For everyone who likes this video they will be able to financially retire before the age of 59! Give it a try! You can check out my entire playlist on trading options here: th-cam.com/play/PLscTZuOqKWIxSZzy4ObKWDznEsCot_1HU.html
One more question for your question and answer session… I own 100 shares of Jpm, mo O and Brookshire Hathaway. I want to own the shares long-term, but I want to write covered calls to increase my income. My June 17 options expired. I have two choices: Number one… Buy more one month covered calls on the Stocks on Tuesday when the market opens up. I would look for a strike price that has a Delta of Les than 0.3 Number two… Wait until the market hits a new high or at least turns much higher than it is today. Should I just sit on my hands for a week or two and wait until the market as an update, and then sell covered calls on the Stocks?
YES! This is the strategy I've been implementing. What I do is sell a put and use that premium to buy shares of SPY. If assigned the put, then I sell a covered call at the exact same strike price I got assigned. Then I use that same premium to buy more shares of SPY. If assigned the call, then it is as if I just held onto the stock and am leftover with the exact same amount that I can sell the put for. The only bad thing is that I might have to play catch up if the stock goes up too high, but that's where the shares of SPY I bought using the premium come in handy.
Spy is a hard one to get the capital to write puts for I keep the premium in cash and wait until Monday to decide what to do with it. I might not have enough capital to write a spy put but I can write puts on other stocks in the meantime.
What will You do if the price for SPY goes further down and You had to pay the strike price ? At what strike price do You think You will be able to sell the covered calls ? Surely far less than You paid. To make Things easier: Current price for share X is 100 USD. You sell puts at a strike of 90 USD. The price crashes to 80 and You will have to buy at 90 USD. There is no way You will sell a call at a strike of 90 USD. I really like Jake - but if the wheel would work as promised why should Jake continue to make videos at all ?
Thank you for sharing. I find it difficult to understand anything macro economic / financial. You have presented this information well and i think im getting it. Ty.
@@DieWolf57 use 15-20% of the premium earned to buy a put and protect down side risk to an extent. this is called a "collar". e.g., SPY is 400, you sold covered call at 401 strike and collected $8 in premium with 30 DTE. now buy a put at strike 380 (just an example) and pay premium of $1.5 for eg. your loss is capped at $20 while you make $8 in premium.
When this video was made Jan 23 2022, the VIX was ~30, and today it's about half that. Option prices are highly influenced by volatility (VIX), and today the SPY is at ~416, while the VIX is only ~18%, so the same option strategy will only produce about 5k/month, at the money. I am enjoying Jake's videos, but options are complex, be careful. Jake's video on Pin Risk is great advice - required watching if you're thinking of trading options.
You aren't kidding on that. Just for fun I looked up premiums as of now (4-1-24) and even with SPY almost 100 higher than in the video you would need to go out 88 days in expiration to receive 11$ like Jake shows. So now basically 4 months out where as Jake was showing 1 month out. That is an insane difference.
Great video Jake! I've been doing this strategy for a while. It would be brilliant if you did a year end summary if you kept going with this for 2022. My guess is with strike selection further out of the money it would have basically been a push, as with SPY down 20% YTD most strike selections would have meant the declining market would have cancelled out the premium collected. (Or quite likely gone negative) How to use this strategy in bear markets like we're in now would be another useful video. For instance timing put sales with when we hit lower lows of the downtrend, DTE / expiry selection, trade management / rolling ideas, etc. Keep up the great work!
Great video, i'm 67 years old and have been doing this for a year and a half...i am so grateful to the friend/mentor who taught me this method. I sold a rental house that was positive about 500 per month, i sold the house at the market high in 2022, and now use the cash proceeds to make an amount per month that i never imagined possible...
I am actually doing the same thing I have a few more properties to sell but have about 190k doing this making way more with less stress on the money I have 6 more properties to sell
Running a wheel works. Be reasonable and patient. The best thing about the wheel and a long-term sideway stock is stock prices move cyclically. Thanks Jake.
The problem is when the underlying drops massively in value while you own it you can no longer get the premiums you need at any strike above your cost basis. So now you either sell a covered call below you cost basis or sell one way out of the money for very little premium. This strategy is nice until the market starts making massive moves.
This is a nice strategy that I’m also using with a small part of my portfolio. One thing to point out are taxes, and especially stamp duties or some other for of transaction-triggered tax if you’re a resident of a jurisdiction where such taxes apply. As the wheel strategy potentially results in frequent purchases/sales transactions of shares, these stamp duties really can add up quickly, eating away a big chunk of the net premia received. For US based investors, please be aware of short term capital gains taxes which this strategy most likely triggers.
Solid strategy. I know several folks with with a lot more experience and capital than either of us who have been doing this for over a decade. Not exactly as you describe ($500k, SPY, etc) but same basic concept. Can't remember the last time any of those folks pulled money from their 401k or IRAs except for RMDs. Most of them are just living off premiums from selling CCs.
do you happen to know what they do if the price takes off? just pull money out of their 401k/IRA to cover the increased capital required to sell another put?
The more I watch your videos the more I understand options, thanks Jake, love your teaching. I am just amazed how calm you are while everybody in youtube is going crazy and dreading the next few days.
Haha, thanks Marla! The best traders are the ones who can control their emotions and remain objective. I try to remember this before I open up my computer for the day. Cheers!
@@JakeBroeI collect smart quotes from famous minds and I’m adding this one to my collection: ”The best traders are the ones who can control their emotions and remain objective.” JakeBroe, THE smart man of TH-cam
If you haven't heard this yet, your videos are amazing. You're very easy to follow, the pacing of the video is great, the visuals are awesome. Thank you very much Sir.
Hey Jake, I like this strategy. Just read through most of the comments. I would say more than half of people think you can’t make this work. I look forward to watching you make this happen. Keep up the good work.
It would nice to see what would have happened if Jake had implemented this in Jan with the $100K or so he had in his trading account. SPY dropped to $366 in June, so would be nice to see how the actual income streams and capital value would have worked out this year. Instead Jake shorted the QQQ when it was dropping (probably hoping to reach his $437K retirement goal as the world plunged into recession and the QQQ tanked), and then lost (on paper) a lot when QQQ rose for a while (not sure how his position ended up as he was going to close out if it dropped a bit before expiry date, and the market did drop, but then rebounded again -- Jake seems to be focussing only on his Ukraine war vids these days.) A back-test of how this would have worked out over a 2+ year period if started off in Jan 2000, Jan 2008, Jan 2020 or Jan 2022 would be interesting.
Perfect , I needed this today because I’m teaching my sister in law and family . That’s all I’ve ever done is selling also. Jake I do it mostly inside of my self directed IRA that I had to get after leaving a jobs 401k plan. No taxes for capital gains for anything until obviously I taking it out. But it makes a huge gain at the end of the year portfolio value in all market conditions as you know. Thank you for this video today and yes I watched many of your other ones a couple years ago. Glad to be back.
You have been my favorite channel to learn about investing. With your explanation everything make more sense. Thank you for doing such a good job. Wish you well!
Hope you will make the video on explaining the strike price soon and how to pick the right one based on other factors… bullish, bearish market…. Thank you.
That's all great, but do a scenario where you bought your 10 cash secured puts right before the crash of 2020, and tell the investor what to do in that instance. Someone else made a similar comment and I gave my input below, so maybe you will see one of these and comment. Thanks
I had same question cashed secured put risk in a crash situation buying right before market crash. Is it safe to say covered call is a better play then covered call minimize the risk?
Interesting strategy. I see comments concerned over the price of SPY declining which as you say we're not bothered by, however, I see the problem as too much rise. Say you've got your $437k ready to go and you get assigned at $437 (collecting $6k towards living expenses, and $5k to be reinvested). You then sell a CC at $438, collecting the next month's expenses and another $5k to reinvest. But during this month, SPY goes up to $455. You have your sold SPY for $438k and have $10k of reinvestments, but the cash needed to secure the put would be $455k. You would be short $7k. You could sell a put at a lower strike, but would receive a lesser premium, and therefore less to reinvest. It seems in a bull market, one would constantly be losing ground on your purchasing power to sell CSPs. Something to consider, I suppose. Love the videos, Jake. Thanks.
I have exactly the same concern. Wheeling is better for the stocks like AMAT which is channelling. SPY is usually goes up unless it plummets. If you sell CC with the strike price 438 on the SPY that is 437 today, in 26 days it will be higher than $438, most likely. So, in 26 days, (actually sooner) not only you would be better off if you didn't have the CC, you wouldn't be able to restore 1,000 shares of SPY, as by that time the price of SPY will be too high.
