The stocks wheel strategy, also known as the options wheel strategy, has become a popular tool among traders and investors seeking consistent income with controlled risk levels. The primary goal is to generate steady cash flow through premiums while potentially acquiring more shares of the underlying assets at discounted prices. Selecting the best stocks for the wheel strategy is crucial to its success.
In this article, I am going to share with you the following:
- My five basic guidelines on how I choose the best stocks for wheel strategy.
- What stock metrics you can use to find good solid reliable companies to trade the options wheel strategy? I use these metrics to help me find the best dividend stocks for the wheel strategy.
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What are my 5 guidelines for choosing the best stocks for the options wheel strategy that you can use?
1. Market Cap
The company must have a market capitalization of over $40 billion.
The reason for this is simple: smaller cap companies tend to swing way more than stocks of their larger peers. We should only be interested in safe and steady stocks.
2. Cannot operate in a volatile business environment
What this means is avoiding companies in the energy and mining sectors. These can be great investments but they are cyclical and hard to predict. We want reliable and stable brands in our options wheel portfolio.
3. Dividend Paying Companies That Dominate Their Industries
This is probably one of the most crucial. The best options wheel stocks for me are the ones that dominate their industries such as T Rowe Price Group Inc, ticker symbol TROW, or Medtronic, ticker symbol MDT – to name just two. Dividend-paying giants like these tend to recover well after every market downturn.
Plus, if you were assigned shares in one of these from selling a cash-secured put option you will then be able to collect the dividends and sell covered calls on top thereby juicing your earnings potential.
4. Brands That Sell Consumer Goods and Services
Similar to the example above, brands that sell consumer goods and services are good at weathering touch economic times and bear market downturns. A reason is that consumers are brand loyalists, just trying to convince someone to switch from Coke to Pepsi – never gonna happen!
This is why I like these solid reliable companies to form the basis of my options wheel strategy.
5. Only Sell Options When The Premium Is High Enough
As an option seller, we act as our own insurance company. If you think about it, an insurance company is a highly lucrative business only if it writes (sells) smart insurance policies.
The insurance company must evaluate the risk-reward ratio (risk of loss and amount of option premium), and make a calculated bet. For the insurance company (us options traders in this case) to remain profitable, we therefore must select stocks that pay us a suitable premium.
Here’s a list of 19 ticker symbols that fit my main criteria above making them good stocks to wheel:
1. KO – Coca-Cola Company
2. MSFT – Microsoft Corp
3. INTC – Intel Corp
4. CVX – Chevron
5. BP. – British Petroleum
6. ABBV – AbbVie
7. O – Reality Income
8. TROW – T Rowe Price Group Inc
9. MDT – Medtronic
10. ABT – Abbott Laboratories
11. KHC – Kraft Heinz Company
12. GILD – Gilead Sciences
13. JNJ – Johnson and Johnson
14. XOM – Exxon Mobil
15. MCD – McDonald’s Corporation
16. IBM – International Business Mechanics
17. WMT – Wal-Mart
18. WFC – Wells Fargo
19. SWK – Stanley Black & Decker Inc
What stock metrics should you look for?
1. Dividend Cover > 2x
If a company has a forecasted dividend cover of 1.8x this means that the dividend is covered by the company’s earnings 1.8 times. As a general guide anything above 2x is considered excellent. Anything 1x is considered bad, and in the middle at 1.5x is considered ok.
2. Free Cash Flow Dividend Cover >1
This metric is more reliable than earnings as it is based on cash in the company. This should be above 1.
3. How Long Has The Company Paid A Dividend For?
This is easy to find and to save time you can take a look at stocks that meet the criteria to be called Dividend Achievers, Dividend Aristocrats, Dividend Kings, and even Dividend Zombies!
For example, dividend zombies are companies with century-long dividend payouts, whereas dividend kings are companies that have raised their dividend payouts for 50 years or more. I like to look at companies that have over 10 years of increasing their dividends.
