Reinventing the Wheel

Heather Cullen

Heather Cullen

In The Money

Heather Cullen Blog Reinventing the options wheel

The Options Wheel

‘The Wheel’ is probably the highest profile of all options strategies right now. It is a cyclical process where you:

  1. Sell put options on a stock / index that you would like to buy, typically 30 – 45 days to expiration. If it expires worthless you don’t buy the stock, but you get to keep the premium. You keep doing this until you are exercised when you:
  2. Buy the stock. You are now the proud owner of the stock at the strike price of your options. You then proceed to:
  3. Sell covered calls against the stock you have just bought, getting a premium. If you are exercised, then you:
  4. Go back to 1 and do it all again.

All very clear – but does it make a profit? It seems so – this guy claims he makes $31k a WEEK!

Heather Cullen Blog options scam

Using the Wheel on SPY

Let’s check it against SPY. Today is the 22nd of January so let’s look at 23rd February puts. SPY is trading at $482.43 (Woohoo! A new high!) so let’s say we would like to buy it at a 3% discount, or $468. The bid / ask is 1.73 / 1.75, so that gets us $174 premium. Nice – but what is our obligation?

If we are exercised then we are able to buy 100 shares of SPY at $468, so we need to come up with $46,800. You need to check – will your broker allow you to sell puts? You have to have a high level of access to be able to do this. 

 You could do a cash-secured put, but that requires you to actually have enough cash in your account to buy the stock if it is exercised.  If you look closely at the video above you will notice this:

The Wheel Returns

Let’s assume that we are committed to the Wheel and that we have deposited $46,800 in our account. Our premium for the month has netted us $174, or 0.37% for the month. Of course, we can do this every month which would give us a yearly return of 4.46%. I don’t know about you – but my feeling is why bother? You are taking a lot of risk for less than you would get on a fixed term deposit.

The Wheel Risks

Now, to be exercised SPY has dropped to $468 (which it must have otherwise you would not be being exercised) so you are now the proud owner of 100 SPY shares. Is it a bargain? Well, you know that SPY is trading at less than that otherwise you wouldn’t be getting exercised. You could buy on market for the same price or less. But what if it had dropped even further?

Suppose it had dropped 5% (which it can easily do in a month) to $458. This means that you are having to buy something costing $46,800 when it is actually only worth $45,800. In other words you are down $1,000 on the deal. You still have the $174 premium of course, so you have only lost $826, or 2.7%. But you certainly don’t want to be doing that every month as that is a 34% annualized loss.

The Wheel In Motion

But we press on. We’ve bought our SPY shares – now we have to sell covered calls against them. Let’s look at the premiums we can get at current prices. If we look at 5% above the current price – we have a bid / ask of $45 / .45 so we would get a premium of $44, or 0.09%. Cheer up, when annualized that is 1.08%, a princely return!

Heather Cullen Blog Cherry picking results

Naturally we only win if SPY doesn’t go up more than 5%. Could it? I think so, it has done so frequently before.

Suppose it went up 10% – you will be forced to sell it at a 5% discount to the market. A loss of $2,412 of actual profit.

That would hurt. Quite a bit.

Conversely, if SPY was starting a strong upward run you might never be exercised, so you would never get on it. Sure, you get to keep the premiums, but they are a poor substitute for owning the underlying in a strongly trending market.

Is the Wheel A Good Strategy?

In my opinion, no. I have never seen is as a profitable strategy and I have looked many times. I’ve checked various strikes, expiries and stocks but to me the payback is never worth the risk.

Of course, the books all show great examples of it working wonderfully. All I am going to say is:

We can all be brilliant traders in hindsight!

Heather Cullen Blog Brilliant traders in hindsight

2024 Update

I have just finalized Mark I of my backtesting system, and am in the process of updating the Bull Strategy to the end of 2023. I will give a heads up here when it is published. I am not doing it as a formal new edition which means that anyone with an eBook can get the update free. I think, that is the policy. However, it is down to Amazon to put it into practice, I have absolutely no influence over that.

I will also update ITMB, the bear market book. That should be quicker. And curiously – the bear book has been outselling the bull book in January . .  do people know something I don’t?

Heather Cullen Blog ITM 2024 Update

To the markets . . .

And a nice end to the week, with new highs. Very happy, that’s a good sign. We deserve some lovely profits after the last 2 dismal years. Let’s have a look.

SPY Chart

The big news about SPY is that it has made a new all-time high! Yes, it closed at $482.43 on Friday, above the previous all-time high of $479 from January 2022. So, good news at last! Of course, once we are in ‘blue sky’ territory we are flying blind, but we can make a guess that the next resistance is going to be at 500. Why? Just because it is a nice round number and I imagine there will be a psychological barrier at that level.

Naturally, I could be wrong. I expected it to falter at 400 in March 2021 and it didn’t; it just sailed right through without a backward glance. It would be nice if I am wrong again, and we are seeing the start of a lovely bull market.