Very interesting point! One thing though, if the price of SPY goes up from $438 to $455 like in your scenario, yes the cash needed to secure the new puts would be much higher ($455k). But the premium you would receive for these CSPs at this strike price would also increase a lot so you would probably make up for the increase in cash needed to secure puts (provided your capital can still let you afford to sell the same amount of Options contracts).
on a margin account, you would only need less than 10k to sell a naked put on SPY and you only need less than 25k if you do get assigned shares.. i do not recommend this if you don't have the full amount to cover but in your scenario, it would work in a margin account..
Observations: Selling at the money calls increases your chances of being assigned, which has bad tax consequences (short term gains VS LT Capital gains). The better idea is to never get assigned by simply rolling the options, after all you are holding the underlying as a LT investment. That generally results in lower option premium income when the rolling occurs (but the extra $$ is actually locked up as an unrealized capital gain, which is OK). As Jake also pointed out the options premium income is taxed as regular income which will reduce the actual annualized return and land you a hefty tax bill at year end.
@@zachnicholson7924 No. Each time you roll to a new put contract, you are closing your previous position and entering a new one. The only way to get long-term capital gains treatment on this sort of trade is to hold a given contract longer than 1 year, which obviously isn't possible when they only have 1 month to expiration.
Thanks for the video Jake! Would be sick to even show you doing this once a month and more so applying what you do (more visual learners) but I agree, looks like a great strategy especially when you can reinvest half the profit
This works if the market remains static, which it never does. If it goes up too much, you need more capital in order to be able to sell 10 CSPs. For instance, SPY was close to 480 recently, so 437,000 wouldn't have been enough to cover 10 contracts. It also doesn't work if the underlying ETF drops too much, because then you are just forced to hold your shares and either attempt to sell CCs at a lower strike or sell at a higher strike and get less premiums. Your examples are good for one month, but it would be fascinating to see how this plays out over a year with real examples. Thanks for the video, as it's a more realistic way to "retire early" than the people who are delusional enough to think they'll ever have enough capital to live off dividend income. I've been selling options for awhile, and it's really only been a problem when the underlying stock falls too much, and then I'm forced to either take the loss or try to sell calls at lower premiums, while hoping that the stock recovers. At least you know SPY will recover at some point.
I agree with what you say here this does not work the way he explains it. If it's static yes it will work but it's not prices fluctuate up and down if it's down then you're forced to sell at a price lower than your basis.
@@andis9076 the risk is no different than if you were just holding spy shares and not doing the wheel on it. He's assuming that the price will never move lmao which is totally untrue. The example in the video is too simplistic and should be talking about selling spy puts at a certain Delta regardless of price and same for the call side. As the price goes up you need more doller to run the wheel or reduce number of contracts sold. The video is way too simplistic and looks like he's never done the wheel himself lmao and just found out about it 5 mins before making this video.
Wheel Strategy - GREAT IDEA - What do you do if you are assigned and the SPY drops say another 30 points - well below your cost basis. - The ATM cvrd cll for the next cycle still puts you below your C/b. Therefore, there would be a "net" loss. I'm doing this with LRCX and that is my situation. My C/B is 25 pts below the current price. TY
@@jiti5034I was just literally asking chatgpt on that scenario and you have few options. 1) definitely do not sell covered call below what your strike price was 2) remember that you started entire strategy with belief that stock will be bullish in the long run Here are some options for you: Great question! In that situation, where you’re assigned at $99, and the stock price drops significantly to $85, it’s understandable that you wouldn’t want to sell a covered call close to the money (e.g., a strike near $85) because it would lock in a loss if the stock price rises and your shares are called away. Here’s how you might handle it: 1. Hold Off on Selling a Covered Call Immediately: Since you were assigned at $99 and the stock drops to $85, you’re sitting on an unrealized loss. Selling a covered call with a strike price near $85 would cap your upside and lock in those losses if the stock recovers. It might be best to wait for the stock price to recover or sell a higher strike price call. 2. Sell a Covered Call Above Your Purchase Price: If you’re confident the stock will eventually recover, you can sell a covered call with a strike price at or above your cost basis ($99). While the premium will be lower, you can still collect some income without locking in a loss. • For example, you could sell a $99 or $100 strike call. Even though the stock is at $85, selling a higher strike call gives you some premium without risking selling your shares at a loss. • If the stock recovers to $99 or above, you’ll sell your shares at breakeven or with a small profit, plus the premium you’ve collected. 3. Consider a Longer Expiration: • If the stock stays depressed, consider selling a longer-term covered call with a strike price above $99. This can give the stock time to recover and give you more premium than a short-term call. • By extending the expiration, you might receive a decent premium even with a higher strike, but you’ll be locking in your shares for a longer time. 4. Roll the Covered Call: • Another option is to roll the covered call if you’re in a scenario where it looks like the stock might recover slowly. You can sell a call at a higher strike or with a longer expiration and continue to collect premiums over time. 5. Wait It Out (If Necessary): • If you’re really confident in the stock’s long-term potential (like NVIDIA), you could simply hold your shares without selling any covered calls and wait for the price to recover before resuming the Wheel strategy. You might miss out on premium income in the short term, but it could avoid locking in a loss. Why Selling an In-the-Money Call Isn’t Ideal Here: If you sell a covered call near $85 (in the money), and the stock starts to recover, you’d risk having to sell your shares at a loss (if the stock hits $85 and your call gets exercised). Ideally, you’d only sell calls at or above your cost basis when you’re looking to avoid taking a loss. Key Takeaways: • Don’t sell a close in-the-money call if you’re trying to avoid locking in a loss. • Wait for a recovery or sell a call at a higher strike price (near your cost basis) for a lower premium. • Consider longer-term calls to collect more premium while waiting for a stock recovery. It’s all about balancing premium collection with managing risk, and in this case, patience might be your best ally.
Correct me if i m wrong: what happens in the below scenario? Lets say one has sold a cash secured put as the first step and it got exercised because the market was going down. By the time the shares are assigned, if the market is still going down, the value of the original capital will be less than the put strike price, so you are already in loss (unrealized loss). The second step is to sell calls, however since the market is in downtrend, if you sell a covered call with a strike price below the original cash secured put strike price and (again unfortunately) if that gets executed, you are realizing a loss on your capital (minus the two premiums that you received). Or, is it always recommended in the second step to sell calls with a strike price of equal or more than the strike price of the cash secured put strike price, just so that you will preserve your capital?
Exactly. This is a terrible strategy and your example shows that well. If you sell a put and the market drops below it, you could lose a ton of money. You have no downside protection on a short put, it's unlimited risk
@@TR-lh9yz right, thats what i thought. this might be good when the market is already in a correction mode, say when the SandP is already corrected like 15%, then one may sell put and the downside risk is lower
@@rakshere No matter what, if you want to sell a put you are always better off also buying another put further out of the money to spread off the downside risk. Much safer, better capital/margin efficiency. You'll sleep better at night. The guy who does this channel doesn't understand options at all.
@@TR-lh9yz Risk is as if you own the stock. Going to zero. Unlimited risk is selling a naked call. That is if your broker wouldn’t liquidate the position quick enough,,,
Good video, but I have one problem with it. What will you do if price will go 10% below your put strike? What strike you will choose for covered call? below price of assignment or at that price? Because if you get into bear market and you get assigned the price for call at assigned price will be much lower than 2.4% month
One problem with the assumption of 10% per year for future returns is that historically there are 20-year periods of 20% returns followed by 20-year periods of 0% return. Yes on average you're getting 10%, but timing is critical
Been doing something similar, but need to come up with a "system" and this is great inspiration. Your videos are always good and helpful. Thank you Jake!
Thanks Summer! You definitely have to have a set of rules you can follow and remain objective. Months like the one we are having right now is enough to scare most people away from this kind of strategy, but a month like this is an exception, not the norm.
@@JakeBroe Just started with NVDA covered call and selling cash secured put. It has worked in this down market as well. I am a long term holder of NVDA, so I follow the stock closely.
@@JakeBroe just found your channel today & watch this video. What are some stocks for a small account say under 5k? Any $5-20/share stocks for cash secured puts or covered calls?
Good morning Jake. We shared a message in which I wrote that I had heard that SPX is taxed as a long term capital gain even if you held it less than 366 days. Here is the info: " The other reason is that the SPX is settled in cash. When you trade Options on a stock, and it expires IN THE MONEY, then you either have to take ownership of the stock (when Selling Puts) or sell shares of the stock (When Selling Calls). With Index options, like SPX, OEX, NDX, etc, since they settle in cash, part of the gain is considered Long Term by the IRS. Basically, 60% of the trade is Long Term Capital Gains, and 40% is Short Term Capital Gains, REGARDLESS how long you hold it (in my examples above, only one day!). So there is also a tax advantage in using SPX."
