Do you want to learn options trading to maximise returns from S&P 500 ETF?
We'll show you the Wheel Strategy to multiply profits from S&P 500 index.
Contents
- Why Invest in S&P 500 ETF?
- What Is the Wheel Strategy?
- Which S&P 500 ETF Is Most Suitable for the Wheel Strategy?
- 3 Steps to the Wheel Strategy
- How to Set the Strike Prices of Put and Call?
- Expected Returns of Trading the Wheel Strategy With SPY
- Differences Between Holding SPY ETF and the Wheel Strategy
- Best Value Stock for the Wheel Strategy
Why Invest in S&P 500 ETF?
Most experienced traders recognise Standard & Poor's 500 index as the most iconic index fund in the world. It tracks the performance of 500 most profitable companies in the US stock market.
Companies included in the S&P 500 make up around 80% of the total market capitalisation, is widely regarded as the best gauge of large-cap U.S. equities, and a favourite among passive investors.
Most people expect an annual return of 9% from buying and holding ETFs that track the S&P 500 index.
Some of the most dominant companies in the world, such as Apple, Google, Facebook, Netflix, Disney are included in the index. Tesla was also included in the S&P 500 index for the first time in December last year.
Investing in an S&P 500 ETF is a diversified way of purchasing stocks from all these companies at the same time.
What Is the Wheel Strategy?
The Wheel Strategy is a set of steps to combine trading options with stocks to increase the return overs the traditional buy-and-hold strategy.
An expert options trader knows that selling options is most profitable when the underlying doesn't fluctuate a lot, which makes the Wheel Strategy perfect for S&P 500 ETFs that are well diversified and prices don't change suddenly.
Which S&P 500 ETF Is Most Suitable for the Wheel Strategy?
There are 3 popular ETFs that track the S&P 500, which are SPY, IVV and VOO. The 3 ETFs have different tracking accuracies, different management fees, so you might wonder which one is most suitable for the Wheel Strategy.
Since the Wheel trading strategy uses options to boost the returns on investing the underlying for the long-term, we choose the best ETF by the volume of options traded for each ETF.
| S&P 500 ETF | Daily options volume |
|---|---|
| SPY | 2,272,620 |
| IVV | 253 |
| VOO | 111 |
By comparing the options volume for each of the 3 ETFs, we can tell SPY has exponentially more options liquidity than the other 2. So we will choose SPY as the symbol for trading the Wheel Strategy.
3 Steps to the Wheel Strategy
The Wheel Strategy is a sequence of repeatable steps that we can use to combine selling options with holding stocks to buy low and sell high the SPY ETF.
The 3 steps of the SPY options strategy depend on the number of shares you hold:
- Sell a Cash-Secured Put when holding 0 shares.
- Sell a Strangle (a Put and a Call) when holding 100 shares.
- Sell 2 Call options when holding 200 shares.
1. Sell a Cash Secured Put When Holding 0 Shares
When we do not own any SPY stock, we can sell a Cash-Secured Put that expires in 30 days.
If SPY does not drop below the strike price after 30 days, we will collect all the premium from the trade.
If SPY price drops below the strike price, we will be assigned 100 shares of SPY at a discount. Then we move on to the next step.
2. Sell a Strangle When Holding 100 Shares
Now we own 100 shares, we can sell a Strangle that expires in 30 days, which is a combination of a Cash-Secured Put and a Covered Call.
If the SPY price stays within the 2 strike prices after 30 days, we collect all the premium from selling options.
If the SPY rises beyond the Call strike, we will be forced to sell the 100 shares at a high price. Then we move back to step 1.
If the SPY price drops below the Put strike, we get to purchase another 100 shares at an even lower price. Then we move forward to step 3.
3. Sell 2 Covered Call Options When Holding 200 Shares
Now we own 200 shares of SPY ETF, we can sell 2 Covered Call options at the same time to earn twice the amount of premium.
If the ETF price doesn't rise after 30 days, we collect all the premium.
If the SPY price increases beyond the Call strike, we will sell 200 shares at a high price and move back to step 1.
How to Set the Strike Prices of Put and Call?
