What's my goal again?
I want to make $1M in 7 years using a starting capital of around $20,000.
How am I going to do this seemingly impossible task? I'm going to do this by selling options instead of buying them. On financial subreddits, this is called being part of theta gang.
Theta Gang and the Wheel
Why would someone be part of this gang and sell options instead of buying them?
To borrow from their wiki, “Theta represents the time value of an option. It's the extrinsic value of an option, and as each day ticks away the time value decreases a little. That amount is determined by theta. Theta decay is nonlinear and accelerates as expiration approaches for ATM options. ITM (in the money) and OTM (out the money) theta decay tends to be more linear.”
I read a statistic that said around 75-80% of options expire worthless (which is pretty much true based on my own experience).
So I started reading up on how to sell options and be the house - be the casino that offers players a chance to win fortunes. I quickly realized that this was not the lottery ticket strategy that buying options were, but a slow, manageable, and controlled way of making money.
Knowing that the house (almost) always wins, I wanted to be on the selling side of the options trade.
So what is the Wheel?
I am not really sure who coined this term (I could look it up but I am too lazy), but the wheel is basically this:
First, you sell a cash-secured put in a stock that you like or has a high IV that can net you a nice premium. When you sell a put option to open, this means you are opening up a short put (in contrast to buying a put option, which means you have a long put). You can sell at-the-money or closer to the money to at least make it worth it. Let’s say $AAPL is hovering around $125. If I had at least $10,000 in cash, I could use that as collateral to sell one put option in $AAPL. By doing this, I get money in my account as the premium received for selling that put option.
Then, if the stock keeps going up and does not hit your $100 strike price by the option’s expiration date, you keep all that premium.
Now, what happens if the stock does go down and goes below your strike price? If $AAPL goes down to $95 by the expiration date, the contract goes in-the-money and you would be on the hook for 100 shares of $AAPL at the agreed-upon price of $100/share. Now, good thing you had that $10,000 in cash in your account that you put up as collateral! And that’s why it’s called a cash-secured put.
Okay, now that you have gotten assigned, you’re immediately showing a loss of $5/share assuming $AAPL is still at $95. Well, don’t worry, we’re going to use your newly acquired 100 shares of $AAPL to sell calls for a higher strike price, meaning you are opening up a short call or covered call. It’s covered because you have the 100 shares of $AAPL in your account that can get called away in case your call option goes in the money. (When you don’t have any shares at all and sell calls, those are naked calls.)
Anyway, you just keep selling those covered calls and keeping the premium until it eventually hits your strike price, and your shares get called away.
Now, you’re going to have cash in your account and can sell more cash-secured puts. Rinse and repeat. That is the wheel. You can also just keep selling CSPs forever without getting assigned, and you can also keep selling CCs forever in the stocks in your portfolio that you are just holding, assuming you own at least 100 shares of that stock.
I already made some money selling puts on $GME while IV (implied volatility) was still high. So it sort of proved the strategy to me, but I knew I still had much to learn.
Since I still didn't have a day job where I could get some cash to fund this experiment, I sold off some of my long positions in $SHOP, $VGT, and $NFLX, which have appreciated tremendously through the years, to free up around $20,000. That is where I got my starting capital.
(Technically, it’s exactly $16,463.59 because I used some of the money to buy some long positions like some LEAPS on $ARKF, which is turning out to be a mistake. But let’s stick to the nice round number.)
Meme stock volatility
It’s been a couple of months since my foray into option selling, and overall it’s been pretty sweet. I’ve been taking advantage of all the GameStop craziness, and almost all my profitable trades have been selling CSPs on days when $GME is down and IV is high.
So far, I’ve made more than $4,000 since late February, just selling puts on it. When $GME went down, even more, two weeks ago, I closed my open position for a 92% profit (its value was already close to zero) and sold to open another put option for around 45 DTE (days to expiration) with a $90 strike, netting an easy $2,100. Still have 30 days to go, but if all goes to plan and $GME stays above $90 until the end of May, I get to keep all that sweet, sweet premium. That would make me up around $6,000 since I started. Using only $16,000 of capital in 3 months. That would make it an ROC (return on capital) of 37.5%. Not bad!
In the words of Larry David, that’s “pretty, pretty, pretty….pretty, pretty good.”
Option selling has worked out for me so far. And I feel like I’ve gotten my life back. I only check the charts and my positions three times a day - first in pre-market around 9 AM, then around 11 AM-12 NN, then last before market close (sometimes I just forget and check at night).
When I checked the markets today, I saw green everywhere and decided to sell some covered calls on $ARKW and $AMD around 10:30 AM. One of the reasons I do this is that option prices are wonky for an hour after market open. Usually, you can take advantage of this, but I’m trying to minimize stress in my life, so I open a position when prices have stabilized.
Prices were holding and still green for $AMD and $ARKW, so I sell a covered call for each, netting $900 with 45 DTE. I don’t expect to make much money from these CCs, but I usually just try to take advantage of green days and wait until they expire. Rinse and repeat.
Also, I decided to sell a covered call on $AMD because earnings is coming up tomorrow after hours, and IV is usually high in the run-up to earnings. So I sold a CC at a strike I wouldn’t mind selling at ($95) since my cost basis is so low (around $10), considering I bought this stock years back in 2016. Also, I only have 150 shares, so if I get assigned at $95, that really wouldn’t be such a bad deal, and I still get to keep 50 shares which I can just sell later on. Anyway, I have more than 30 days to decide whether I’m going to let it expire and take assignment or just cover once I reach around a 50% gain.
I know I won’t get to milk this meme stock volatility forever, but for now...WEEEEEEE!
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