I don't think I understand this Gilbert. I am not sure why if you held the ETF for less than a year why any part of it would get favorable long term capital gains.
Nice video. It's really all material you've covered in other videos, but it becomes more clear when the focus is on the retirement strategy. I'm definitely looking into this. Do you think this strategy would be good in a Roth as an account builder rather than income?
The only time I ever made money with options was covered call on SPY. I would avoid options overall. A simpler method would be to just buy something like JEPI which does all the work for you.
So what if on your first go at this you sell 10 puts at 437 for example and spy tanks. Your account is at 11000 for the premium you collected but now you just lost more than 11000 so you can't buy the puts back at expiration because you need more than 11k. I thought you'd have to put up collateral in case this happens so in theory you couldn't sell 10 puts with 437k
@@TR-lh9yz you’d subtract the premium you were paid giving you your break even price and sell covered calls above that price. Holding shares of spy obviously gives you risk. If you have a plan saying you’d buy spy at x price why wouldn’t you sell puts? You were going to buy shares regardless.
@@kennethkyle8771 That's true, on the covered call part of the strategy, your risk comes from the stock not the short call. But the guy that made this video claims that there's no risk in selling a naked put, which is not true at all. For a short term trader, there's no reason to ever do a covered call or short put. Much better off selling a put spread and having an actual hedge for the downside risk.
@@ts4426 No it doesn't. Cash secured just means you reserve the money in your account to buy the stock at the put strike if you get assigned. It's "naked" if you don't have another long put protecting the downside. A naked put has unlimited downside risk whether it's cash secured or not. Say the stock is trading at 100 and you sell the 90 put. If the stock drops to 80, you lose $1000 per contract whether it's cash secured or not.
Thanks for the sharing. But if the SPY goes down quickly you won't be able to sell covered call with high premium. If it keeps going down, the premium is getting less and less.
Everytime stock crash, the call value is getting crushed so you've huge lost from holding 437K of stocks plus you can't sell call without loosing amount of money ! Basically this wheel works when stock AND market is stable.
Right, so you just wait for a recovery. Don't force the wheel. The only underlying you should wheel on its something you mind owning. A lot of bad stuff has to happen if SPY goes to $0
@@CSPare_CChange yeah and most people who do this strategy have plans for when things go bad. They also tend to notice a crash a little sooner than the average Joe.
Great strategy Jake! I know this is nightmare scenario but... what would happen if the stock market crashes and SPY goes back to $337 (pre-covid high) and you've sold 10 cash-secured puts at $437 or a little less? I guess, it would take a long time to recover (I know it's just one stock but we've just witnessed NFLX losing $100 overnight). In my catastrophic scenario here, you would have to spend $437K to buy something that is now worth $337K, so a loss of $100K in account value. Even if you continue to sell CCs after that, the premiums you would get for it would be really lowered. Also, you would still have to pay taxes on all the premiums you collected during the tax year although you have lost $100K in account value during the same year which doesn't even count as Capital gain loss if I'm correct!
So BTW, all this can be done in a IRA. There is the option (no pun) to 'Roll' your position (down and out, in this case). Or as you mention, sell calls against it, typically at the 15-20 delta so as not to get assigned, to capture additional premium and lower your cost base as you crawl back from the downturn. Just a couple of 'maintenance' techniques to employ when trading options. Additionally paying attention to the overall market, maybe not going 'all in' initially and holding back some capital for this type of scenario, to then 'double down' and wheel in some more. Many ways to skin the cat with options.
Odds of that happening in 1 month would be rare, but if things start to get scary, you could always buy back the option, for a loss of course, but a lot less than holding into infinity. A year like last year, what he is saying probably would have worked great, but in a volatile year, think 2020 in March down 30% in 1 month, and your scenario would have played out, but again, that doesn't happen usually, but obviously it can happen. Another way to help protect is to sell out of the money, give yourself some cushion, but of course the premiums won't be as good, but instead his 37% scenario, shoot for 15 or 20%. By giving a cushion of 5-10% it would in most cases keep you safe and in a really bad case, keep your losses maybe in the 20% range or less, especially if you buy it back. I may be missing something, only been trading options for a bout a year, so maybe he will see your comment and mine and chime in.
I agree with Mcgragor .. I have been doing this , works like a charm. I give a cushion of 5% when selling puts , so a 10% drop does not hurt me as much when I have to do sell call after its assignment. A 30% drop takes 6 to 12 months to come back - just hold onto your shares . Never sell assigned shares for a loss . The key is to Not panic and enjoy the ride ! That's how you become a millionaire. Over a 10 year period you would have made an average of 15% to 20% per year on your capital which otherwise you would have lost to inflation anyways. Remember to do this wheel strategy with 'excess cash' after setting aside money for index fund investments in brokerage account & IRAs and even better if you have cleared your home mortgage or student debts if any, and ofcourse after setting aside emergency expenses. Then, you are least anxious about locking in a huge capital on a 30% market drop. Also when I do the wheel, I only do it on SPY and not on individual stocks , since the recovery time for SPY on major crash is the fastest compared to individual stocks . Hope that helps!
Hey Jake, I keep loving your videos...I believe my investing trajectory has drastically been improved since I see the potential thru these relative safer options plays. Thanks so much!!
So if for example you sell a put at 430 and it goes to 425 at expiration you get assigned, I get that, but you also lose on the put you sold as well correct? So you collect premium but the put you sold puts you at a net loss
You collect the premium the same day you sold the put. Once you get assigned and are forced to buy the stock at $430, you are technically down $500 because the current price is $425. But the stock can go back up to $430 the next week, so you aren't always going to lose once you get assigned. You keep the 100 stocks and can just wait it out until it goes back up.
@@RandyLy ya I get all that you said but the put itself let's say is negative 1000 or whatever it might. So getting assigned I get but the value of the put is now negative quite a bit don't you lose on that in addition to getting the 100 shares? So a double loss?
Yes. You have to buy it at $430 and if you were to immediately sell it you would lose $500 (100 shares x $5) yet would also have had the premium offset that, so not as much. But the point would be that you should begin to sell covered calls to collect that premium, and if you want you could sell it at $430 and when/if SPY closes back above that at expiration you've made another premium and your stock was called away. Then, repeat.
i did half this strategy with CC and each time buying more stock. And it worked great for 6 months. the market took a big tumble on my volatile tech stock and i sold and still managed to break even. Time to play the other side.
Thanks Jake, I like it. Not much more risky than just holding SPY. Got to put it somewhere guys. And the more you put your calls OTM, the less risky. Of course less premiums. One other thought is one could just do the covered calls during less volatile periods skipping the put. And the puts on days like today. But holding SPY without options lost today so options work!
Hi Jake, I'm glad you had that part at the end about buying further out of the money...i kept thinking "why not give yourself a better Delta with a slightly further OTM strike price to help avoid being exercised". Also, when selling CSP's, why not avoid the 3rd Friday of every month option expiry date so you don't fall into that market stall that typically happens (as you've explained) the 3rd Friday of every month. I realize trying to time the market is a fools errand, but seems fairly reliable that there will be a stall so why not ride through it with a dif Friday expiration date which "could" help you avoid being exercised?
Hey Josh! I was not trying to make this video any more complicated than it needed to be so I avoided talking about delta. As for options dates, you are correct in that if you are selling cash secured puts, you might want to avoid the 3rd friday (when the market sells off). However, if you are selling covered calls, then maybe you do want the 3rd friday if this helps you not be assigned.
Great video as usual, but I have a point, you should buy and sell far from ATM Because high move up or down will cost you a lot capital , less returns but more safe I have subscribed to your channel 🙏🌹
Jake , thank you so much for your great explanation .... Jake , my biggest concern in this beautiful wheel strategy is the STEP # 4 ( at 6:47 ) . why ? let me give you a worst case scenario ...... if for example a " black swan event " starts forming at the stage 4 , and stock market continue going down by 60- 80 % , then how we can exercise or execute " SELL COVERED CALL when stock market is in a FREE FALL and chance of recovery is 3-5 years ??? CAN you make another video , and explain WHAT we should do and how we save our 437 K , at stage# 4 , if a "black swan event" happens in this " wheel strategy )
Thanks my man Jack, I’m always looking for a better way. And you found it as always. What is a good time to call you. I tried the other night but we missed each other. Thanks again. George.