If we look at the price history of SPY, we can see the ETF price rarely falls beyond the Bollinger Bands. So we can use the Bollinger Bands to set the strike prices for selling Puts and Calls.
The upper and lower bounds of the SPY Bollinger Bands are currently $376 and $394, so we can use these as the strike prices for selling Puts and Calls.
Another quick way to set the Strangle prices is to use the Options Scanner to find the prices at 0.20 delta.
| Symbol | Last | Strangle details | Strangle BP | Strangle ROC |
|---|---|---|---|---|
| SPY | 383.63 | C396 (0.19) P361(-0.20) | 4313 | 10.5% |
The 0.20 delta Strangle suggested by the options scanner:
- Short $396 Call and short $361 Put.
- If you don't own any SPY shares, you need $4313 buying power for a 10.5% return on capital.
Expected Returns of Trading the Wheel Strategy With SPY
We can use step 2 to estimate the wheel options strategy returns with SPY. If we assume the fluctuations of SPY rarely exceed our Bollinger Bands, the premium collected from $376 Put and $394 Call is around $1200 per month.
Since we set aside $77,000 cash to purchase 200 shares of SPY, the monthly return from the premium is 1.6%, which is around 19% per year.
Differences Between Holding SPY ETF and the Wheel Strategy
If buying and holding shares of SPY can expect 9% average return a year, then we can add 19% more from the premium of the Wheel Strategy, tripling our annual returns on investing in SPY.
| Strategies | Holding SPY ETF | Wheel strategy |
|---|---|---|
| Minimum investment | $383 | $77,000 |
| Annual return | 9% | 28% |
Best Value Stock for the Wheel Strategy
The Wheel strategy is ideal for stable, high-performing stocks. That's why we use the Bullish Value Stock list to identify companies that are currently suitable for entering with this strategy.
Since we plan to rely on the Wheel strategy for long-term investing, we can focus on dividend aristocrats, companies that have consistently increased their dividends for at least 25 years. We can set our filter to select those with over 25 years of dividend growth.
Then, by arranging the data according to Dividend Yield, we can compile a list of the companies that offer the highest yields among the bullish dividend aristocrats.
| Stocks | Last | Dividend yield | Years of dividend growth |
|---|---|---|---|
| SJM | $115.05 | 3.81% | 27 |
| SYY | $78.96 | 2.55% | 54 |
| BDX | $225.12 | 1.84% | 52 |
| MSA | $168.97 | 1.17% | 53 |
| SEIC | $84.23 | 1.14% | 33 |
The current highest-yielding dividend aristocrat is SJM. If you're looking to invest through the Wheel strategy, you'll need to set aside $23,000 to buy 200 shares.
The SJM 0.20 delta Strangle, which expires in 30 days, is expected to generate an income of $212. This Wheel strategy allows us to boost our monthly income by 0.9%, translating to roughly 11% annually.
| SJM dividend yield | Returns from wheel strategy | Combined annual return |
|---|---|---|
| 3.81% | 11% | 14.81% |
With an initial yield of 3.81% from holding SJM, using the Wheel strategy can lead to an expected annual profit of around 14.81%.
Now it's your turn to use the Bullish Value Stocks to find undervalued blue-chip stocks to trade the Wheel Strategy.
Hi, can this strategy work in IWM?
Yes it can, try it.
I'm curious how it would work if this was done with TQQQ or UPRO.
As long as the volatility is low and you want to hold it for a long period of time, it is suitable for rolling investment.
Nice article Tony!
One question, comparing (benchmarking) the wheel strategy to buy and hold, do you have any insight whether the "frequency" of going through that wheel strategy amplify or kill return? going through that wheel strategy amplify or kill return?
frequency meaning you set the delta threshold to have step1,2,3 happen quickly.
Thanks.
We find monthly expiration option contracts give the best risk/reward ratio.
So we usually sell the options that expire at least a month away.
Hi. Thank you for writing this post.
I have a question. If there's a shortage of funds, would you recommend replacing SPY with SPLG?
I've heard that liquidity is much worse. How much of an impact will it have?
It's okay.
SPLG is less expensive and uses less capital.
Although the liquidity is relatively poor, but if a retail investor wants to buy or sell one or two contracts, it will not be a problem.
