So there's definitely a go-with-what-you-know element to trading. Consistency is most important, actual returns are secondary, and if you're really getting consistent results with the wheel, great. The general issue with the wheel (and, selling options in general) is that unless there's quite a bit of underlying strategy its
hard to get consistent and material returns in the long run, over different kinds of markets. And IMHO if you build in enough strategy to do so, you realize its better to deviate from The Wheel proper...
That's the best place to start, yeah. Start looking at multi leg strategies, their upsides and downsides, and their proper (and improper) use cases. It really is imperative to
really understand the primary greeks and how they work (Vega//IV, ∆/gamma, and theta), how they fluctuate, their relative importance (= theta is by far the weakest greek) and how they impact contract value.
Also, the reality is that, at least to a degree, multi-leg strategies
are available to many of the folks here who are trading in IRAs--selling is of course limited to covered calls and cash covered puts and buying is limited to straight up buys, but there are a number of quasai-multi-leg positions that one can build up with those order types. For instance, one can still buy a put(s) to protect the downside on a cash covered put in an IRA, effectively backing into a spread (of sorts)....just one that requires more capital than a margined account. And when one has complex positions like that built up, one has more maintenance plays available. For instance, if underlying does go up against the [the cash covered put + bought puts] example, one can bail out of the bought puts while they still have value, and then ride out the cash covered put in relative safety since price has gone up. Or if underlying tanks, one could bail out of the cash covered put and just keep the +P going.
The other good news is that, whether folks realize it or not, reality is that most people here are actually making material gains on their sold contracts via underlying movement. You see plenty of people closing sold contracts early because favorable price action (and corollary contract ∆) has burned down the CV to an acceptable closable value. So...whether people realize it or not, they're actually making decent directional decisions
without even trying. Imagine what just a little bit of conscious directional logic would do when applied to properly directional trading? And
@Oil4AsphaultOnly that's what I'm really alluding to with respect to "better" risk/reward strategies. The "easy money" of straight selling of options relies on quantity to make returns--one needs to constantly be in position to see material returns. The (IMHO) "not that hard money" of directional trading relies on quality to make returns (which is a non-zero lift, of course), where one is more selective about entering positions that bring the opportunity of much higher returns.
For me, straight selling contracts (or credit spreads or Iron Condors) falls into two categories: 1) capturing high volatility (such as my ZM earnings play described above) and 2) capital that will go unused for some period of time (like the Iron Condor play for this week I described above). Beyond that, for me, I only sell as part of multi-leg strategies, both to offset high volatility and to reduce cost basis.
This is a pretty good case study. On the 5th (where the meatball is on the screenshot below) IV was coming out of a pretty significant trough, that ~bottomed where the previous post-corona troughs ~bottomed, and also one where IV30 dipped below IV360--which is a pretty good indicator of very low IV. Given that the post-corona IV peaks were way higher than IV30 on the 5th, one could have reasonably assessed that IV would have quite a bit of headroom to grow. Not to mention we're a few weeks out from earnings--while not a sure thing, its hard to bet against volatility increasing on a run up to earnings. In addition, price just broke ATH on the 4th during a run-up and, while that's again not a sure thing indicator of a continuing run, it is a little hard to bet against the trend at that point. So your mistake was 1) as you note incorrectly assessing price as stabilizing, but more importantly 2) selling a contract at just about the worst time (= low volatility).
Of course, given that it was an OTM CC you're still making out green so its not a total loss, and definitely no need to beat yourself up. On the flip side, had you put down, say, $1.8k (or so) on a march 1000 call late Tuesday, it would have closed at $8.3k today. For reference, I basically made this play, entering 50x July $1000 calls on the 29th (luckily, the last day of the trough) for ~$208k. Current value of the position is $782k.
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Further assessing the above screenshot, IMHO the IV30 peaks at ~125 from the summer are probably
not something we'll see in this IV rally, but the more recent ~105 peak is probably in reach--that would probably be when I'd start selling options. FTR I'm almost certainly going to repeat my above ZM earnings play (DITM CC) with TSLA and am just waiting for the right entry. Easy money would be to enter now. Smart money would be to enter later.
Yeah, exactly! If you have a core position that you want to keep, don't mess with it unless you're willing to let a call go underwater against them, potentially for months or even years. But if you also have some unallocated capital that's not invested because of your risk posture, use that in a manner that satisfies your risk tolerance. If that manner is The Wheel, great, if that's something more sophisticated, even better.