Love the video Have one question what you do if the put is assigned well below the strike price what strike price would you use to sell your call example sell SPY put today one strike out of the money at today strike price 415 for $14.70 if SPY moves to 410 and you are assigned at 415. do you use the 415 as your break even when you sell your call ?
I did this around the time you made it with 1 put it payed 1160. I closed it 3 days later and kept 1000 , I could of let it run for 20 days longer and got full pay but thought I would do a second one and get paid twice in a month. For the record I have not yet done the second put yet because of the increased price of shares .
The risk of this strategy and having all your capital stuck seems downplayed. As what happens if sell a secured put at $100, but stock ends at $80 after 30 days? And never returns to a position that can sell a covered call and not be down a crippling amount? Broad indexes in theory should be less prone to this, but what happens with this strategy and ones capital if played during tech bubble burst or 2008?
Doesn't matter. I'm only recommending this on a broad index and even if the index goes down 20% in a year, I keep the Wheel Strategy going collecting premium. I'm not trying to convince you of anything in this video, lol. You can believe it works or don't believe it.
@@JakeBroe Didnt mean to come across as questioning, just more wanting to check have as many of the worst case sceraios thought through. For example, you mention you keep the wheel strategy going by collecting premium, but what happens if you cant sell a covered call that is above your breakeven? That is the risk trying to better understand. As found myself in a position with KHC in which that has been the case. Thank you for all the great content!
It doesn't have to "return to a position" for you to sell CC. If you sold 100P and index is at 80 then you'll have cost basis of 100 (as you went ITM and got assigned). Now just sell 80 call for next month. Or maybe a higher strike / less premium depending on preference.
Awesome sounds great thank you so much for your help I really appreciate that you are much better than other TH-camr, They are selling course and Waste time, to give you something Tough doesn’t Wake money.
The first minute of this video is what I told my family after telling them over and over but non of them listen… “I’m not trying to convince you I’m just gonna show you what I know…” Today I’m 37 retired and I’m also the youngest of my siblings…
I’m guessing you’re not really retired in the traditional sense though? Ok, you don’t work for someone else, but you still need to ‘work’ by constantly managing your funds to hopefully produce an income and if you have a bad run you’ll need to find work or sell assets, so no, not really ‘retired’.
In the current market would you still try to sell a put to enter and plan to get assigned or just buy the shares and sell the calls since that's more a bearish strategy?
Love the video Have one question what you do if the put is assigned well below the strike price what strike price would you use to sell your call example sell SPY put today one strike out of the money at today strike price 415 for $14.70 if SPY moves to 410 and you are assigned at 415. do you use the 415 as your break even when you sell your put ? Thanks
When running the Wheel strategy, do you usually close the trade when you reach a certain profit amount, or do you typically let it run to expiration? Thank you
If you're over 60 or 70% profit amount, BTC. Lots of articles online about this. But the last 20% of the time of an option contract moves very flat compared to the first half. Use that time to your advantage. Try to double the amount of contracts you get to sell.
great explanation I've been learning option myself for the last year and this so far my favorite strategy ... have you try naked put option? and poor man covered call?
Hi Jake, if not mistaken, when market drops, 'buyer' does not gain value with long calls (13:25 in video)...buyers are looking for price to go up. At 17:00, you mention breakeven at $450.01...why worry about breakeven at this point, as long as the stock is above your strike, the shares will be assigned to the buyers, which is what you want, you still keep the $12K. OK, just some thoughts...thumbs up! Of course, for your viewers, a lot more than meets the eye with this strategy, as the markets dictates what eventually happens, and there are numerous management strategies and techniques when trading the wheel...great stuff!
@@JakeBroe Break even calc on the covered call is incorrect. It's not 438+12=450, it's 438-12=426. That's the point of coevered calls, some downside protection.
Great Video Jake! Looking forward to seeing/following this strategy as you approach your retirement goal.s Love the transparencies, and as usual, very easy to follow!
Thanks MrChoudhury! I already have the funds to do this on 300 shares of SPY just in my taxable brokerage account, so I am 30% of the way to my goal. I'll keep people updated!
@@TR-lh9yz if he’s selling cash secure puts or covered call if he’s getting assigned, the biggest risk I can see if the spy crashes way below his strike price or miss out on the gain if it goes to the moon. Otherwise it appears to be a steady income strategy. Do you mean unlimited downside in case of a black swan event if Spy goes way way down?
Well, let's use his example. SPY is at 437 and you sell the 437 put for 11/share. If SPY drops to 400 (like 8%), you are forced to buy it at 437 from your put. So you lost $26 a share (Bought at 437, it's now at 400, and you collected 11 for the option you sold.) So now you sell a call at 400 and probably collect another 10. SPY goes back up to 437, but you are forced to sell at 400 from the short call. So at the end SPY ended up flat after two months, but you lost $16 a share jacking around with the options. There's a lot of risk this guy doesn't seem to understand. An 8% drop and recovery is not a black swan event, happens all the time.
Jake, you're really, really good at explaining things/concepts etc; it's wild- keep it up as you always do :) Still can't believe how shocked I was to see you in the Graham Stephan testimonial for his YT course
For everyone who likes this video they will be able to financially retire before the age of 59! Give it a try!
You can check out my entire playlist on trading options here:
th-cam.com/play/PLscTZuOqKWIxSZzy4ObKWDznEsCot_1HU.html
One more question for your question and answer session…
I own 100 shares of Jpm, mo O and Brookshire Hathaway. I want to own the shares long-term, but I want to write covered calls to increase my income.
My June 17 options expired. I have two choices:
Number one… Buy more one month covered calls on the Stocks on Tuesday when the market opens up. I would look for a strike price that has a Delta of Les than 0.3
Number two… Wait until the market hits a new high or at least turns much higher than it is today. Should I just sit on my hands for a week or two and wait until the market as an update, and then sell covered calls on the Stocks?
YES! This is the strategy I've been implementing. What I do is sell a put and use that premium to buy shares of SPY. If assigned the put, then I sell a covered call at the exact same strike price I got assigned. Then I use that same premium to buy more shares of SPY. If assigned the call, then it is as if I just held onto the stock and am leftover with the exact same amount that I can sell the put for. The only bad thing is that I might have to play catch up if the stock goes up too high, but that's where the shares of SPY I bought using the premium come in handy.
Spy is a hard one to get the capital to write puts for I keep the premium in cash and wait until Monday to decide what to do with it. I might not have enough capital to write a spy put but I can write puts on other stocks in the meantime.
What will You do if the price for SPY goes further down and You had to pay the strike price ? At what strike price do You think You will be able to sell the covered calls ? Surely far less than You paid. To make Things easier: Current price for share X is 100 USD. You sell puts at a strike of 90 USD. The price crashes to 80 and You will have to buy at 90 USD. There is no way You will sell a call at a strike of 90 USD. I really like Jake - but if the wheel would work as promised why should Jake continue to make videos at all ?
@@DieWolf57 Because he doesn't have $437,000 cash yet to invest?
Thank you for sharing. I find it difficult to understand anything macro economic / financial. You have presented this information well and i think im getting it. Ty.
@@DieWolf57 use 15-20% of the premium earned to buy a put and protect down side risk to an extent. this is called a "collar". e.g., SPY is 400, you sold covered call at 401 strike and collected $8 in premium with 30 DTE. now buy a put at strike 380 (just an example) and pay premium of $1.5 for eg. your loss is capped at $20 while you make $8 in premium.
When this video was made Jan 23 2022, the VIX was ~30, and today it's about half that. Option prices are highly influenced by volatility (VIX), and today the SPY is at ~416, while the VIX is only ~18%, so the same option strategy will only produce about 5k/month, at the money. I am enjoying Jake's videos, but options are complex, be careful. Jake's video on Pin Risk is great advice - required watching if you're thinking of trading options.
Thanks. Never heard of Pin Risk
You aren't kidding on that. Just for fun I looked up premiums as of now (4-1-24) and even with SPY almost 100 higher than in the video you would need to go out 88 days in expiration to receive 11$ like Jake shows. So now basically 4 months out where as Jake was showing 1 month out. That is an insane difference.
yeah, just checked (9/24)... def not the same.
Great video Jake! I've been doing this strategy for a while. It would be brilliant if you did a year end summary if you kept going with this for 2022. My guess is with strike selection further out of the money it would have basically been a push, as with SPY down 20% YTD most strike selections would have meant the declining market would have cancelled out the premium collected. (Or quite likely gone negative)
How to use this strategy in bear markets like we're in now would be another useful video. For instance timing put sales with when we hit lower lows of the downtrend, DTE / expiry selection, trade management / rolling ideas, etc. Keep up the great work!