The Dividend Zombies List:
Procter & Gamble (PG)
Stanley Black & Decker (SWK)
Colgate Palmolive (CL)
PPG Industries (PPG)
Consolidated Edison (ED)
4. P/E Ratio <20
The P/E ratio is simply a measure of the price per share divided by the earnings per share. In other words, how many years would I need to own this share for it to pay for itself based on current earnings? Anything under 20 would suggest it’s good value.
5. Dividend Yield Between 2.5-6%
Remember that inflation will eat away at the buying power of your money so it’s good if the dividend is forecast to grow at least in line with inflation. I like to look at stocks that have a minimum of a 2.5% dividend yield. For UK investors we have to pay an additional 15% withholding tax on any dividends received from US stocks. This is also the case even if we hold shares in our tax-free ISA. This is why I like to aim for a minimum yield of 2.5%.
– The options wheel strategy aims to generate steady income with controlled risk levels by selling options on reliable and stable stocks. Whether you decide to sell monthly or weekly options is down to your personality and investing style.
– Key stock selection criteria include market capitalization above $40 billion, avoiding volatile sectors, focusing on dividend-paying dominant companies, and consumer goods and services brands.
– Important stock metrics include dividend cover, free cash flow dividend cover, dividend history, P/E ratio below 20, and a dividend yield between 2.5% to 6%.
Advanced Trading Techniques and Resources
Adapting the Wheel Strategy for Various Market Conditions
The Wheel Strategy is versatile and can be adapted for various market conditions. It is important to assess the current market trend, volatility, and individual stock behavior before applying the strategy. Here are a few tips to consider:
In a bullish market, focus on selecting stocks with a strong upward momentum instead of selling puts on stocks experiencing downward price pressure.
In a sideways market, take advantage of the neutral movement by selling options with lower strike prices or shorter expiration dates.
In a bearish market, be cautious with the stocks you choose and consider rolling your options to manage risk.
Options Selling Roadmap Course $97
Frequently Asked Questions?
By following the guidelines and selecting the right stocks, you can generate steady cash flow through premiums from selling options. The strategy also allows you to collect dividends and sell covered calls, enhancing your earnings potential.
With the options wheel strategy, you can generate 4x the income from your shares using the power of options. It is a high-yield, low-risk profitable investment strategy that spins off regular dividend-like income, only takes a few hours a month, and can make money in up, down, or sideways markets.
If the premium on a stock is not sufficient, it may be prudent to wait for better opportunities or consider other stocks that offer more attractive premiums. Selling options when the premium is high enough is essential for the profitable execution of the strategy.
The 19 ticker symbols provided in the article are examples that meet my criteria and I have traded in before. You should conduct your own research and due diligence to identify suitable stocks that align with the Options Wheel Strategy guidelines.
From experience, the people who tend to do well with the options wheel seem to be entrepreneurial in spirit and have an abundance mindset. You also need to treat the options wheel strategy like running a business. This means you need to be keeping a profit and loss record on each stock position, whilst also keeping records of monthly cash flow.
I have had many conversations with friends who show interest, talk about it for a while, ask tons of questions, and then just never take action. If you want to learn this wonderful life skill and get good at trading the options wheel strategy, then just go for it!
Warren Buffett, the renowned investor, employs a favorite trading tactic: selling put options. His strategy involves identifying undervalued assets and committing to own them at even lower prices. By collecting option premiums upfront, he not only secures potential ownership but also reduces his overall cost basis if the asset’s price declines.
When you sell options the probabilities of winning are like that of a casino, as the odds are in your favor. Buying options is where you can lose a lot of money.
The wheel strategy is an options trading technique that involves selling cash-secured puts on stocks you are willing to own and then, if assigned, selling covered calls on those same stocks. This strategy aims to generate income from option premiums and potentially acquire stocks at a lower cost basis.