Wheel Strategy Trading Plan

INVESTMENT OBJECTIVE

The primary objective is to generate monthly income from the sale of options with a high probability of success. The secondary objective is to generate capital gains from the sale of any exchange traded funds purchased.

INVESTMENT STRATEGY

The primary strategy will be the Wheel Strategy, which consists of selling cash secured puts (CSP) to establish new positions, followed by selling covered calls (CC) until the underlying is called away. Then rinse and repeat.

EXCHANGE TRADED FUNDS

The following 10 ETF's will be used for this strategy:

Market ETF's

• DIA, IWM, QQQ, and SPY,

SPDR Sector ETF's

• XLB, XLE, XLI, XLK, XLV, and XLY.

POSITION SIZING

Positions will be initially established at 1 contract (i.e. 100 shares) per underlying per strike. Each underlying will be limited to 4 open positions at different strikes/purchase price.

TECHNICAL ANALYSIS

Ichimoku Cloud will be used to determine both trend and support/resistance levels.

Probability of Expiring Cone will be used to plot the price levels for a 1 standard deviation move at the desired expiration dates.

Slow Stochastic will be used to determine overbought/oversold conditions.

TTM Squeeze will be used to determine if the underlying is consolidating or trending and whether a squeeze breakout is expected.

Daily charts will be used primarily for trading signals. Weekly charts will be used to analyze longer time frames.

The chart analysis will help identify when to sell puts or calls and at which strikes.

ENTRY STRATEGY

Cash Secured Puts

Each new position will start out as a cash secured put (CSP) with the following criteria:

Entry criteria

• Sell on a down day since it increases put premium.
• Strike price below a support level.
• Delta of -20 or less (80% or more Probability of expiring OTM).
• Premium for market ETF's of at least $1.85 and for sector ETF's at least $0.65.
• Days to Expiration 30-45.

Covered Calls

If a CSP is assigned and the underlying is purchased, sell a covered call (CC) with the following criteria:

Entry criteria

• Sell on a up day since it increases call premium.
• Strike price at or above the assigned strike and above a resistance level.
• Delta of 20 or more (80% or less Probability of expiring OTM).
• Premium for market ETF's of at least $1.02 and for sector ETF's at least $0.36.
• Days to Expiration 30-45.

If it's not possible to sell a CC at or above the assigned strike then hold the position until a CC can be sold according to the entry strategy.

EXIT STRATEGY

Cash Secured Puts

Profit targets will be 55% of collected premium if the underlying stays the same or goes up. This should allow the positions to be closed before expiration. When a CSP position is closed, a new CSP will be established in the same underlying according to the entry strategy.

Covered Calls

Profit targets will be 55% of collected premium with DTE >=30, or 80-90% of collected premium with DTE <=15. If the CC reaches its profit target and is closed, sell another CC according to the entry strategy. If the CC goes ITM, either allow it to be assigned and the underlying called away, or roll out and up for additional capital gains.

ROLLING STRATEGY

Cash Secured Puts

• Consider rolling out or out and down when Delta is >= 50.
• Do nothing and accept assignment.

Determine the buying power effect of rolling vs accepting assignment and selling a covered call. In some case it will be better to roll and in other cases it will be better to accept assignment.

Covered Calls

• Consider rolling out and up when Delta >= 50.
• Do nothing, accept assignment and allow the underlying to be called away.

Bull Put Credit Spread ETF Trading Plan

INVESTMENT OBJECTIVE

The primary objective is to generate monthly income with a high probability of success. This strategy is an alternative to trading Cash Secured Puts (CPSs) for smaller accounts.

INVESTMENT STRATEGY

Sell out-of-the-money (OTM) Bull Put Credit Spread (BPCS) on Exchange Traded Funds (ETF's) with an 80%+ probability of expiring OTM.

EXCHANGE TRADED FUNDS

The main ETF's traded will be DIA, IWM, QQQ, SPY, and the XLx SPDR Sector ETF's.