Great video, i'm 67 years old and have been doing this for a year and a half...i am so grateful to the friend/mentor who taught me this method. I sold a rental house that was positive about 500 per month, i sold the house at the market high in 2022, and now use the cash proceeds to make an amount per month that i never imagined possible...
I am actually doing the same thing I have a few more properties to sell but have about 190k doing this making way more with less stress on the money I have 6 more properties to sell
Running a wheel works. Be reasonable and patient. The best thing about the wheel and a long-term sideway stock is stock prices move cyclically.
Thanks Jake.
The problem is when the underlying drops massively in value while you own it you can no longer get the premiums you need at any strike above your cost basis. So now you either sell a covered call below you cost basis or sell one way out of the money for very little premium. This strategy is nice until the market starts making massive moves.
I guess this is why Jake is saying only buy stocks that you want to own. I’m going to own spa anyway
I would use SPY or QQQ. More expirations and moving not as great movement on bad or good days
Precisely. Good luck selling CC on a paper that dropped 30-40 points. You can of course try and collect pennies in front of a steamroller…
Well you can always hedge your holdings by buying puts or selling call spreads on indexes if market conditions aren't bullish. Thats what I do
Sure but then you hold and sell CSPs to recover. You can then lower your cost basis and start selling CC again.
This is a nice strategy that I’m also using with a small part of my portfolio. One thing to point out are taxes, and especially stamp duties or some other for of transaction-triggered tax if you’re a resident of a jurisdiction where such taxes apply. As the wheel strategy potentially results in frequent purchases/sales transactions of shares, these stamp duties really can add up quickly, eating away a big chunk of the net premia received. For US based investors, please be aware of short term capital gains taxes which this strategy most likely triggers.
Solid strategy. I know several folks with with a lot more experience and capital than either of us who have been doing this for over a decade. Not exactly as you describe ($500k, SPY, etc) but same basic concept. Can't remember the last time any of those folks pulled money from their 401k or IRAs except for RMDs. Most of them are just living off premiums from selling CCs.
do you happen to know what they do if the price takes off? just pull money out of their 401k/IRA to cover the increased capital required to sell another put?
@@scottwilly86 i don't think they are selling put they are doing covered call
The more I watch your videos the more I understand options, thanks Jake, love your teaching. I am just amazed how calm you are while everybody in youtube is going crazy and dreading the next few days.
Haha, thanks Marla! The best traders are the ones who can control their emotions and remain objective. I try to remember this before I open up my computer for the day. Cheers!
@@JakeBroeI collect smart quotes from famous minds and I’m adding this one to my collection:
”The best traders are the ones who can control their emotions and remain objective.”
JakeBroe, THE smart man of TH-cam
Good job Jake. Very clear presentation of a complicated topic.
Jake, your vids on that are on of the top on TH-cam. Thank you for sharing the process in such detail and a whole lotta videos.
If you haven't heard this yet, your videos are amazing. You're very easy to follow, the pacing of the video is great, the visuals are awesome. Thank you very much Sir.
Hey Jake, I like this strategy. Just read through most of the comments. I would say more than half of people think you can’t make this work. I look forward to watching you make this happen. Keep up the good work.
It would nice to see what would have happened if Jake had implemented this in Jan with the $100K or so he had in his trading account. SPY dropped to $366 in June, so would be nice to see how the actual income streams and capital value would have worked out this year. Instead Jake shorted the QQQ when it was dropping (probably hoping to reach his $437K retirement goal as the world plunged into recession and the QQQ tanked), and then lost (on paper) a lot when QQQ rose for a while (not sure how his position ended up as he was going to close out if it dropped a bit before expiry date, and the market did drop, but then rebounded again -- Jake seems to be focussing only on his Ukraine war vids these days.)
A back-test of how this would have worked out over a 2+ year period if started off in Jan 2000, Jan 2008, Jan 2020 or Jan 2022 would be interesting.
Ditto on that..and all the little steps inbetween.
Perfect , I needed this today because I’m teaching my sister in law and family . That’s all I’ve ever done is selling also. Jake I do it mostly inside of my self directed IRA that I had to get after leaving a jobs 401k plan. No taxes for capital gains for anything until obviously I taking it out. But it makes a huge gain at the end of the year portfolio value in all market conditions as you know. Thank you for this video today and yes I watched many of your other ones a couple years ago. Glad to be back.
You have been my favorite channel to learn about investing. With your explanation everything make more sense. Thank you for doing such a good job. Wish you well!
Thanks Husky Deal! I appreciate that!
Hope you will make the video on explaining the strike price soon and how to pick the right one based on other factors… bullish, bearish market…. Thank you.
Hey Aziz! It's all mixed in with my buying and selling, but generally I always just go straight at the money when picking a strike.
That's all great, but do a scenario where you bought your 10 cash secured puts right before the crash of 2020, and tell the investor what
to do in that instance. Someone else made a similar comment and I gave my input below, so maybe you will see one of these and comment. Thanks
I had same question cashed secured put risk in a crash situation buying right before market crash. Is it safe to say covered call is a better play then covered call minimize the risk?
Outstanding explanation!
Interesting strategy. I see comments concerned over the price of SPY declining which as you say we're not bothered by, however, I see the problem as too much rise. Say you've got your $437k ready to go and you get assigned at $437 (collecting $6k towards living expenses, and $5k to be reinvested). You then sell a CC at $438, collecting the next month's expenses and another $5k to reinvest. But during this month, SPY goes up to $455. You have your sold SPY for $438k and have $10k of reinvestments, but the cash needed to secure the put would be $455k. You would be short $7k. You could sell a put at a lower strike, but would receive a lesser premium, and therefore less to reinvest. It seems in a bull market, one would constantly be losing ground on your purchasing power to sell CSPs. Something to consider, I suppose.
Love the videos, Jake. Thanks.
I have exactly the same concern. Wheeling is better for the stocks like AMAT which is channelling. SPY is usually goes up unless it plummets. If you sell CC with the strike price 438 on the SPY that is 437 today, in 26 days it will be higher than $438, most likely. So, in 26 days, (actually sooner) not only you would be better off if you didn't have the CC, you wouldn't be able to restore 1,000 shares of SPY, as by that time the price of SPY will be too high.
Very interesting point! One thing though, if the price of SPY goes up from $438 to $455 like in your scenario, yes the cash needed to secure the new puts would be much higher ($455k). But the premium you would receive for these CSPs at this strike price would also increase a lot so you would probably make up for the increase in cash needed to secure puts (provided your capital can still let you afford to sell the same amount of Options contracts).
on a margin account, you would only need less than 10k to sell a naked put on SPY and you only need less than 25k if you do get assigned shares.. i do not recommend this if you don't have the full amount to cover but in your scenario, it would work in a margin account..
Or maybe you would have to sell one less contract
Observations: Selling at the money calls increases your chances of being assigned, which has bad tax consequences (short term gains VS LT Capital gains). The better idea is to never get assigned by simply rolling the options, after all you are holding the underlying as a LT investment. That generally results in lower option premium income when the rolling occurs (but the extra $$ is actually locked up as an unrealized capital gain, which is OK). As Jake also pointed out the options premium income is taxed as regular income which will reduce the actual annualized return and land you a hefty tax bill at year end.
What if you keep rolling cash secured puts for a year without ever getting assigned? Will they be long term gains?
@@zachnicholson7924 No. Each time you roll to a new put contract, you are closing your previous position and entering a new one. The only way to get long-term capital gains treatment on this sort of trade is to hold a given contract longer than 1 year, which obviously isn't possible when they only have 1 month to expiration.
New place coming together nicely Jake!
Yes it is CB! Cheers!
Thanks for the video Jake! Would be sick to even show you doing this once a month and more so applying what you do (more visual learners) but I agree, looks like a great strategy especially when you can reinvest half the profit
Not a bad idea Mikey! I can think about this!
This works if the market remains static, which it never does. If it goes up too much, you need more capital in order to be able to sell 10 CSPs. For instance, SPY was close to 480 recently, so 437,000 wouldn't have been enough to cover 10 contracts. It also doesn't work if the underlying ETF drops too much, because then you are just forced to hold your shares and either attempt to sell CCs at a lower strike or sell at a higher strike and get less premiums. Your examples are good for one month, but it would be fascinating to see how this plays out over a year with real examples.
Thanks for the video, as it's a more realistic way to "retire early" than the people who are delusional enough to think they'll ever have enough capital to live off dividend income. I've been selling options for awhile, and it's really only been a problem when the underlying stock falls too much, and then I'm forced to either take the loss or try to sell calls at lower premiums, while hoping that the stock recovers. At least you know SPY will recover at some point.
