personally are the following:

  1. MSFT (Microsoft Corporation)
    Strong financials and consistent growth. Partnership with OpenAI. As you can see below MSFT has put premiums that can bring in ~2% in roughly one week. The volume is in the thousands, with open interest in the tens of thousands.

    msft - .
  2. AAPL (Apple Inc.)
    Dominant market position and loyal customer base. Long-term hold when assigned shares with the wheel strategy.
  3. ADBE (Adobe Inc.)
    Recurring revenue model and industry-leading software products. The con is this one is expensive and only for large accounts.
  4. CRM (Salesforce.com, Inc.)
    Long-term contracts and high customer retention rate.
  5. Palantir Technologies (PLTR)
    A data analytics software company with a market cap of around $42 billion. PLTR has been volatile in the past, but it has potential for growth in the tech industry. This is the best wheel stock under $10.
  6. Oatly Group (OTLY)
    A plant-based milk and food company with a very cheap stock price. OTLY has been growing rapidly and has a lot of potential for growth as more consumers turn towards plant-based options. In fact, OTLY is The Best Cheap Stock For Wheel Strategy in 2023. OTLY is the best wheel strategy stock because of the cheap stock price being easy for beginner option traders to wheel into. This is the best wheel stock under $10. You can see the market share and growth Oatly has in various markets below.
    [Source: https://twitter.com/venturetwins/status/1384280963815854091 ]
  7. AT&T Inc. (T)
    A telecommunications company with a market cap of around $213 billion. T has a stable business model and offers a high dividend yield, making it a good choice for income-focused investors. In fact, T stock is the best wheel strategy stock for retirees looking for consistent cash flow. When selling call options on this stock you are running what I call the double dividend strategy. You get a huge dividend plus premium from selling calls options once you get assigned T stock running the wheel strategy. I have been asked “i am retired is selling short term puts for income a good idea.” And I think it’s the best investment strategy in the world. Sit back and relax selling covered puts for income. Then once you have this dividend aristocrat you sell covered calls for income safely plus get the dividend.
  8. Tesla (TSLA)
    This stock is good for many reasons. Tesla is becoming a value stock because its price-to-sales (P/S) ratio has been decreasing over time, approaching the P/S ratio of more established companies like Apple. The P/S ratio compares a company’s market capitalization to its revenue and is often used as a valuation metric for growth companies. Tesla’s P/S ratio has been declining as its revenue has grown rapidly over the past few years. This means that investors are valuing the company less on its potential for future growth and more on its current financial performance. This comes back to stable and predictable price movements. Although Tesla is still a growth company with significant potential for future expansion, its decreasing P/S ratio is a good sign for a good stock to do the wheel strategy on. It was the best stocks for wheel strategy 2022 and I think it will be again in 2023 now that its price has stabilized.
  9. The Invesco QQQ Trust (QQQ) is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index.
    This ETF is heavily invested in big tech companies like Apple, Amazon, Facebook, Google, and Microsoft. In fact, it holds many great technology companies. Here are the top 10.
    "top 10"
    QQQ is one of the best ETF’s to use for the wheel strategy. Investing in QQQ can provide medium to high rewards, but it also comes with medium to low risk. Additionally, QQQ has a high level of liquidity, which makes it easy to buy and sell. As you can see below I am currently in the wheel strategy on QQQ with 11% of my money. You can see I am up $8,950 on the stock appreciating and $569 in option premium gains.
  10. Last but not least we have SPY.
    The SPY Wheel is a great way to generate income with low risk. However, because it tracks the overall market, it may not offer the same explosive growth potential as a more tech-heavy investment like QQQ. SPY is the best overall dollar for dollar investment in my opinion. It provides the best return per risk. This is called Sharpe Ratio. The Sharpe ratio is an important metric for evaluating the performance of the Wheel Strategy. This ratio helps to determine whether the returns achieved by the strategy are commensurate with the level of risk involved. Due to its large size and high trading volume, SPY has tight bid-ask spreads, which makes it easy to buy and sell at the current market price with low transaction costs. Most people expect an annual return of 8% to 10% from buying and holding ETFs that track the S&P 500 index. With the wheel strategy you can make a lot more money on the same asset.

In conclusion, the wheel is my favorite, long-term consistent income option trading strategy.

For more information and videos you can watch these wheel strategy videos on my YouTube channel.

The Wheel Option Trading Strategy (Consistent Passive Income with Options)
The Wheel Option Trading Strategy (Consistent Passive Income with Options)
← Back to the blog