Updated: Dec 6, 2018
This ugly October is coming to an end with a small relief rally into the last day here, but as of now the S&P 500 is still down -6.83% on the month. So it's been one of the worst since the financial crisis. Volatility is obviously going to be quite elevated during a move like this which makes it a good time to scoop up a "Wheel of Fun" Short Put.
I personally have a couple short lists of stocks I like to target for these. The first is a list of solid companies for targeting put wheel trades when stocks have taken a beating. The second is a list of what I consider weak companies which I target for call wheel trades when stocks are near highs. Considering we're in the middle of a market decline, we'll start with a Put wheel.
For today though, let's do it through a basic selection process using a stock screener. I use ThinkorSwim, but any will do. There's one that's public and free which I've used before in a video, so I'll go ahead and use that again so everybody can follow along.
Go to Finviz.com
2) Filters: All - We're going to apply some filters to reduce the number of stocks 7540 stocks left
3) Option/short: optionable and shortable - Our wheel trade won't work if there are no options, so this is first 4209 stocks left
4) Average volume: over 1M - Good underlying liquidity is important for getting fill prices 1292 stocks left
5) Market cap: +mid (over 2 bln) - I typically stick to larger companies for more stability 903 stocks left
6) Dividend: over 3% - Dividend-paying stocks have yield protection during crashes 255 stocks left
7) Beta: under 1 - Again we want stocks that don't demonstrate wild swings 142 stocks left
8) Price: under 20$ - We need it to scale to smaller accounts (no Amazon) 46 stocks left
9) 200-day simple moving average: price below sma(200) - Just looking for stocks that are beaten down lately 34 stocks left
10) P/E: under 15 - Not comprehensive of course, but a decent "quality" filter 19 stocks left
Using those filters we get a short list of 19 companies which if you want you can analyze some or all of them. For me, a few names jumped out that I've traded before which always helps with being familiar with how they move. The one we want is Bed Bath and Beyond (BBBY)
It's a decent company, price near it's lows, it's reported earnings already so we're not expecting any major shocks, and I've traded it before and find the option premium to be decent considering it's stability.
The Trade:"Wheel of Fun" Short Put on BBBY
Sell to Open 4 x 21 Dec 18' BBBY 12.50 Put Credit: ~ 0.40 Days to expiry: 51
* prices move around, so just get the highest premium you can.
Margin Requirement: - We always trade these "cash-secured" meaning we reserve the full capital required to own the shares outright if assigned
- 1 option contract = 100 shares if assigned - 100 shares of BBBY @ 12.50 = 1,250 - This trade requires 1,250 per contract - 4 contracts @ 1,250 = 5,000
- The VTS Discretionary model portfolio is at 26,061.38 - 5,000 is 19.19% of the portfolio
* You can scale your trade to roughly 20% of your VTS Discretionary funds
Stop-loss: - We always use a 10% stop-loss on this type of trade - 1,250 per contract is what the trade is valued at - 1,250 * 10% = 125
* If we are down more than 125$ per contract we will close it
If you haven't caught the video explaining the Wheel of Fun, you can check it out below and ask any questions you have.
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