Heather Cullen Blog ITM SPY chart

It is possible that SPY will retrace to the support / resistance line around $479. This would be entirely normal behavior, and as long as it holds is nothing to worry about.

For some perspective, here’s the last 3 years showing us breaking through resistance at the previous all-time high.

Heather Cullen ITM Blog SPY weekly chart

SPYG Chart

SPYG retraced to test resistance as we discussed in last week’s blog. It bounced off again and headed north, making a new post-bear market high. 

Heather Cullen Blog ITM SPYG chart

However, it is not making new all-time highs; it still has a way to go to surpass the December 2021 high as you can see in this chart:

Heather Cullen Blog ITM SPYG weekly

QQQ Chart

QQQ is also in ‘blue sky’ territory. It has surpassed its previous all-time high of $403.78 in November 2021. It spent a couple of weeks above it in December, then retraced at the start of the new year falling below it for a week or so. It is now above it again and has been for almost 2 weeks, which is very encouraging.

Heather Cullen ITM Blog QQQ Chart

The longer term chart shows the breakthrough, then retracement then back for another shot at breaking through.

Heather Cullen ITM Blog QQQ weekly chart

VIX Chart

The VIX continues in low-volatility territory, which is nice. In December and January it has been the lowest since huge spike during the Covid bear

Heather Cullen ITM Blog VIX chart


Heather Cullen Blog ITMeter

The week ahead . .

Well, we got our wish from last week – that SPY made a new high. So, flushed with success I’m going to make another one – more all-time highs please!

At this stage the futures are positive – 12 hours before market open.

Heather Cullen ITM Blog Futures

Fingers crossed for another good week – we surely deserve it after the last 2 dismal years!


Comments, Questions & Answers

4 thoughts on “Reinventing the Wheel”

    1. I am simply saying that I cannot replicate their results using real-time data. Anyone can make a $32K weekly profit – if they just have enough capital! If you look at the bit I have highlighted you will see that it was on a base of $500,000+ and not everyone has that in their accounts, especially of they are just starting out.
      Perhaps I was being unfair using it on SPY as an example. It may work better on a lower-priced stock where you need less capital, so I am looking right now at the options chain for Ford (F) currently trading at $10.92. If you wanted to sell a put 30 days to expiry for $10 then you will get $12.34, or 1.23%, annually 14.76%. I agree that is a lot better than using it on SPY but you have the added risk of holding the stock, which has decreased from $25 to $10 over the past 2 years.
      I was not alleging that anyone was lying, just saying I could not replicate their results.

  1. Hi Heather! I loved your books about ITM strategy and have a question… I recently looked to purchase SPY call $285 expiring 1/17/2025 and found it hard to find the time value below 1%.. I ended up paying $199.05 and the underlying SPY price was $474.10. From my understanding that gives me a time value of 2.1%… I even tried to put a limit order $.01 above the mid between ask and bid, but never got filled until i used a market order. is this phenomenon more common? Inability to find the under 1% time value or was it my timing due to markets being at all time high?

    1. Hi Brian
      Yes, I have been doing quite a few blog posts and answering questions recently about choosing options within the 1%. To answer them all, I am updating the bull book right now and looking at using higher time values with ITM and what outcomes it produces.
      Basically, even though volatility is low interest rates are higher than they have been in recent years so options are expensive If you want to come in under 1% you have to get a nearer-dated option (June to September) or lower your strike but then you get lower leverage. Here is part of a section based on a list of options from Monday that fit the 1% time value rule with their leverage:
       June 21, 2024
      o Strike 240, 50% of current
      o Strike 245, 51% of current
      o Strike 250, 52% of current
      o Strike 255, 53% of current
      o Strike 260, 54% of current
      o Strike 265, 55% of current
      o Strike 270, 56% of current
      If we choose June 2024 options, we can get up to 56% leverage while keeping under 1% time value. Let’s try September:
       September 20, 2024
      o Strike 235, 49% of current

      As you can see, the extra 3 months has an effect on the options prices, and we can’t get 50% leverage with 1% time value. Thie highest is the 235 strike at 49%. Let’s’ check the December options:

       December 20, 2024
      o Strike 200, 41% of current
      Time Value: 1.5%
      Again, we choose from the same expiry dates and find the highest strike with 1.5% time value is:
       June 21, 2024
      o Strike 350, 72% of current
       September 20, 2024
      o Strike 275, 57% of current
       December 20, 2024
      o Strike 240, 50% of current
      That’s a lot better. We can get very high leverage with June options and 50% in December.
      Re your current option – I would suggest that you keep it – SPY has gone up a little since then so you should already be in profit and if we are starting a nice bull run then all will be well.
      Hope this helps – I am updating the bull book as fast as I can and if you have the eBook then you should be able to get the update for free from Amazon.
      Whew! Long answer! Must get that update out asap!

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