This week we’re covering the art of managing a wheel strategy, the sneaky nature of Theta, and the importance of keeping your long-term holds separate. Let’s dive in!
Managing the Wheel Strategy – Don’t Jump on a Red Monday
Alright, so you got assigned shares on Friday—awesome! You were ready for it, and your plan was to start wheeling those shares out with a Covered Call. But hold up a second, what if Monday rolls around and it’s a big red day for that stock?
What NOT to do:
Do NOT rush to sell a Covered Call on that red day. I know, I know—it’s tempting to make that premium right away. But here’s the deal: selling a call on a red day means you’ll likely have to set a much lower strike price than you’d want. Why settle for less?
What to do instead:
Be patient! Wait for a better day—maybe Tuesday, maybe Wednesday. Stocks move, and chances are you’ll get a bounce soon enough. When the stock rebounds, you’ll be able to sell a Covered Call at a strike price you’re happy with, and still collect that premium.
Remember, the wheel’s about patience, not panic. The market will throw you better opportunities if you wait.
Theta Ø: The Silent Killer of Option Premiums
Now let’s talk about our good friend, Theta Ø!
In school we used theta to designate a geometric angle, usually in trigonometry. SinØ, CosØ etc.
But in stock options theta refers to time decay. ⏱️
Theta is basically the rate at which the value of your option decreases as time ticks by. Let’s break it down:
Suppose you buy a call option with 30 days until expiration, and its Theta is -0.05. That means the option will lose $0.05 of value every day, just from time decay.
And guess what? Theta doesn’t stay still. It increases the closer you get to expiration, meaning your option will lose value faster the nearer it gets to the end of the road.
Weekend Theta Decay: A Popular Myth
Ever heard someone say, “I’m gonna hold over the weekend for that sweet, sweet Theta decay?” Hate to break it to you, but there’s no free lunch here.
Here’s why:
By the time the market closes on Friday, market makers have already priced in the decay for the weekend. So while your options do technically lose time value over the weekend, it’s already baked into the price when the bell rings Friday. No magical Monday surprise waiting for you!
Moral of the story: You can’t game the market makers. They’re way ahead of us.
Bonus Tip: Keep Your Long-Term Holds Safe from Covered Call Chaos
Okay, I learned this one the hard way, so listen up. I used to mix my long-term holds with the shares I sold Covered Calls on. Sounds efficient, right? Wrong.
Here’s what happened: I sold a Covered Call on a stock I planned to hold forever, and guess what? The stock shot up, and I had to let those shares go and deal with the capital tax on long term gains. Not ideal.
My advice?
Separate your long-term holds from your option trading holds. If you’re in it for the long haul with a stock, don’t mess around with selling calls on say 50% of it.
Trust me, you’ll sleep better at night knowing you’re not risking your favorite long-term positions for a little extra premium.
That’s it for this week, folks!
Keep your trades smart, stay patient, and as always—happy trading!
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