POSITION SIZING

Positions will be established at 1 contract (i.e. 100 shares) per underlying.

TRADE SETUP

Before entering a trade, use Ichimoku Cloud to determine the trend and the support levels. Preferably the trend should be neutral to up. Key indicators of an uptrend:

• The cloud is Green (Senkou Span A > Senkou Span B).
• The stock price is above the cloud .
• The Base Line (Kijun-sen) is above the cloud.
• The Lagging Span (Chikou Span) is above the cloud.

Support is at the top and bottom of the cloud. So look for strikes in that range.

ENTRY STRATEGY

Place an order the sell a BPCS by selling an OTM Put with a delta of 20 or less (80%+ Probability OTM), and buying an OTM Put in the same expiration for $0.05.

EXIT STRATEGY

Place a GTC order to close the BPCS at $0.05 to take profit.

Place a GTC order to close the spread at market if the stock price falls below the breakeven price (i.e. stop loss).

TRADE ORDERS

All 3 orders can be placed at once using Thinkorswim (TOS) 1st Triggers OCO. The first order will be to enter the BPCS. If filled, it will trigger the GTC OCO orders to close the BPCS either at a profit or loss. OCO stands for One-Cancels-Other, meaning one order will be filled and the other canceled.

Cash Secured Put ETF Trading Plan

INVESTMENT OBJECTIVE

The primary objective is to generate monthly income with a high probability of success.

INVESTMENT STRATEGY

The sell out-of-the-money (OTM) Cash Secured Puts (CSP) on Exchange Traded Funds (ETF's) with an 80% and/or 90% probability of expiring OTM.

EXCHANGE TRADED fUNDS

The main ETF's traded will be DIA, IWM, QQQ, & SPY, which are index funds that represent that overall market, and ARKK, which is an actively managed fund that represents innovative technology companies.

POSITION SIZING

Positions will be established at 1 contract (i.e. 100 shares) per underlying per strike. For each ETF, up to 2 puts will be sold at different strikes/probabilities.

TRADE SETUP

Before entering a trade, use Ichimoku Cloud to determine the trend and the support levels. Preferably the trend should be neutral to up. Key indicators of an uptrend:

• The cloud is Green (Senkou Span A > Senkou Span B).
• The stock price is above the cloud .
• The Base Line (Kijun-sen) is above the cloud.
• The Lagging Span (Chikou Span) is above the cloud.

Support is at the top and bottom of the cloud. So look for strikes in that range.

ENTRY STRATEGY

Every week, enter positions with expiration within 14-18 days. This is a continuous strategy with options expiring every week at different strikes.

Sell an OTM Put with a delta of 20 (80% Probability OTM) and/or sell an OTM Put with a delta of 10 (90% Probability OTM). Ideally the strikes should be at support levels at or below the cloud.

MANAGEMENT/EXIT STRATEGY

At or before expiration, close each position when it can be bought back for $.05 or less to take off the risk and margin requirement.

As soon as the positions are closed, enter a new position for the next 14-18 days.

If the stock price reaches or breaches the strike, consider rolling out, and down if possible, for a net credit to avoid assignment.

If assigned early, then sell Covered Calls at or above the assigned strike. However, the goal is to avoid assignment by closely monitoring the positions and rolling when the strikes have been breached.

Seagull and Jade Lizard Trading Plan

INVESTMENT OBJECTIVE

The primary objective is to generate monthly income with a high probability of success.

INVESTMENT STRATEGY

The following two option strategies can be used individually or in combination on ETF's like QQQ & SPY:

• Seagull - An option combination consisting of a Cash Secured Put (CSP) and a Bull Call Debit Spread. The premium collected from the short Put plus the short Call should be more than the premium paid for the long Call. This results in a net credit and a risk free trade to the upside. This strategy reaches maximum profit when the stock price is above the short Call at expiration (i.e. it has an upward bias).

