Hey, stock and options traders. Welcome back to the channel. Over the last year or so I’ve noticed that a lot of Youtubers are promoting and trading the wheel strategy. And I’ve even reviewed an instructor that trades that wheel. And this is a very popular strategy, but I believe that’s really due to recency bias. And what I mean is that the wheel strategy works well until it doesn’t. And it works well in a bull market and even a sideways market, but what happens in a down market?
If you look at the recent surge of Youtubers promoting this wheel strategy, I’ll call it the old-school wheel strategy, you’ll find that they all started after March of 2020, after the crash. Now, I did an interview with Marcus from Rockwell Trading and I appreciate that Marcus took the time to do an interview with me. And part of the interview was about the wheel strategy.
So I added parts of this interview in order to get a couple of points across. And one point is that the old-school will strategy is risky. And second, I think Marcus’s views on the wheel strategy are a very good representation of other instructors and how they also think and approach the wheel strategy.
(Excerpt from Interview)
Karl: Let’s say that my cost basis goes down below the strike–we’ve talked about this before. Now, do I use that same strike that is not giving me any premium whatsoever? But I won’t take a loss or do I go back to the 40 delta and just take my premium; and you know probably if the market goes up and recovers, I’m not gonna I’m gonna I’m gonna take a loss there because I’m not recovering.
Marcus: Absolutely right. It’s uh it’s one of the challenges where again it goes back to how do you like to trade it?
Karl: We talked about a crash market that if you were uh what were you running a wheel strategy?
Karl: And you mentioned that because you only go one week out you’re able to recognize that a crash could be coming. You remember that conversation?
Karl: And you were like no no I’m not gonna, you know, be in that situation. I’m gonna cash out or whatever.
Karl: And that comes to the same thing. Where you’re saying that you can kind of look in the past and say hey a crash is coming. But that’s where I don’t, you know, we’re not you and I probably disagree. Like I don’t…it’s like driving by only looking in the rearview mirror. Like that’s not gonna work. I don’t know if you can identify a crash fast enough or quick enough in order to kind of go to cash and not take that major hit. You know what I mean? If you’re in a wheel strategy for example.
Marcus: A market, when it goes into a bear market or when it is really crashing, it starts slowly. And then it accelerates. We can actually take a look at the charts here of what happened last year, because we have now the one year anniversary…
Karl: Yeah, March 2020. That was the 35% drawdown within a couple weeks, two weeks.
Marcus: Right, right.
Karl: So that was pretty fast. Like that would be difficult to get out. If you were in the wheel strategy. Now, luckily the market recovered, okay, but you know, in 2008 I think that took four years to recover from the, you know, once it started going down all the way to get back to where it was. And then of course in the year 2000 that was probably what 10 to 12 years before you recovered with…
Marcus: Yeah, yeah and you’re absolutely right. You can’t see when the market is going down. Yeah, we have something like this and then we have a quick bounce and then we go down again, look at this, and then we have a quick bounce and then we go down again. And then we have a quick bounce and then we are no longer going down. So with the wheel strategy and by bringing down the average cost basis, all I need is a bounce of two to three days to get out of this at break even or at a small loss. So and again Karl I’ll be the first to admit it is a risky strategy, absolutely! I mean, I’m not saying that this is the safest strategy in the world. The safest strategy in the world is buy bonds, right? Or put your money into a savings account. That is probably the safest strategy in the world. When trading there’s risk and. The wheel strategy absolutely is a risky trading strategy. And it lulls you in because it works for a really really long time until it doesn’t.
(End of Excerpt)
Now after watching this clip from that interview, I think it was pretty clear that there are things about the wheel strategy that I don’t like and that I would not trade the old-school wheel strategy with my money.
In fact, Marcus has struggled with the wheel with one particular stock he struggled with a stock called $RIDE, you know, symbol R-I-D-E. Now as he started trading $RIDE in February of 2021, the stock was around $23 or $24, and now it’s around $4. So I don’t mean to pick on Marcus as I know other Youtubers have also been beat up with this old-school wheel strategy.
And let me say here that I believe Marcus is slightly up on the year overall with this strategy. But it is these single names that can take down your account. And last time he shared his ride position it was down over $110,000. And that is with a planned capital of $100,000 for each position. So he had a plan capital of $100,000 and he’s down over $110,000 and this means that this one trade individually is down over 110%.
And, you know, I don’t know if that makes sense to you. You know, how can you be down over 110%? Well, he’s had to take capital that he allocated other trades and apply it to this trade. And I say this, you know, not to beat up on Marcus. I say it to warn people that this strategy is dangerous and that the danger was proven this year in 2021.
So what’s the purpose of this video? Well if you’ve been on my channel, you know that I’ve been trading options online for 27 years now. And over the last year or so, I started thinking about the wheel strategy and how I could reduce the risk. And I came up with a trade plan that I call The Safe Wheel Strategy. And now whenever you reduce risk in a strategy there’s almost always a trade-off and in this instance, the trade-off is that potential for those lofty high returns using the wheel.
Now with that trade-off in mind, I went ahead and back-tested the strategy, The Safe Wheel Strategy, from January 2017 to November 2021. And I continually tweaked the system and created rules as I went through the back-test. So whenever I made a change, I had to start those back-tests all over again. And I did close to a thousand back-tests to come up with this strategy.
