Ep85 - Double Dipping When Trading the Options Wheel

Dan explains how certain Wheel trades can create an opportunity to “double dip” by collecting option premium from both sides of a stock position. The strategy is a covered strangle, combining stock ownership with a short call and a short put. Dan uses a real position in The Metals Co. (TMC) to show how this setup can develop naturally while trading the Wheel.

Dan walks through why he chose to sell puts instead of covered calls while TMC was trading near $4, what happened when one tranche of those puts was assigned and how the additional shares opened the door to selling calls while another put position remained open. He also explains why he accepted assignment instead of rolling the puts, demonstrating how liquidity, bid-ask spreads, synthetic positions and trade objectives can influence real-world Wheel management decisions.

Key Topics

• What “double dipping” means when trading the Options Wheel
• Understanding the structure of a covered strangle
• Using a real TMC Wheel trade as a case study
• Selling puts when you don't want to cap a stock's potential upside
• Managing multiple tranches of shares within the same Wheel position
• Combining long stock, short puts and short calls
• Using different strikes and expirations in a split-time strangle
• Why assignment can sometimes be preferable to rolling a cash-secured put
• How option liquidity and bid-ask spreads affect trade management
• When liquidity can become less important in a Wheel strategy

Key Takeaways

• Covered strangles can create two sources of option premium. When the setup is appropriate, an investor who owns shares can sell calls against part of the position while simultaneously selling puts on shares they're willing to acquire.
• The strategy isn't appropriate for every Wheel trade. Dan views the covered strangle as a tool to use when the position, outlook and trade objectives create the right opportunity rather than something that should automatically be applied to every stock.
• You don't have to sell calls against every share you own. Dan wanted to maintain the upside potential on his original TMC shares, so he planned to sell covered calls only against the newer shares acquired through put assignment.
• Selling puts can make sense when you're willing to own more shares. Dan was comfortable acquiring additional TMC shares at the $4 strike, allowing him to collect put premium while waiting to see whether assignment occurred.
• Assignment can create the next stage of the Wheel. Once Dan's first tranche of puts was assigned, those new shares could be used for covered calls while his other short puts remained open.
• A covered strangle doesn't necessarily require matching expirations. Calls and puts can potentially use different expiration dates, creating what Dan describes as a “split time strangle.”
• Rolling isn't automatically the best choice. Even though a covered call and cash-secured put can be synthetically equivalent, poor liquidity may make rolling the put unattractive.
• Execution costs matter. Wide bid-ask spreads can make it difficult to close and roll an option at an acceptable price, potentially changing the best way to manage the position.
• The Wheel can provide another way to deal with less-liquid options. If you're comfortable accepting assignment, allowing an option to reach expiration can sometimes eliminate the need to pay an unfavorable spread to close it.
• Trade management should follow the objective of the position. Dan's TMC example shows how stock outlook, volatility, liquidity, assignment and existing share exposure can all influence whether to sell calls, sell puts, roll or simply allow an option to expire.

Connect

Join Dan for the Wealth Builder Trade Room, a live online master class where he trades his personal IRA and walks through his positions, option selection, adjustments, rolls and the fundamental and technical analysis behind his investments. The Trade Room meets every Friday at 11:15 AM Eastern / 10:15 AM Central / 8:15 AM Pacific.

To join the Wealth Builder Trade Room, visit MarketTaker.com/wealth.

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Disclosure:

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors must read Characteristics and Risks of Standardized Options (ODD), which can be found at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document

Don’t trade with money you are not prepared to lose. Anything discussed on this show is intended to be generalized information and not intended to be a recommendation to buy or sell any security. The host and guests are not familiar with listeners’ specific situations. For trading information relevant to your specific needs, speak with a licensed broker or advisor.

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