[Option Strategy] LEAPS Vs. WHEEL

In my first year of option trading, I have only used 2 trading strategies and they have served me very well. The 2 strategies are the Wheel strategy and LEAPS strategy.

To recap on what are the wheel and LEAPS strategies, please refer to these posts:
How Does The WHEEL Strategy Works?
How Does LEAPS Works?

In this article, I will discuss the pros and cons of each strategy and give my 2 cents’ worth of advice on when to use them.

Let’s start off with LEAPS.

Pros:

  1. Unlimited upside for stocks that are on bullish trend.
  2. Lower capital investment as compared to buying 100 shares of stock.
  3. Limited loss as maximum amount that one can lose is the premium paid, which is lower compared to the loss if 100 units of the same stock tank to zero.
  4. Magnified returns as compared to price appreciation of underlying stock, i.e. stock increases 10% in price, LEAPS option premium can increase 50% in value.
  5. Not limited by short term contract expiration, whereby theta (time) decay makes contract loses value rapidly. LEAPS has a very far out expiration date.

Cons:

  1. Can incur magnified loss when stock is on bearish trend downwards.
  2. Not earning anything if stock is trading sideways, i.e. price stays stagnant.

Next, let’s discuss the Wheel Strategy (Cash-secured puts + covered call).


Pros:

  1. Can still earn from covered call if stock goes sideways or downtrend
  2. Premium is used to cover cost of purchasing stock, which translate to a discounted pricing if option contract is assigned.
  3. Provides a good source of monthly income through selling cash-secured puts or covered calls to continuously collect premium every month.
  4. Premium is collected and secured whenever a contract is sold, no matter which direction stocks goes. There is no need to wait until the contract is assigned or bought back before earning a premium.

Cons:

  1. Higher collateral or reserves required, just in case the PUT contract is assigned and seller of the PUT contract will require to buy 100 units of the underlying asset.
  2. Returns are capped as (maximum returns = premium paid) even when stock surge
  3. If stock price plunge, wheel strategy can be halted for covered call seller as strike price is unable to be close to then breakeven price, unless seller of covered call is willing to take a risk by offering a strike price that is below his breakeven price.
  4. Lower returns as compared to the LEAPS strategy.

Conclusion
The LEAPS strategy is good when stock is on a bullish trend as it helps the LEAPS buyer to magnify returns in a short period of time. However, it is not advisable to buy LEAPS on stocks that are likely to go sideways (stagnant pricing) for a long time.

The wheel strategy, on the other hand, is good for stocks that are stable and have minimal fluctuation in share price. In this way, it is less likely to be exercised in covered call contracts, as a sudden price surge can force the seller to sell his shares due to the contract being exercised.

Related Articles:
My Biggest LEAPS Options Contract Closed, 173.8% Returns In 10 Days
I Sold An AMD PUT Contract And Collected 4.36% Returns In 18 Days (1 Nov 21)
I Close My Nvidia PUT Option Contract and Made $1405 (5.98%) in 12 days

***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
The Ultimate LEAPS Options Thread

Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:
MY TRADES

Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)

I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day

I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021

This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months

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