• Jade Lizard - An option combination consisting of a Cash Secured Put (CSP) and a Bear Call Credit Spread. The premium collected from the short Put plus the short Call will be more than the premium paid for the long Call. This results in a net credit and a risk free trade to the upside. This strategy reaches maximum profit when the stock price is below the short Call at expiration (i.e. it has a neutral to downward bias).

Seagull trades have 3 profit zones:

• Zone 1: Between the short put and the long call. Max profit is the net credit received.
• Zone 2: Between the long call and the short call. Max profit is the net credit plus the profit from closing the Bull Call Debit Spread, if any.
• Zone 3: Above the short call. Max profit is the net credit received plus the width of the Bull Call Debit Spread (e.g $200 on a $2 spread).

Jade Lizard trades have 3 profit zones:

• Zone 1: Between the short put and the short call. Max profit is the net credit received.
• Zone 2: Between the short call and the long call. Max profit is the net credit minus the profit from closing the Bear Call Credit Spread, if any.
• Zone 3: Below the long call. Max profit is the net credit received minus the width of the Bull Call Debit Spread (e.g $100 on a $1 spread).

Combining both strategies produces 3 primary profit zones:

• Zone 1: Between the short Put strike and the long Seagull Call strike. Max profit is the net credit received (e.g. $300).
• Zone 2: Between the long Seagull Call strike and the short Jade Lizard Call strike. Max profit is the net credit received plus the Bull Call Spread width (e.g. $500).
• Zone 3: Above the long Jade Lizard Call strike. Max profit is Zone 2 max profit minus the Bear Call Spread width (e.g. ($400).

In a cash account or IRA, the margin requirement is equal to the strike price of the combined short Puts (e.g. a $300 strike would require $30,000 per strategy for a total of $60,000 margin requirement.). In a margin account, the requirement would be much less.

POSITION SIZING

Positions will be established at 1 contract (i.e. 100 shares) per option per strategy.

TRADE SETUP

Before entering a trade, be sure the underlying is in a neutral to bullish trend. Use Ichimoku Cloud to determine the trend. Key indicators of an uptrend:

• The cloud is Green (Senkou Span A > Senkou Span B).
• The stock price is above the cloud .
• The Base Line (Kijun-sen) is above the cloud.
• The Lagging Span (Chikou Span) is above the cloud.

Support is at the bottom of the cloud, so look for short Put strikes below the cloud.

ENTRY STRATEGY

Every week, enter positions with expiration within 14-18 days. This is a continuous strategy with options expiring every week.

Seagull

1. Buy an ATM/OTM Call with a delta of 50+ (50+% Probability ITM).
2. Sell an OTM Call 2 strikes above the purchased Call (i.e. spread width of $200).
3. Sell an OTM Put with a delta of 20 (80% Probability OTM). Ideally the strike should be below the cloud.
4. Note: The premium collected from the sale of the Put and Call must be greater than the premium paid to purchase the lower strike Call, resulting in a net credit and risk free spread.

Jade Lizard

1. Sell an OTM Call with a delta of 20 (80% Probability OTM).
2. Buy an OTM Call 1 strike above the sold Call (i.e. spread width of $100).
3. Sell an OTM Put with a delta of 20 (80% Probability OTM). Ideally the strike should be below the cloud. Use the same strike as the Seagull.
4. Note: The premium collected from the sale of the Put and Call must be greater than the spread width, resulting in a net credit and risk free spread.

MANAGEMENT/EXIT STRATEGY

Each strategy consists of 2 parts (CSP + Call spread) and should be managed separately.

Cash Secured Put

At or before expiration, close the short Puts if they can be bought back for $.10 or less to take off the risk and margin requirement.

If the stock price reaches or breaches the short Put strike, consider rolling out, and down if possible, for a net credit to avoid assignment.

Ideally, the CSP will be OTM at expiration and expire worthless for maximum profit.