Thanks for the answer. One more question.
You can make 3 times more money in a bull market with a roller.
So if one day we go into a bear market like 2022, will we lose three times as much?
You won't lose three times as much.
Rolling strategy to sell options will definitely generate revenue
Buying stocks at a cheaper price when the stock is declining
So the loss must be less than just buying stocks.
Thanks for the information. any thought on back testing this strategy selling the put in step 1 atm?
Well, we are selling ATM Put Spreads on our Bull Put Spread Screener most of the time and our winning rate is about 75%.
If you use the Wheel Strategy then the winning rate is less relevant as the "losing trades" are held to sell Covered Calls against the "losing trades". Against.
May I ask what software was used to chart the range of gains and losses of options on the article?
This is with tastytrade
After being assigned, would selling a straddle be more advantageous than selling a strangle?
That can work if you want to quickly move on to either step 1 or 3.
The straddle means you will always be assigned next, either sell the 100 shares or buy 100 more.
The premium received would be higher than a strangle though.
The figure showing "$376 Put and $394 Call is around $1200 per month" seems to have put/call with expiration of 41d. So the 1.6% return is for 41 days instead of one month. I am also trying to check the current SPY options, can't find a way to achieve 1.6% monthly return. I am also trying to check the current SPY options, can't find a way to achieve 1.6% monthly return.
You are right about the timeframe of the expiration, it's an assumption.
The returns from selling neutral options are lower at the moment because VIX is quite low, which means the volatility is low.
Hence the premium received would be lower right now.
Do you think adding QQQ is a good idea or stick to SPY if you are mostly looking for safety?
QQQ has been working out for me with nice premiums and ability to roll quickly but spy feels a lot less volatile. However when looking at 10 year chart ( Monthly) they seem to go hand in hand. However when looking at 10 year chart ( Monthly), they seem to go hand in hand.
I think the point of the Wheel Strategy is to balance less risks and more premiums from the options.
Both QQQ and SPY give you less risks than stocks.
While a slightly more volatile QQQ should give you better premiums and wider Call/Put strike prices.
It's good to test the two ETFs then decide which gives a better balance for you.
Thanks for your reply.
So far I'm really enjoying SPY and QQQ and don't have to worry about management, earnings etc
I have learned so far as you mentioned that qqq has better premiums but SPY is a bit more stable.
Covered strangle is working out nicely and adjusting positions up or down depending on market mood
Following your suggestion to use the upper and lower bounds of Bollinger bands for SPY, I come up with 404 and 418 as the strike prices for put and call, respectively. However, your options scanner for 0.20 delta indicates 386 and 427. Big difference!
I double-checked the 0.20 delta suggestions on SPY, and it seems to fit with the trading platform's numbers for expirations 7/21 and 6/16.
Can you confirm if the expirations you are looking at are the same?
If so, then the differences may be explained by the delay in data.
Hi, step number 1 considering SPY as underlying, at which delta do you recommend the first trade?
0.20 delta is a good starting point
Is the choice of the strike mainly delta or do you also consider other factors such as high premium, volatility, open interest, volume, earnings, or other?
The Options Scanner is quite useful in picking high return 0.20 delta Strangles to trade the Wheel with
https://slashtraders.com/en/tools/options-scanner/
Use the filter to find high IV stocks (>60%) that have high premium to sell options with, and sort by Strangle ROC to get the best return Strangles
When you're in Step 1 of the Wheel, you're selling only one cash-secured put, which means collecting only one premium. The other two steps involve collecting two premiums. other two steps involve collecting two premiums. Is it advisable to sell two puts in the beginning, or else one put with a strike price closer to the stock price, in order to increase the premium? Is it advisable to sell two puts in the beginning, or else one put with a strike price closer to the stock price, in order to increase the premium?
If you sell 2 cash-secured Puts in step 1, you will need to double the contracts in steps 2 and 3 later as well.
Selling a Put with a closer strike is preferable from the two choices you mentioned.
Why are you adding the theoretical pct return to the buy and hold return to come up with 28%? If you're doing the whell strategy ur not If you're doing the whell strategy ur not realizing the 9% gain from buy and hold, ur in and out of the ETF, so I'm not understanding your math.