Would mutual fund prices be more stable than individual stocks?
Buy more shares if it's too low, it'll reduce your cost basis.
I agree with what you say here this does not work the way he explains it. If it's static yes it will work but it's not prices fluctuate up and down if it's down then you're forced to sell at a price lower than your basis.
@@hankking4878 That's true. He should expose the risk if holding $437,000 when the market crashing like right now.
@@andis9076 the risk is no different than if you were just holding spy shares and not doing the wheel on it. He's assuming that the price will never move lmao which is totally untrue. The example in the video is too simplistic and should be talking about selling spy puts at a certain Delta regardless of price and same for the call side. As the price goes up you need more doller to run the wheel or reduce number of contracts sold. The video is way too simplistic and looks like he's never done the wheel himself lmao and just found out about it 5 mins before making this video.
Thank you for making this video!
You are very welcome Viktoriia!
Wheel Strategy - GREAT IDEA - What do you do if you are assigned and the SPY drops say another 30 points - well below your cost basis. - The ATM cvrd cll for the next cycle still puts you below your C/b. Therefore, there would be a "net" loss. I'm doing this with LRCX and that is my situation. My C/B is 25 pts below the current price. TY
This will not be answered
@@jiti5034I was just literally asking chatgpt on that scenario and you have few options. 1) definitely do not sell covered call below what your strike price was 2) remember that you started entire strategy with belief that stock will be bullish in the long run
Here are some options for you:
Great question! In that situation, where you’re assigned at $99, and the stock price drops significantly to $85, it’s understandable that you wouldn’t want to sell a covered call close to the money (e.g., a strike near $85) because it would lock in a loss if the stock price rises and your shares are called away. Here’s how you might handle it:
1. Hold Off on Selling a Covered Call Immediately:
Since you were assigned at $99 and the stock drops to $85, you’re sitting on an unrealized loss. Selling a covered call with a strike price near $85 would cap your upside and lock in those losses if the stock recovers. It might be best to wait for the stock price to recover or sell a higher strike price call.
2. Sell a Covered Call Above Your Purchase Price:
If you’re confident the stock will eventually recover, you can sell a covered call with a strike price at or above your cost basis ($99). While the premium will be lower, you can still collect some income without locking in a loss.
• For example, you could sell a $99 or $100 strike call. Even though the stock is at $85, selling a higher strike call gives you some premium without risking selling your shares at a loss.
• If the stock recovers to $99 or above, you’ll sell your shares at breakeven or with a small profit, plus the premium you’ve collected.
3. Consider a Longer Expiration:
• If the stock stays depressed, consider selling a longer-term covered call with a strike price above $99. This can give the stock time to recover and give you more premium than a short-term call.
• By extending the expiration, you might receive a decent premium even with a higher strike, but you’ll be locking in your shares for a longer time.
4. Roll the Covered Call:
• Another option is to roll the covered call if you’re in a scenario where it looks like the stock might recover slowly. You can sell a call at a higher strike or with a longer expiration and continue to collect premiums over time.
5. Wait It Out (If Necessary):
• If you’re really confident in the stock’s long-term potential (like NVIDIA), you could simply hold your shares without selling any covered calls and wait for the price to recover before resuming the Wheel strategy. You might miss out on premium income in the short term, but it could avoid locking in a loss.
Why Selling an In-the-Money Call Isn’t Ideal Here:
If you sell a covered call near $85 (in the money), and the stock starts to recover, you’d risk having to sell your shares at a loss (if the stock hits $85 and your call gets exercised). Ideally, you’d only sell calls at or above your cost basis when you’re looking to avoid taking a loss.
Key Takeaways:
• Don’t sell a close in-the-money call if you’re trying to avoid locking in a loss.
• Wait for a recovery or sell a call at a higher strike price (near your cost basis) for a lower premium.
• Consider longer-term calls to collect more premium while waiting for a stock recovery.
It’s all about balancing premium collection with managing risk, and in this case, patience might be your best ally.
Jake, I'm NEVER disappointed in your videos!!!
Thanks Joe! Glad you like them!
Correct me if i m wrong: what happens in the below scenario? Lets say one has sold a cash secured put as the first step and it got exercised because the market was going down. By the time the shares are assigned, if the market is still going down, the value of the original capital will be less than the put strike price, so you are already in loss (unrealized loss). The second step is to sell calls, however since the market is in downtrend, if you sell a covered call with a strike price below the original cash secured put strike price and (again unfortunately) if that gets executed, you are realizing a loss on your capital (minus the two premiums that you received). Or, is it always recommended in the second step to sell calls with a strike price of equal or more than the strike price of the cash secured put strike price, just so that you will preserve your capital?
Exactly. This is a terrible strategy and your example shows that well. If you sell a put and the market drops below it, you could lose a ton of money. You have no downside protection on a short put, it's unlimited risk
@@TR-lh9yz right, thats what i thought. this might be good when the market is already in a correction mode, say when the SandP is already corrected like 15%, then one may sell put and the downside risk is lower
@@rakshere No matter what, if you want to sell a put you are always better off also buying another put further out of the money to spread off the downside risk. Much safer, better capital/margin efficiency. You'll sleep better at night. The guy who does this channel doesn't understand options at all.
@@adamwright9381 Not surprising. There are so many things in the video that are simply not true. He doesn't understand options at all.
@@TR-lh9yz Risk is as if you own the stock. Going to zero. Unlimited risk is selling a naked call. That is if your broker wouldn’t liquidate the position quick enough,,,
Well articulated! Staying with the shares will also help to collect dividends 4 times a year
Very true! Cheers Prasad!
Great strategy: wash, rinse, & repeat. Thx. for sharing.
Good video, but I have one problem with it. What will you do if price will go 10% below your put strike? What strike you will choose for covered call? below price of assignment or at that price? Because if you get into bear market and you get assigned the price for call at assigned price will be much lower than 2.4% month
Liked and subbed. This is the clearest explanation of the Wheel Strategy I've ever seen. By the way, the Wheel Strategy works in Canada, too!
Welcome to the channel John! Great to have you with the channel!
Great explanation Jake. Thank you. 🙂
One problem with the assumption of 10% per year for future returns is that historically there are 20-year periods of 20% returns followed by 20-year periods of 0% return. Yes on average you're getting 10%, but timing is critical
You're right. Powerful strategy.
Good break down.......my head is going around in circles........but good explanation 👍
thanks i just stared this strategy a month ago so far so good ive made like $2500. So far so good.
Been doing something similar, but need to come up with a "system" and this is great inspiration. Your videos are always good and helpful. Thank you Jake!
Thanks Summer! You definitely have to have a set of rules you can follow and remain objective. Months like the one we are having right now is enough to scare most people away from this kind of strategy, but a month like this is an exception, not the norm.
@@JakeBroe Just started with NVDA covered call and selling cash secured put. It has worked in this down market as well. I am a long term holder of NVDA, so I follow the stock closely.
@@JakeBroe just found your channel today & watch this video. What are some stocks for a small account say under 5k? Any $5-20/share stocks for cash secured puts or covered calls?
Excellent as always
Good morning Jake. We shared a message in which I wrote that I had heard that SPX is taxed as a long term capital gain even if you held it less than 366 days. Here is the info:
" The other reason is that the SPX is settled in cash. When you trade Options on a stock, and it expires IN THE MONEY, then you either have to take ownership of the stock (when Selling Puts) or sell shares of the stock
(When Selling Calls). With Index options, like SPX, OEX, NDX, etc, since they settle in cash, part of the gain is considered Long Term by the IRS. Basically, 60% of the trade is Long Term Capital Gains, and 40% is
Short Term Capital Gains, REGARDLESS how long you hold it (in my examples above, only one day!). So there is also a tax advantage in using SPX."
I don't think I understand this Gilbert. I am not sure why if you held the ETF for less than a year why any part of it would get favorable long term capital gains.
@@JakeBroe I have so far seem to video options gurus who said that you were taxed less on SPX. I also don’t know why!
You’d make such a great professor!
Nice video. It's really all material you've covered in other videos, but it becomes more clear when the focus is on the retirement strategy. I'm definitely looking into this. Do you think this strategy would be good in a Roth as an account builder rather than income?
Thanks edod! Yes, as soon as I roll my TSP (gov 401K) in to my IRA I plan on doing this.
one condition i would add is...stay sidelines/ close positions when vix >20
Why ? Selling premium when vol is elevated is the best time to do it. Vol is always mean reverting. Won't stay elevated for ever.
Another great video Jake. Thanks
Thanks wannaknow! Cheers!
I like the way you think. I like the flow chart. Nice
Thanks Kevin! Cheers!