 

Bull Call Debit Spread

At or before expiration, close the short Call if it can be bought back for $.10 or less. This leaves the long Call uncovered for potential unlimited upside gain if the stock rises.

At expiration, if the long Call strike is ITM, but the short Call strike is OTM, close the spread.

At expiration, if both Call strikes are ITM, let them be exercised/assigned.

Ideally, the Call spread will be ITM at expiration for maximum profit.

 

Bear Call Credit Spread

At or before expiration, close the Call spread if the short Call can be bought back for $.10 or less.

At or before expiration, if the short Call strike is ITM, but the long Call strike is OTM, close the spread.

At expiration, if both Call strikes are ITM, close the spread if it can be bought back for less than the spread width, otherwise let them be exercised/assigned.

Ideally, the Call spread will be OTM at expiration and expire worthless for maximum profit.

Trading Plan Template

One of the most important things you should do as an investor/trader is to develop a written trading plan. Having a written plan takes the emotions out of investing/trading. It also provides a disciplined approach. Unfortunately, this is one step that most people don't put enough time into, if at all. Some people invest/trade without a written plan, and, IMHO, that's a recipe for disaster.

In the interest of helping everyone write their own trading plan I included a Trading Plan Template below. My own trading plan is also posted on this blog. I hope you take the time to not only read that document but also put it to use and develop your own trading plan BEFORE you place your first trade. Even if you already started trading it's never too late to write down your trading plan.

Another important reason to have a written trading plan, that most people don't think of, is for backup purposes. As investors/traders we mostly trade in isolation. You might know what you're doing and think you don't need a written plan but what if something should happen to you? Who will take over if you're unable to trade? What will happen to your open positions? These are important issues to consider. If you're married, will your spouse know what to do? Without a written trading plan, probably not. So your plan should be detailed enough, including step-by-step instructions, so that someone else can take over for you in an emergency. Share your plan with your spouse or a friend you can trust or your broker. Make sure they understand it and can execute it if needed.

Once it's written remember it's not caste in stone. It should be a living document, updated as needed. I'm on the 3rd version of my trading plan. I'm constantly tweeking it as I learn from experience, and you should too.


TRADING PLAN TEMPLATE


OBJECTIVE

Describe the objective of this trading plan (e.g. capital appreciation, current income, etc.), your return requirements, and how you will measure your results (e.g. account balance, cash flow, etc.).

STRATEGY

Describe the strategy you will use to meet your objectives (e.g. trend following, breakouts, option spreads, covered calls, etc.).

Determine the risks involved in your chosen strategy and what you will do to minimize those risks.

CAPITAL

Broker: Name of the brokerage firm
Account Type: Cash, Margin, or IRA
Capital Available: Starting capital

INSTRUMENTS

Describe the investment instruments you’ll be trading (e.g. stocks, options, bonds, indices, futures, commodities, etc.)

TIMEFRAME

Describe both the overall timeframe for this plan and the timeframe of individual trades (e.g. short, medium, or long term).

POSITION SIZING

Describe how much capital will be invested in any given trade, how much total capital will be invested and how much will be held as cash reserves (e.g. 2% per trade, 90% invested, and 10% cash reserves).

TRADE ENTRY STRATEGY

Describe, in detail, your criteria for entering a trade (e.g. technical analysis, fundamental analysis, etc.).

Describe how you will enter a trade (e.g. market order, limit order, leg in, spread, etc.) including the commission cost.

TRADE EXIT STRATEGY

Describe, in detail, your criteria for exiting a trade (e.g. technical analysis, fundamental analysis, etc.).

Describe how you will exit a trade (e.g. stop loss, market order, limit order, leg out, spread, etc.) including the commission cost.

POSITION MANAGEMENT STRATEGY

Describe, in detail, how you will manage a position once it’s entered, assuming it hasn’t met your exit criteria.

What will you do if:

1. The price is unchanged.
2. The price is slightly lower.
3. The price is significantly lower.
4. The price is slightly higher.
5. The price is significantly higher.