So here are the results. Okay, so here are the back-test results with a Safe Wheel Strategy from January 2017 to November 2021. You can see that I’m up $2,560 and that’s on a $5,000 account. So, you know, around 50% over a 5 year period. So that’s averaging about 10% per year.
Let’s look at the equity curve. Now with this, I’d like to explain that–you see these drops here? This is the hedge coming off. So when you look at it from a closed position point-of-view; yeah, you had this much money and then all of a sudden you dropped like that. If this were to take in the actual NetLiq., the open and closed positions, it wouldn’t pop up like this. It wouldn’t get these high pop-ups. That it would be more of a straight line. The NetLiq. was more of a straight line like this. And so you can see that it looks like there were high drawdowns, but really the drawdowns, as I calculated them, was about 10%. So the max drawdown I saw was around 10% and it didn’t happen all the time or every year.
So it’s a pretty good return if you’re getting about 10% and then you sell your max drawdown of around 10%. Those are really good numbers to deal with; good return on risk. I used three different underlyings $X, $EWZ, and $AMD and then back to $X again.
So one of the reasons is because I found that this strategy works well if you have a $5,000 account. I like to work around stocks that are trading around $30. Once they get above $40, it doesn’t work quite as well. And once they get below $20, it doesn’t work quite as well.
So I had to kind of switch back and forth between stocks, but you can see, you know, there’s no guarantee that I’m going to make money with this strategy or anything like that. But 10% a year with a maximum 10% drawdown; I like those numbers and this is back-tested through the 2020 crash. And you can see that it didn’t really have much of an effect; back-tested through the 20% drawdown during the 2018. You can see that those big drawdowns didn’t really have that much of a negative effect. You see it kind of drew down a little bit with that 20% drawdown there. But it was able to recover and come back up.
Now with the old school strategy, the old school wheel strategy, you know, those guys…that particular strategy did not really survive those big downturns. There were significant drawdowns and possibly strategy abandonment with losses taken. I mean, do you see the old school real instructors show you the back-test results through down markets? You never see that, because it’s too painful. It’s too much; too big of drawdowns
Another thing that I like about this strategy is that I use a single stock. Which makes it easy to implement and also to duplicate. Others can duplicate it a lot easier. I don’t have 5 different stocks I have to track, I just have 1. One at a time.
Now, the way I’m going start this, I’m gonna start this with real money with a $5,000account. Now I chose $5,000 because I think it’s a small enough account size that people can relate to it. For example if I started with $25,000, I think it would be less relatable and I wanna reach and relate to as many people as I can.
Now the system is traded once per week on Mondays as I sell weekly options for premium. And I’m looking to make my trades live on Youtube Monday mornings around 7:15 a.m. Pacific time, or 10:15 east coast time. So if you want to follow my trades in real time, just show up on Mondays at 7:15 a.m. and maybe you can grow your account with a safe premium selling strategy for free.
Now, you can follow my trades, and I’m not acting as a financial advisor, and this strategy can lose money. But I am willing to trade this in real time, right in front of you, and share my account net liquidation value on screen every week.
Now why am I doing this? Well, I’m interested in creating value for my subscribers and I’m tired of these Youtube gurus promoting a strategy that can really hurt people. If I can use my skills to help people and grow my channel, it’s a win-win. Now, I also have other online products available so if I can provide value for free maybe you’ll trust me to provide more value behind a paywall.
Now one final subject, earlier I mentioned that Rockwell Trading was down 110% on $RIDE starting from February to November 202, and I thought it would be a good comparison to trade $RIDE from the same time frame with The Safe Wheel Strategy. And I think this would give an idea of how the strategy performs in a catastrophic situation.
So here are the results of The Safe Wheel Strategy from February to November 2021. Okay, here are my results trading $RIDE from February 2021 to November 2021. And it started around $23/$24 and came down to $4. Which I think you may know if you have any experience with a wheel strategy, uh the old school wheel strategy. You’ll know that when the market goes down or when that particular stock that you’re trading goes down, it really hurts the strategy. So to go down from $24 down to $4 is catastrophic.
And you can see here I did end up losing about 10% over that time frame, you know, because this is based on a $5,000 account. So you could see the equity curve here. I was up for a while and then as that stock really dropped down, you know, I ended up down 10%. Which, you know…First of all I wouldn’t stay in this stock because when it got under $20, I would be making my way out of it. So this isn’t really reality as far as The Safe Wheel Strategy, but I just wanted to do a straight up comparison of real strategy that we’ve seen done live with Rockwell Trading.
Again you know, Rockwell doing that traditional or old school wheel strategy was down 110%, the way that he was trading it. There’s different ways to trade it of course, but with The Safe Wheel Strategy you’d be down 10% so not bad. I mean it’s not the end of the world to be down 10%, but again I wouldn’t have traded this stock once it got below $20. But there’s a fair comparison.
And I think if you’re a more conservative trader, someone that doesn’t like those big drawdowns and they like to keep their account more secure, I think you’re really going to like this strategy. Especially if it’s for free. Now that you’ve seen the performance of my Safe Wheel Strategy, hopefully you’ll join me on Monday 7:45 a.m. Pacific time.
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