Summary of "The Wheel vs Covered Strangle Strategy Comparison"

The Wheel vs Covered Strangle Strategy Comparison

Strategies Compared

Wheel Strategy
Covered Strangle Strategy

Core Differences

Both strategies begin by selling cash secured puts. Upon assignment:

Both sell covered calls on the long stock.
Wheel: Continues selling short calls only against the assigned stock.
Covered Strangle: Continues selling covered calls and additional cash secured puts, allowing more active trade management and greater sensitivity to price movements.

Example & Timeline

Underlying Asset: IWM ETF (iShares Russell 2000 ETF)
Initial Date: December 2, 2015
Account Size: $30,000 (assumed)
Return Period: December 15, 2015 – May 16, 2016 (~5 months)

Results:

Covered Strangle: $952 profit (~3.0% return)
Wheel: $788 profit (~2.63% return)

Note: The study ended early by neutralizing positions, so actual returns could differ.

Trade Details & Management

Initial Trades:
- Covered Strangle: Sold 1x Jan 16 116 put @ $1.38
- Wheel: Sold 2x Jan 16 116 puts (using more capital upfront)
Assignment: Occurred after a price drop (~from $119 to $102).
- Covered Strangle held 100 shares
- Wheel held 200 shares
Post-Assignment Actions:
- No short calls sold initially due to low premiums (e.g., only $0.09 premium at $116 strike when underlying was $102).
- Covered Strangle sold additional short puts (e.g., Feb 26 100 puts @ $2.50), lowering basis and collecting more premiums.
- By mid-February:
  - Wheel realized $276 profit on puts
  - Covered Strangle realized $387 profit on puts
Further Activity (Covered Strangle):
- Continued adding short puts (e.g., April 8 100 puts @ $1.82, May 20 105 puts @ $1.29), further reducing cost basis and realizing profits.
- Sold short calls later (e.g., May 9, 30 June 116 calls for $0.58 premium), allowing room for stock appreciation.
Wheel Strategy:
- Held more shares but was less active in adding puts or calls.

Key Metrics

Covered Strangle realized profits on multiple short put sales totaling approximately $696 by May 20.
Covered call premiums were often too low early in the cycle to justify selling (nickels or pennies).
Strategy preference depends on the ability to:
- Stay active in the market
- Realize profits more frequently
- Lower cost basis through additional puts
- Manage risk better during down markets

Macroeconomic Context

The example includes a market drop, highlighting the risk inherent in these strategies.
Covered Strangle is favored in bear markets or prolonged downturns (bear markets average ~290 days).
IWM was chosen for diversification and trading flexibility.

Recommendations & Cautions

Covered Strangle allows more frequent profit-taking and basis reduction.
Wheel may allow more upside if selling fewer calls and holding more shares.
Both strategies require careful management of short puts and calls.
Selling calls at or near the basis with low premiums may not be worthwhile.
Patience is key — waiting for better premiums or stock appreciation before selling calls.
This is not financial advice; viewers are encouraged to reach out with questions.

Methodology / Framework for Covered Strangle (as per video)

Sell initial cash secured put(s).
If assigned, sell covered calls on the long stock.
While calls are active, continue selling additional cash secured puts to:
- Lower cost basis
- Collect more premiums
- Remain active in the market
Manage trades with profit-taking metrics (e.g., ~60% of credit received).
Avoid selling calls with very low premiums that cap upside too early.
Wait for favorable option premiums or stock appreciation before selling calls.
Neutralize positions when appropriate to lock in profits.

Instruments & Assets Mentioned

Ticker: IWM (iShares Russell 2000 ETF)
Options: Cash secured puts, covered calls (various strikes and expirations from Jan 2016 through June 2016)

No other sectors or asset classes were discussed.

Presenters / Sources

Presenter: Eric (no last name given)
Platform: Thinkorswim / ThinkBack used for historical trade simulation
Disclaimer: Not financial advice; viewer discretion advised.

Summary

This video compares the Wheel and Covered Strangle options strategies using IWM as the underlying asset. The Covered Strangle is preferred by the presenter due to its flexibility in managing risk, ability to stay active by selling additional puts after assignment, and more frequent profit realization. The Wheel is simpler but less flexible and may underperform in prolonged bear markets. The example from December 2015 to May 2016 shows a modest edge for the Covered Strangle in returns and active management benefits.