If you are going to trade 10 options, you should time spread them so that your risk is more manageable if the market has a quick move.
You can do this if you like Ivan!
The only time I ever made money with options was covered call on SPY. I would avoid options overall. A simpler method would be to just buy something like JEPI which does all the work for you.
One day when I have my debt in check I’ll be looking through all of jakes videos to learn all of these complicated things I don’t know about.
Solid plan Mike! No worries, these videos aren't going anywhere!
Brilliant mate!! I’ve done a few cash secured puts myself but I really love these numbers!! Thanks Jake!
You are very welcome djking! Cheers!
So what if on your first go at this you sell 10 puts at 437 for example and spy tanks. Your account is at 11000 for the premium you collected but now you just lost more than 11000 so you can't buy the puts back at expiration because you need more than 11k. I thought you'd have to put up collateral in case this happens so in theory you couldn't sell 10 puts with 437k
You wouldnt buy them back youd just get assigned and buy the 1000 shares of spy.
@@kennethkyle8771 Yes, you end up buying the stock at the put strike which is above market and lose a ton of money.
@@TR-lh9yz you’d subtract the premium you were paid giving you your break even price and sell covered calls above that price. Holding shares of spy obviously gives you risk. If you have a plan saying you’d buy spy at x price why wouldn’t you sell puts? You were going to buy shares regardless.
@@kennethkyle8771 That's true, on the covered call part of the strategy, your risk comes from the stock not the short call. But the guy that made this video claims that there's no risk in selling a naked put, which is not true at all. For a short term trader, there's no reason to ever do a covered call or short put. Much better off selling a put spread and having an actual hedge for the downside risk.
Well explained. Thanks Jake. Simple strategy and very low risk. Brilliant!
Thanks Rhoda! Cheers!
This is NOT a low risk strategy. If you sell an ATM put naked and the market moves down, you lose a ton of money. Unlimited risk!
@@TR-lh9yz but with this strategy you aren't naked. It being a cash secured put means you aren't naked.
@@ts4426 No it doesn't. Cash secured just means you reserve the money in your account to buy the stock at the put strike if you get assigned. It's "naked" if you don't have another long put protecting the downside. A naked put has unlimited downside risk whether it's cash secured or not. Say the stock is trading at 100 and you sell the 90 put. If the stock drops to 80, you lose $1000 per contract whether it's cash secured or not.
This is awesome. Thank you.
You are welcome R C!
Thanks for the sharing. But if the SPY goes down quickly you won't be able to sell covered call with high premium. If it keeps going down, the premium is getting less and less.
Everytime stock crash, the call value is getting crushed so you've huge lost from holding 437K of stocks plus you can't sell call without loosing amount of money ! Basically this wheel works when stock AND market is stable.
Right, so you just wait for a recovery. Don't force the wheel. The only underlying you should wheel on its something you mind owning. A lot of bad stuff has to happen if SPY goes to $0
@@CSPare_CChange yeah and most people who do this strategy have plans for when things go bad. They also tend to notice a crash a little sooner than the average Joe.
@@CSPare_CChange Exactly!
you can still get high premium
as long as you choose ATM strike no matter how low a stock dips
Hi Jake ... do you do Options course Mentoring ?
Awesome info!
Great strategy Jake! I know this is nightmare scenario but... what would happen if the stock market crashes and SPY goes back to $337 (pre-covid high) and you've sold 10 cash-secured puts at $437 or a little less? I guess, it would take a long time to recover (I know it's just one stock but we've just witnessed NFLX losing $100 overnight).
In my catastrophic scenario here, you would have to spend $437K to buy something that is now worth $337K, so a loss of $100K in account value. Even if you continue to sell CCs after that, the premiums you would get for it would be really lowered.
Also, you would still have to pay taxes on all the premiums you collected during the tax year although you have lost $100K in account value during the same year which doesn't even count as Capital gain loss if I'm correct!
Yep that is the problem with taxable accounts and trading options
So BTW, all this can be done in a IRA. There is the option (no pun) to 'Roll' your position (down and out, in this case). Or as you mention, sell calls against it, typically at the 15-20 delta so as not to get assigned, to capture additional premium and lower your cost base as you crawl back from the downturn. Just a couple of 'maintenance' techniques to employ when trading options. Additionally paying attention to the overall market, maybe not going 'all in' initially and holding back some capital for this type of scenario, to then 'double down' and wheel in some more. Many ways to skin the cat with options.
Odds of that happening in 1 month would be rare, but if things start to get scary, you could always buy back the option, for a loss of course, but a lot less than holding into infinity. A year like last year, what he is saying probably would have worked great, but in a volatile year, think 2020 in March down 30% in 1 month, and your scenario would have played out, but again, that doesn't happen usually, but obviously it can happen.
Another way to help protect is to sell out of the money, give yourself some cushion, but of course the premiums won't be as good, but instead his 37% scenario, shoot for 15 or 20%. By giving a cushion of 5-10% it would in most cases keep you safe
and in a really bad case, keep your losses maybe in the 20% range or less, especially if you buy it back.
I may be missing something, only been trading options for a bout a year, so maybe he will see your comment and mine and chime in.
You can close your options early. Or roll them.
I agree with Mcgragor .. I have been doing this , works like a charm. I give a cushion of 5% when selling puts , so a 10% drop does not hurt me as much when I have to do sell call after its assignment. A 30% drop takes 6 to 12 months to come back - just hold onto your shares . Never sell assigned shares for a loss . The key is to Not panic and enjoy the ride ! That's how you become a millionaire. Over a 10 year period you would have made an average of 15% to 20% per year on your capital which otherwise you would have lost to inflation anyways. Remember to do this wheel strategy with 'excess cash' after setting aside money for index fund investments in brokerage account & IRAs and even better if you have cleared your home mortgage or student debts if any, and ofcourse after setting aside emergency expenses. Then, you are least anxious about locking in a huge capital on a 30% market drop. Also when I do the wheel, I only do it on SPY and not on individual stocks , since the recovery time for SPY on major crash is the fastest compared to individual stocks . Hope that helps!
Hey Jake, I keep loving your videos...I believe my investing trajectory has drastically been improved since I see the potential thru these relative safer options plays. Thanks so much!!
You are very welcome James! Cheers!
I love selling options 😁
So if for example you sell a put at 430 and it goes to 425 at expiration you get assigned, I get that, but you also lose on the put you sold as well correct? So you collect premium but the put you sold puts you at a net loss
You collect the premium the same day you sold the put. Once you get assigned and are forced to buy the stock at $430, you are technically down $500 because the current price is $425. But the stock can go back up to $430 the next week, so you aren't always going to lose once you get assigned. You keep the 100 stocks and can just wait it out until it goes back up.
@@RandyLy ya I get all that you said but the put itself let's say is negative 1000 or whatever it might. So getting assigned I get but the value of the put is now negative quite a bit don't you lose on that in addition to getting the 100 shares? So a double loss?
Yes. You have to buy it at $430 and if you were to immediately sell it you would lose $500 (100 shares x $5) yet would also have had the premium offset that, so not as much. But the point would be that you should begin to sell covered calls to collect that premium, and if you want you could sell it at $430 and when/if SPY closes back above that at expiration you've made another premium and your stock was called away. Then, repeat.
i did half this strategy with CC and each time buying more stock. And it worked great for 6 months. the market took a big tumble on my volatile tech stock and i sold and still managed to break even. Time to play the other side.
Very well explained.
Great video, Jake. I really like the wheel. I haven’t tried it yet but want to. It just seems too good to be true.
Haha, the deck is stacked in favor of options sellers. Unfortunately those are the people with all the money already...
Thanks Jake, I like it. Not much more risky than just holding SPY. Got to put it somewhere guys. And the more you put your calls OTM, the less risky. Of course less premiums. One other thought is one could just do the covered calls during less volatile periods skipping the put. And the puts on days like today. But holding SPY without options lost today so options work!
Hi Jake, I'm glad you had that part at the end about buying further out of the money...i kept thinking "why not give yourself a better Delta with a slightly further OTM strike price to help avoid being exercised". Also, when selling CSP's, why not avoid the 3rd Friday of every month option expiry date so you don't fall into that market stall that typically happens (as you've explained) the 3rd Friday of every month. I realize trying to time the market is a fools errand, but seems fairly reliable that there will be a stall so why not ride through it with a dif Friday expiration date which "could" help you avoid being exercised?
He has talked about this before. He likes to have as much liquidity as possible which is why he always trades the 3rd Friday
Hey Josh! I was not trying to make this video any more complicated than it needed to be so I avoided talking about delta. As for options dates, you are correct in that if you are selling cash secured puts, you might want to avoid the 3rd friday (when the market sells off). However, if you are selling covered calls, then maybe you do want the 3rd friday if this helps you not be assigned.