28% is a hypothetical return based on step 2, sell a Strangel while holding 100 shares.
Buying and holding the ETF, gaining 9%/year
Both short Put and short Call options expire worthless, receiving a premium of around 19%/year
So you only make 28% if both the put and call from the strangle expire worthless in all 12 months? That's extremely unlikely to actually happen, right? That's extremely unlikely to actually happen, right?
Yes and no.
It's a general assumption.
If the Put get assigned, you get to buy stocks at a discount.
If the Call get assigned, you sold your stocks for a profit greater than the premium earned.
It's about being profitable long term.
Hi, is there any ready etf that do all this mechanics?
Not that I know of.
Hello, Tony.
I read both of your posts.
The first one is "Rolling Investment Strategies."
The second is "Reasons We Don't Love Trading Covered Calls."
However, we all know that "rollers" will inevitably use "covered call", aren't you contradicting yourself?
Suggest you change the title of "covered call" so as not to mislead those who don't know much about the right to choose, but trust you.
Thank you for your message.
Covered Call is easy to use, but there are a couple of drawbacks that make us not so fond of trading it.
We honestly share our thoughts and let the readers decide.
Hi Tony.
I have been trying wheel strategy with paper money. At what point do we need to cut losses if the stock moves below the put strike? since we will be paying more than the spot price at assignment. At what point do we need to cut losses if the stock moves below the put strike?
Are there any adjustments that should be considered?
Thanks.
Vishal
Hi Vishal.
Actually, we prefer to trade wheel strategy on stocks that we want to buy and hold for the long term.
So we don't mind buying the stocks when the spot price moves below the Put.
If we anticipate the blue-chip stock to be valuable in the long run, a temporary dip isn't that big of a deal.
We just keep selling the Covered Call until we sell the shares for a profit.
Cheers.
How do we avoid the "Wash-Sale" in short cycles (monthly or weekly) when ETFs keep getting assigned?
After you get assigned the undervalued shares you can sell Covered Calls with monthly expiration as the underlying moves from significantly undervalued to significantly overvalued. After you get assigned the undervalued shares you can sell Covered Calls with monthly expiration as the underlying moves from significantly undervalued
When an underlying is 30-40% overvalued, you can start selling at 0.15-0.40 delta Covered Calls.
The transition of the underlying from undervalued to overvalued takes a long time and will not be at risk with the wash-sale rules.
Should your underlying be called away, you will not regret it too much because your gain from valuation has been significant.
Hi, if let's say now we are holidng 200 shares of SPY and SPY crashed, how do we set the strike price for selling calls as we are still in capital loss? How do we set the strike price for selling calls as we are still in capital loss?
Thanks in advance.
It depends.
If you expect SPY to bounce back quite quickly, then you can set the Call strike at the breakeven price.
If you expect SPY to stay low for a while, then maybe set the Call strike at 0.20 delta (assuming that is lower than the breakeven price), to earn a better premium.
Hi Tony, wow - not complicated but highly effective, thank you so much!
Would it be a advantage to use the weekly contracts in SPY, for example always Friday?
Hi Chris.
We prefer trading monthly options because the theta decay is more predictable, leading to higher probability trades.
We don't trade weekly contracts because the time to expiration is too short, as that would mean trading gamma not theta.
Gamma is much more unpredictable than theta.
Also, weekly options have less premium due to less time value, so you don't get as much income from selling options.
What if I own 500 stocks?
Sell 400 calls and one strangle?
Yes, selling 4 Covered Calls and 1 Strangle can work in your situation.
The wheel strategy does seem like a great way to increase my returns on dividend stocks
Yes, you can combine the wheel with high yield dividend stocks to improve your returns
What is the best strike price if the sell put is assigned? If the assigned stock is declining, what is the best strike price to set when selling a call in this situation? If the strike price is set too high, the premium won't earn much, and if the strike price is set too low, the stock may be sold at a low price, resulting in a loss.
If you don't want to hold the stock for a long time, when Put is assigned, you can sell a Call in the original Put's strike.
That should still be high enough to pay back if the stock price comes back up
On what chart are you using the bollinger bands? Because it is different if you use a year chart, 5 year, or 180 days?