TAX STRATEGY (For Taxable Accounts Only)

Describe, in detail, how you will manage taxable events and, if possible, defer taxes to subsequent years (e.g. year-end tax strategies, SysCW Tax Deferred Strategy, etc.).

Covered Call Trading Plan

Version 16 - Updated 10/23/18

INVESTMENT OBJECTIVES

The primary objective is to generate income every month with an annual account return of 5% or more, which is twice the average dividend yield of the Dividend Champions/Contenders/Challengers.

Investments will be made in a diversified portfolio of common stocks in dividend paying companies who have increased their dividend for 5 or more consecutive years (i.e. Dividend Champions/Contenders/Challengers).

INVESTMENT STRATEGY

The primary strategy is to establish positions in undervalued companies with solid fundamentals, and a history of increasing dividends (see Stock Selection below).

Cash Secured Put (CSP) options will be sold to establish new positions and Covered Call (CC) options may be sold if the stock is acquired.

The income generated will be reinvested, held in cash, transferred to other accounts, or used for other investment strategies, depending on the availability of qualified candidates and/or other investment opportunities.

POSITION SIZING

Initial positions will be established at 100 shares.

Additional shares of a given company may be purchased, usually through the assignment of new put options.

STOCK SELECTION

The following resources will be used to select potential candidates:

• Dividend Champions

• Morningstar

• Value Line Daily Options Survey

• Zacks Stock Screener

The following is the selection criteria for Dividend Champions:

• Dividend Champions (25+ years) or Contenders (10-24 years) or Challengers (5-9 years).

• Dividend yield >= interest paid on cash balance (currently 1.60%).

• Covered by Morningstar and Value Line Daily Options Survey.

• Strike price below M* Fair Value and between $25 and $100.

• Bid price >= $0.30

• Expiration before earnings announcement.

• Days to expiration (DTE) <= 14 days

• Annual Return on Investment (AROI) >= 10%

ENTRY/MAINTENANCE STRATEGY

Initial positions will be established by selling a CSP.

If the CSP is assigned, CC's may be sold at/above the purchase price, until the stock is called away. Calls may be rolled out/up if the stock prices rises as long as it can be done at a net credit.

Stocks may be also held uncovered to take advantage of dividends and possible capital appreciation.

EXIT STRATEGY

When a company's fundamentals no longer meet the criteria, or if the dividend was decreased below an acceptable level or eliminated, all positions for that company will be closed.

OPTION EXPIRATION STRATEGY

At option expiration, Cash Secured Puts (CSP), Covered Calls (CC) and Uncovered Stocks will be handled as follows.

Cash Secured Puts (CSP)

1. If the company is no longer a qualified candidate, close the position, preferably at a profit, as soon as possible.

2. If the company is still a qualified candidate then do one of the following:

   • If assigned and the stock is purchased, continue the position by selling a CC at/above the purchase price. Try to avoid selling a call below the purchase price of the stock. The stock may also be held uncovered to take advantage of dividends and capital appreciation.

   • If expired and another strike can be sold, establish a new position by selling another put.

   • If expired and another strike can not be sold, look for new opportunities.

Covered Calls (CC)

1. If the company is no longer a qualified candidate, close the position, preferably at a profit, as soon as possible.

2. If the company is still a qualified candidate then do one of the following:

   • If assigned and the stock is sold, close the position.

   • If expired and the same strike can be sold, continue the position by selling another call at the same strike.

   • If expired and the same strike can not be sold, hold the position uncovered, while collecting dividends, until the same or higher strike can be sold. Try to avoid selling a call below the purchase price of the stock.

Uncovered Stocks

1. If the company is no longer a qualified candidate, close the position, preferably at a profit, as soon as possible.

2. If the company is still a qualified candidate then do one of the following:

   • Continue to hold the stock uncovered to take advantage of dividends and capital appreciation.

   • Sell a CC at/above the purchase price. Try to avoid selling a call below the purchase price of the stock.