Three High Premium Wheel Strategy Trades for August 2024
Last month, the stock market was all over the place. I was assigned on several cash-secured puts at the end of July and early August. Sticking to the wheel strategy, I quickly wrote covered calls on these positions at strike prices at my cost basis. Thankfully, the market bounced back, pushing these positions beyond their purchase prices. By August 16, I closed out these positions profitably—about 20% of my open risk turned into gains. It's a pretty solid way to wrap up the week!
With a fresh stash of capital, I'm back hunting for new wheel strategy trades. People often ask, “What makes a good stock for the wheel strategy?” It’s pretty simple: pick stocks you wouldn't mind owning and at prices you consider a steal. I'll dive deeper into choosing stocks for the wheel strategy in upcoming posts, but today, let’s focus on how I spotted three great trades this month using Premium Pirates. Without this tool, I'd be buried in research for days. If you haven’t already, check out the free trial of Premium Pirates to see how you can customize it for your trading style.
Starting with a Watchlist
I keep a watchlist on Premium Pirates with all the popular wheel stocks from recent months. It's tempting just to follow the herd, but I encourage you to do your research and find trades that suit your comfort level. We’re working on some cool new features to show which stocks are trending among wheel traders on our platform—so stay tuned!
Setting Your Own Fair Value
What I love about Premium Pirates is the ability to set my own fair values for any stock on my watchlist. I generally lean on MorningStar’s latest fair values—they know their stuff. This helps me see at a glance which stocks are trading at a bargain according to my criteria.
Scanning for Gold
The most thrilling part of my week is firing up the Options Scanner to look for new trades. Here’s my filter setup for this week:
- All major expiration dates through the end of 2024
- Only the "Popular Wheel Stocks" watchlist
- Stocks with at least a 1-star discount to fair value
- Aiming for returns of 2% or more
- Only puts
- Strike prices between $30 and $56
- Delta under 0.4
- Market cap over $9 billion
I’m hunting for stocks trading well below their fair value and offering high-premium options.
A quick note about risk management
I will likely create other posts to discuss the importance of risk management and diversification. I like to put at most 5% (or 10% under special circumstances) of my portfolio into any trade idea. I also want to be well-diversified across various sectors.
The Premium Pirates campaign tracker makes keeping tabs on your diversification easy. When I started my research for the week, my open risk was too heavy in the Consumer Cyclical sector for my liking. Here’s a screenshot of my sector allocation from the campaign tracker.
This Week’s Trades
DOCU $52 Put for 9/6/24 - 2.25% Return
The premium for this position was $1.17, so I made a $117 return on $5200 open risk. Not bad!
This position concerns me because DOCU earnings will be available on 9/5/24 after hours. So, the day my position expires, the market will react to their earnings. However, Morningstar updated the fair value of DOCU to $65 on 8/2. When I opened this position, DOCU was trading at $56.25, the delta was below 0.3, and since if I am assigned at $52, this would still be a 20% discount to fair value, I took the trade. We’ll see how it turns out. I will add an update to this post when there is an update to this campaign.
Update on 9/4: I knew when I opened this trade that I wanted to get out before the earnings announcement. The price of DOCU kept climbing and I bought back my put option for $37 on August 30. I don't typically close campaigns early, but in this case I was ready to take profits and move on to something else. My final premium for this campaign was $80 on $5200 open risk, a 1.5% return on a campaign that was open for ten days.
ZM $56 Put for 9/6/24 - 2.4% Return
The premium for this position was $1.36 on $5600 open risk. Again, this position was iffy for me at the outset because their earnings were to be available on 8/21, the day after I opened the position. Under normal circumstances, I avoid opening a campaign the day before an earnings announcement. Still, MorningStarar has a fair value of ZM set at $ 89, updated on 8/2, and I was specifically looking to open up risk in the Technical sector. Ultimately, I decided it was worth the risk.
Update on 8/22: The day after I opened this position, ZM exceeded their estimated earnings, and the price went up to $68.20. I bought back my short put for $12, which closed this campaign. I earned $124 ($136-$12) on $5600 open risk, a 2.2% return for a campaign that was only open for two days. This, my friends, is premium plundering at its finest!
RBLX $39.50 Put for 9/6/24 - 1.9% Return
The week's theme is opening positions that expire on September 6. MorningStar has a fair value of RBLX at $53, which was updated on 8/2/24. The premium on this trade was $0.78. And the best part? There are no earnings announcements until November 6, hopefully long after I’ve wheeled out of this position. This one felt like a no-brainer to me.
Update 8/22: Over the next two days, the market price of RBLX continued to climb from ~$40 to $43.40. I bought back my short put back for $13 and closed the campaign. I ended up with $65 income for $3950 open risk. AI will always be a fan of a 1.6% return for a campaign open for two days. If you can do this enough, you can see how profitable the wheel strategy can be over time.
These real-world examples illustrate how Premium Pirates can streamline your trading process and help you make informed decisions. If you want to improve your trading strategies and cut down on research time, try Premium Pirates.
Want to try it for yourself?
Don’t just take my word for it—try it out yourself! Sign up for a 14-day free trial of Premium Pirates today and start exploring all its features. And if you're not ready to dive in just yet, join our email list for updates on new trades and tips.