@@JakeBroe when is the best time to sell cash secured puts if it is not 3rd friday?
Great video as usual, but I have a point, you should buy and sell far from ATM
Because high move up or down will cost you a lot capital , less returns but more safe
I have subscribed to your channel
🙏🌹
Welcome to the channel Mohamedha! Great to have you with us!
@mohamedha578 Why high move UP cost a lot of capital ?
Does the wheel strategy trigger a wash sale? great video..thkx..
Great video. Will be doing this strategy when the market is less volatile
Jake , thank you so much for your great explanation .... Jake , my biggest concern in this beautiful wheel strategy is the STEP # 4 ( at 6:47 ) . why ? let me give you a worst case scenario ...... if for example a " black swan event " starts forming at the stage 4 , and stock market continue going down by 60- 80 % , then how we can exercise or execute " SELL COVERED CALL when stock market is in a FREE FALL and chance of recovery is 3-5 years ??? CAN you make another video , and explain WHAT we should do and how we save our 437 K , at stage# 4 , if a "black swan event" happens in this " wheel strategy )
Very well done video.
Thanks BJJJUDO! Cheers!
Awesome video… noticed for the break even you didn’t have the cost of the options included….FYI…anyways love the idea…👍
Thanks Brian! I appreciate the support!
What a great strategy! This really looks good.
Thanks Donnie! Cheers!
Thanks my man Jack, I’m always looking for a better way. And you found it as always. What is a good time to call you. I tried the other night but we missed each other. Thanks again. George.
Thanks. Been doing that, but with individual S&P stocks. Having a blood bath at the moment but will keep going.
Thanks Jake
You are very welcome Kevin! Cheers!
Jake, have you looked into IWM wheel strategy?
Great video! This is precisely what I’m trying to do. I’m targeting 3 more years to reach $439K in my trading account.
Solid plan Alondo!
Love the video Have one question what you do if the put is assigned well below the strike price what strike price would you use to sell your call
example sell SPY put today one strike out of the money at today strike price 415 for $14.70
if SPY moves to 410 and you are assigned at 415. do you use the 415 as your break even when you sell your call ?
Wow! Definitely an awesome strategy will try it in the future when I get that amount for collateral 🙏🏼. Thanks always for the excellent content!!
I did this around the time you made it with 1 put it payed 1160. I closed it 3 days later and kept 1000 , I could of let it run for 20 days longer and got full pay but thought I would do a second one and get paid twice in a month. For the record I have not yet done the second put yet because of the increased price of shares .
I do this all the time, close it out if it hits around 90% and go again on something else suitable or wait for it to come back down a bit
The risk of this strategy and having all your capital stuck seems downplayed. As what happens if sell a secured put at $100, but stock ends at $80 after 30 days? And never returns to a position that can sell a covered call and not be down a crippling amount? Broad indexes in theory should be less prone to this, but what happens with this strategy and ones capital if played during tech bubble burst or 2008?
Doesn't matter. I'm only recommending this on a broad index and even if the index goes down 20% in a year, I keep the Wheel Strategy going collecting premium. I'm not trying to convince you of anything in this video, lol. You can believe it works or don't believe it.
@@JakeBroe How unhelpful is THAT answer! Geez.
@@JakeBroe Didnt mean to come across as questioning, just more wanting to check have as many of the worst case sceraios thought through. For example, you mention you keep the wheel strategy going by collecting premium, but what happens if you cant sell a covered call that is above your breakeven? That is the risk trying to better understand. As found myself in a position with KHC in which that has been the case. Thank you for all the great content!
It doesn't have to "return to a position" for you to sell CC. If you sold 100P and index is at 80 then you'll have cost basis of 100 (as you went ITM and got assigned). Now just sell 80 call for next month. Or maybe a higher strike / less premium depending on preference.
Can you record a new video for Fidelity options trading?
Awesome sounds great thank you so much for your help I really appreciate that you are much better than other TH-camr, They are selling course and Waste time, to give you something Tough doesn’t Wake money.
The first minute of this video is what I told my family after telling them over and over but non of them listen… “I’m not trying to convince you I’m just gonna show you what I know…”
Today I’m 37 retired and I’m also the youngest of my siblings…
I’m guessing you’re not really retired in the traditional sense though? Ok, you don’t work for someone else, but you still need to ‘work’ by constantly managing your funds to hopefully produce an income and if you have a bad run you’ll need to find work or sell assets, so no, not really ‘retired’.
In the current market would you still try to sell a put to enter and plan to get assigned or just buy the shares and sell the calls since that's more a bearish strategy?
Love the video Have one question what you do if the put is assigned well below the strike price what strike price would you use to sell your call
example sell SPY put today one strike out of the money at today strike price 415 for $14.70
if SPY moves to 410 and you are assigned at 415. do you use the 415 as your break even when you sell your put ?
Thanks
Very helpful
When running the Wheel strategy, do you usually close the trade when you reach a certain profit amount, or do you typically let it run to expiration? Thank you
If you're over 60 or 70% profit amount, BTC. Lots of articles online about this. But the last 20% of the time of an option contract moves very flat compared to the first half. Use that time to your advantage. Try to double the amount of contracts you get to sell.
You can always buy back and roll over.
How do you feel about spld? Smaller nav than spy
great explanation I've been learning option myself for the last year and this so far my favorite strategy ... have you try naked put option? and poor man covered call?
I just got an audiobook about options. Im gunna follow your advice.
Hi Jake, if not mistaken, when market drops, 'buyer' does not gain value with long calls (13:25 in video)...buyers are looking for price to go up. At 17:00, you mention breakeven at $450.01...why worry about breakeven at this point, as long as the stock is above your strike, the shares will be assigned to the buyers, which is what you want, you still keep the $12K. OK, just some thoughts...thumbs up! Of course, for your viewers, a lot more than meets the eye with this strategy, as the markets dictates what eventually happens, and there are numerous management strategies and techniques when trading the wheel...great stuff!
Thanks kanegs! Yeah, there is a lot going on here and I just tried to condense as much as I could for a video under 20 mintues.
@@JakeBroe Break even calc on the covered call is incorrect. It's not 438+12=450, it's 438-12=426. That's the point of coevered calls, some downside protection.
Love the video! Quick question, why do this with SPY and not QQQ? Or is that simply a matter of personal taste/risk? Thx!
What's the delta to start the put ???
That was fun! Can u do that again on a smaller amount, say $200k
Jake, do you buy to close earlier to free up buying power?
Bro, you been taking salty shots at the ppl in the comments in your recent videos. Forget about them and keep doing you honey boo boo. 🔥
Hey jack how is your exit setup for option selling? Like when do you take profit and cut loss, in terms of percentage thanks
Great Video Jake! Looking forward to seeing/following this strategy as you approach your retirement goal.s Love the transparencies, and as usual, very easy to follow!
Thanks MrChoudhury! I already have the funds to do this on 300 shares of SPY just in my taxable brokerage account, so I am 30% of the way to my goal. I'll keep people updated!
This is not a viable retirement strategy. When you're holding that short put you have unlimited downside risk. Very bad idea.
@@TR-lh9yz if he’s selling cash secure puts or covered call if he’s getting assigned, the biggest risk I can see if the spy crashes way below his strike price or miss out on the gain if it goes to the moon. Otherwise it appears to be a steady income strategy. Do you mean unlimited downside in case of a black swan event if Spy goes way way down?
Well, let's use his example. SPY is at 437 and you sell the 437 put for 11/share. If SPY drops to 400 (like 8%), you are forced to buy it at 437 from your put. So you lost $26 a share (Bought at 437, it's now at 400, and you collected 11 for the option you sold.) So now you sell a call at 400 and probably collect another 10. SPY goes back up to 437, but you are forced to sell at 400 from the short call. So at the end SPY ended up flat after two months, but you lost $16 a share jacking around with the options. There's a lot of risk this guy doesn't seem to understand. An 8% drop and recovery is not a black swan event, happens all the time.
@@ichoudhury007 Sorry, didn't tag your name
Do you ever use Optionet Explorer software?
Jake, you're really, really good at explaining things/concepts etc; it's wild- keep it up as you always do :)
Still can't believe how shocked I was to see you in the Graham Stephan testimonial for his YT course
Thanks Lalit! I'm in a testimonial for Graham's course? I didn't know that.
@@JakeBroe Yupp, you, Jake Tran and a couple others- amazing to see how you literally grew so much with literally the consistency- big ups :)