We use the Bollinger Bands on the daily chart
It's an estimation of 2 standard deviation move
Shouldn't matter too much if you use a year chart, 5 years, or 180 days
Hello TONY. If the BOLLINGERBAND is always narrow when choosing the STRIKE, the STRIKE chosen is also very close to the spot price. This will not be very dangerous? Because after the Bollinger Band is narrowed, it will naturally widen to a large size! In that case, isn't it easy to lose money?
Hello Eric
Yes, that's why we usually have to sell options when the Bollinger bands are shorter to make more money, or we can wait for the IV to shrink and make money on Vega.
Does this method work in a market crash?
This trade will buy 100 shares at a low price during a market crash
The next step is to sell Calls to earn income and wait for the stock price to rise.
This is a great options strategy, thanks
You're welcome
Thank you for the detailed explanation of how to use the wheel strategy to increase the returns of my SPY
Yes, the wheel strategy is a simple way to use options to increase your long term returns
Current prices for calls/puts (as of mid Oct 2021) doesn't yield such high returns and wouldn't bring you any where close to 1.6%.
Have the markets changed so much or am i looking at it wrong?
Market has changed a lot over the course of this year. Volatility (VIX) The historical level is between 11-16. When you consider the current ROC level as not interesting for selling covered calls, it is the normal market environment and return profile that you will be confronted with going to the market. When you consider the current ROC level as not interesting for selling covered calls, it is the normal market environment and return profile that you will be confronted with going forward. You can better sell put and call spreads at the money with much higher ROC because in these cases you are selling at-the-money volatility which is the highest point of volatility of the money. You can better sell put and call spreads at the money with much higher ROC because in these cases you are selling at-the-money volatility which is the highest point of volatility of any underlying. The put and call spread scanners are great tools to find such ATM trades. It is not easy to find ATM trades with high probability of success because it is a directional trade with high rewards. I do not trade any covered calls because ROC is low and you don't want your patiently acquired stocks to be called away and after that the stocks moves another 5% without you owning it. Covered calls Covered calls is easy to comprehend for beginners as a low risk strategy but doesn't get you anywhere.
Thank you for this great S&P 500 trading strategy, looks like a great way to accelerate the returns of my SPY long term investment strategy.
Thank you for your kind words.
Please give this S&P 500 trading strategy a try and let me know your results.
Thank you for sharing a comparison of the wheel strategy vs buy and hold
I'll be using the wheel strategy to improve the returns of my buy and hold stocks from now on
Please give the wheel strategy a try, you'll love it
What is the characteristics for your billing we bands
You can sign up for our affiliate program to be a partner.
This is a great trading model for option newbies!
Yes, as long as you pick an ETF or stock that is not too volatile, you can sell options with it to increase your income.
Have you the strategy backtest? If yes, what are the results?
Here is an interesting video from Tastytrade that backtested stock vs Puts, which should answer half of the equation.
https://www.tastytrade.com/shows/market-measures/episodes/puts-or-stock-07-09-2018
Thank's for the link.
Thank you for sharing this great article, it's been very beneficial!
Thank you for the tip
This sounds like a good strategy for MSFT
I definitely would like to own more MSFT stocks at a discount
You are right!
The Wheel Strategy is great for financially strong companies like MSFT and FAANG.
Very good operation mode, would like to further ask the stocks that are suitable for the operation of the subject?
Hi, The Wheel Strategy, as mentioned in the article, focuses on using the income from selling options to increase the ROI of long term holdings of stocks or ETFs.
Therefore, it is recommended to use the roller investment in.
1. Stocks/ETFs that you would like to hold long term
2. Stocks/ETFs with low volatility (so as not to lose the spread if the stock price exceeds the performance price by too much).
Therefore, it is recommended to use it on competitive and long-term growth stocks such as FAANG.
and S&P 500 ETFs such as VOO, IVV, etc.
Thank you very much!
How about TNA and SOXL?
Hi Simon, thank you for getting in touch.
Yes, I think TNA and SOXL are also good candidates for the Wheel Strategy, since they are ETFs that tend to be less volatile than individual stocks.
Their lower prices also mean you need less capital than SPY to execute the Wheel.