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Option Wheel Strategy: A Strategy To Juice Income For Investors

Dec. 30, 2021 12:36 PM ETAbbVie Inc. (ABBV), O, VICI
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Around six months ago, we launched Cash Builder Opportunities. We've made many successful trades since that time. Now that we are more established. We are looking for more members to join us by offering a 20% discount for new members! Before signing up, consider giving us a free 2-week trial to see if we are a great fit.

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At Cash Builder Opportunities, we offer the Core Income Builder Portfolio and the Satellite Income Builder Portfolio. These portfolios are designed to build up an investor's income over time by selecting leading dividend growth stocks across various sectors for diversification. Our Core Portfolio is designed to be less active by letting them work over time. On the other hand, the Satellite Portfolio can be a bit more active when opportunities present themselves.

Where we are the most active is in our options writing strategy. We utilize a "wheel option strategy." In this approach, we prefer to write puts and then, if assigned, turn around and sell calls. This is a fairly common strategy. It is known as the "wheel option strategy," as you go around and around in a circular pattern.

A group of arrows arranged in a circle with one arrow filling a gap

Richard Drury/DigitalVision via Getty Images

Wheel Option Strategy

I prefer to sell puts then turn around and sell calls if assigned because, to a certain degree, I want to be long shares of a company as well. Being able to participate in the unlimited upside (though it comes with the risk of going to $0 too) that stocks can have.

Sometimes this strategy could require patience. For example, if you are assigned ABC shares at $100 but shares declined all the way to $80 - then chances are the premium isn't worth collecting if you want to sell calls at $100. Thus, you are "stuck" with the position.

For me, it isn't "stuck" with the position as it is usually only going to happen with shares that I want to own. If I'm assigned shares of a volatile stock that I don't want to own over the long term, then selling sometimes at a loss is a perfectly acceptable way out. The reason being is because while losses are obviously not the goal, that capital can be put back to work right away. That is, instead of having money tied up into something you might not have the utmost faith in.

Of course, this is on a case-by-case basis as well. If it is a volatile stock, we could potentially turn around and collect some premium from writing covered calls as well. Typically, if it is a more volatile stock, premiums on both sides are going to be elevated. This is where appropriate position sizing comes in place. With more aggressive trades, having smaller allocations of capital tied up is a must, in my opinion. Position sizing means we are reducing risks that aggressive trades could negatively impact our overall portfolio significantly.

I'll highlight a couple of examples of this strategy in action. Though there are only a few that we've executed through Cash Builder Opportunities since most of our trades expire worthlessly or we close the position early and profitably.

VICI Properties Example

VICI Properties (VICI) was a prime example of the options wheel strategy that we employ. It was short-lived but quite lucrative as well. We had another kicker of holding shares with this trade as the stock went through its ex-dividend date.

The original position was initiated by selling puts on September 9th, 2021. At that time, they had announced a secondary stock offering that sent shares tumbling lower. This is an event we have taken advantage of in the past with Realty Income (O). At that time, the trade for O was closed well in advance of its expiration.

For VICI, it took a different path with us ultimately being assigned (September 17th.) Which then prompted us to wait for an opportunity to sell calls against the position. Lucky for us, that opportunity came on the following Monday after the assignment (September 20th) of the shares.

Shares went ex-div on September 23rd, 2021. Since we held through the ex-div date, we also were entitled to that dividend. Now fast forward to October 15th, 2021, option expiration day, and we are saying farewell to VICI shares as shares just barely closed above the $30 strike.

To sum up, what we were able to produce in terms of returns here was the breakdown.

  1. Sold puts at $30 strike collecting $0.25 per share
  2. We were ultimately assigned those puts and, during that time, collected the $0.36 quarterly dividend
  3. We then sold calls on that assigned position at a $30 strike and collected $0.51

We broke even on the share price as we didn't move up the strike when assigned the shares. The next strike for VICI was $35 with limited volume. So here we were, a bit more limited in flexibility in terms of what we could do.

That being said, we still totaled up a return of $1.12 during that time. That works out to 3.11x the quarterly dividend. However, we did so in the span of just 36 days.

We ultimately risked $30 per share or $3000 per contract had VICI went to $0 per share. While there are certainly unknowns and risks with VICI, the chances of that happening seemed quite limited, in my opinion. As is the case with most of the stocks we are going to be writing options on.

Our breakeven would have been the $30 per share minus the $1.12 collected during that time; that put it at $28.88 or $2888. Of course, we won't know until time goes on what could have happened if we didn't get these shares called. We would have continued to write calls as opportunities arose.


Earlier this year we also had a successful series of trades with (ABBV) too. ABBV is a strong dividend payer which is a long position in our Core Income Builder Portfolio, as well as being a prime candidate for writings puts and calls.

On July 30th, 2021 we entered into a trade to sell puts on ABBV at a $115 strike, collecting $2.60. We were then assigned those shares on September 17th, 2021.

Shares remained depressed so we had to take a bit of time hanging onto the shares before writing calls that would provide a worthwhile premium. That chance came on October 1st, 2021. At that time, we collected $1.31. Selling calls at the $115 strike that we were originally assigned shares at. Come November 19th, 2021, the position was assigned and shares were called away.

We once again were able to collect a dividend in that trade as well - that was good for another $1.30 paid out to us. In total, it resulted in a $5.21 return over the course of 112 days. That translated into an annualized return of 14.76%.

Shares of ABBV have continued to surge, which means I'm quite happy that I'm still long the position. In fact, ABBV is hitting new all-time highs.

Data by YCharts

While holding more shares would have been an even better result, we don't always know what way stocks are going to trade. This is especially true in the short term. 

VICI can be a great example of that, in that case, it was better to get rid of those shares when we did as they were called away. The reason being is that the shares have traded slightly downward since. Rising more only recently to come closer to the $30 level.

Data by YCharts

Every trade discussed above was given as a trade alert for members of Cash Builder Opportunities to consider executing in their own accounts. If these types of alerts are of interest to you, consider giving us a 2-week free trial today.

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Nick Ackerman is the lead author for Cash Builder Opportunities. Nick is an avid student of the markets and has invested in his own accounts for more than twelve years. He's a former financial advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. His specific focus is on closed-end funds, dividend growth stocks, and option writing as an attractive way to achieve income and general financial planning strategies towards achieving one’s long-term financial goals.

Stanford Chemist is a scientific researcher by training who has taken up a strong and passionate interest in investing. His members appreciate the analytical and agenda-free insight and analysis that he brings to investments. He has developed his own metrics and tools for understanding closed-end and exchange-traded funds and how to profit from them. He will seek to apply the same logical principles to Cash Builder Opportunities.

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Analyst's Disclosure: I/we have a beneficial long position in the shares of ABBV, O, short O puts either through stock ownership, options, or other derivatives.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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