Using the "wheel" strategy for income in retirement?

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jjunk
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Using the "wheel" strategy for income in retirement?

Post by jjunk »

I realize that options trading isnt really something Bogleheads typically do but I've been contemplating an idea as a means to generate income for retirement expenses. I'm sure I'm missing something with this plan and I am going to paper trade it for a while. My main goal is income, so I'm fine with not capturing upside or additional profit. Here are my assumptions:

1. Start with 700K in a taxable account
2. Sell monthly puts at 7-10% discount to current strike price (to reduce chance of getting assigned)
3. Re-up monthly until assignment occurs
4. Covered calls once assigned, I'm ok with taking losses here on major dips (10%++)
5. Repeat until 700K is exhausted

Here's my thought process. I currently have 700K sitting in BIV (intermediate bonds) and it generates ~1200/mo in dividends. When I retire this year or next, I plan to use that as well as LTCG from my equities to pay for expenses. Since my plan is to spend down my entire portfolio, "wheeling" the 700K seems to generate more income and has roughly the same drawdown, potentially better, over the time I'd use up the funds. Looking at the Feb18 puts for example, I would sell 17 contracts and generate 5k-7.5k in premiums. This would pay a good portion of my expenses and with dividends from my remaining portfolio I'd be fine. I'd need a fairly solid decline in a month to get assigned and I'm ok with spending it all down.

So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
DanFFA
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Re: Using the "wheel" strategy for income in retirement?

Post by DanFFA »

Why not just focus on absolute long-term returns and generate your own effective 'dividends' at your will through the use of withdrawals? This way you can invest more efficiently for return and rest safe automating the 'dividends'.

Don't take on more risk than you have to for your goals to be met. Simplicity trumps complexity.
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Schlabba
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Re: Using the "wheel" strategy for income in retirement?

Post by Schlabba »

jjunk wrote: Wed Jan 26, 2022 1:10 am I realize that options trading isnt really something Bogleheads typically do but I've been contemplating an idea as a means to generate income for retirement expenses. I'm sure I'm missing something with this plan and I am going to paper trade it for a while. My main goal is income, so I'm fine with not capturing upside or additional profit. Here are my assumptions:

1. Start with 700K in a taxable account
2. Sell monthly puts at 7-10% discount to current strike price (to reduce chance of getting assigned)
3. Re-up monthly until assignment occurs
4. Covered calls once assigned, I'm ok with taking losses here on major dips (10%++)
5. Repeat until 700K is exhausted

Here's my thought process. I currently have 700K sitting in BIV (intermediate bonds) and it generates ~1200/mo in dividends. When I retire this year or next, I plan to use that as well as LTCG from my equities to pay for expenses. Since my plan is to spend down my entire portfolio, "wheeling" the 700K seems to generate more income and has roughly the same drawdown, potentially better, over the time I'd use up the funds. Looking at the Feb18 puts for example, I would sell 17 contracts and generate 5k-7.5k in premiums. This would pay a good portion of my expenses and with dividends from my remaining portfolio I'd be fine. I'd need a fairly solid decline in a month to get assigned and I'm ok with spending it all down.

So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
With this option strategy you can decide how much risk you take yourself depending on how far out of the money you are selling. If you sell far out of the money you have little risk of being assigned but also little reward.

What alternatives have you considered? Did you consider automating this process using an ETF (such as XYLD) to sell calls for you? Or perhaps simply a dividend index such as VYM?

I'd also hold bonds to survive the downturn(s)
AnilG
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Re: Using the "wheel" strategy for income in retirement?

Post by AnilG »

Instead of do it yourself, consider some ETFs which are using options to enhance monthly distributions, such as QYLD, XYLD, RYLD, DIVO, etc. I am personally considering QYLD and DIVO. Take a look at this Reddit post reviewing Covered Call Income portfolio. https://www.reddit.com/r/qyldgang/comme ... _analysis/

Of course, these ETFs and options strategies come with higher risk and should be a smaller part of broader income generation portfolio that includes funds and ETFs investing in bonds, REITs, dividend paying stocks, and other income producing assets.
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jjunk
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

Thanks for the suggestions everyone. I never knew about the ETFs so I’ll look into those as well as read up on the link.
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Watty
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Re: Using the "wheel" strategy for income in retirement?

Post by Watty »

....strategy for income in retirement?
....
Is there anything else I'm missing from a risk perspective?
I did not really understand it but it sounds like there are a lot of moving parts that you will need to manage.

The problem with that is that as you age you may become less financially competent and may make mistakes or not follow your plan correctly. I have known 70 year olds where this has become a concern so you may not have until you are in your 80s and 90s.

In addition if you are married then your spouse will also need to know what to do with this if something happens to you. Likewise if you are unexpectedly ill for two months and not able to manage your finances then what will happen to your plans.

A big concern would also be that one of the early signs of dementia can be making poor financial decisions. You would likely not recognize this in yourself and others may not recognize it and intervene until your finances have been badly hurt.

Even without dementia it is likely that managing things like this will be a lot harder for you in 10 or 20 years. You may not recognize that or have difficulty in converting to investments that are easier to mange when that happens.

Even before I retired I was working to get my investments simplified and on automatic pilot as much as possible.
jjunk wrote: Wed Jan 26, 2022 1:10 am Is there anything else I'm missing ....
It sounds like a tax nightmare. Be sure to factor in taxes in your calculations.

If this was easy and reliable then actively managed mutual funds would be doing this and consistently beating index funds. The fact that overall they don't beat index funds makes me skeptical that this will work.

You can call the people who manage actively managed index funds lots of things but stupid is not one of them. Don't assume that you are smarter than them.
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Re: Using the "wheel" strategy for income in retirement?

Post by randomguy »

jjunk wrote: Wed Jan 26, 2022 1:10 am So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
I think that is the pretty big aside. Every time I look at options strategies, you do well up until you don't and then you give back most of the gains. You would need to figure out if you can actually handle the volatility or not. If you could make an easy 5% by these strategies, nobody would buy bonds. You need to make sure you understand what happens when things go south. Go plot up your strategy for 2000-2 or 2007-9 and see if you are ok with it
TheDoctor91
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Re: Using the "wheel" strategy for income in retirement?

Post by TheDoctor91 »

IMO absolutely not

Introduction unnecessary complication and worse tax treatment and behavioural mistakes and lower overall performance

Less is more.
investlikebogle
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Re: Using the "wheel" strategy for income in retirement?

Post by investlikebogle »

jjunk wrote: Wed Jan 26, 2022 1:10 am I realize that options trading isnt really something Bogleheads typically do but I've been contemplating an idea as a means to generate income for retirement expenses. I'm sure I'm missing something with this plan and I am going to paper trade it for a while. My main goal is income, so I'm fine with not capturing upside or additional profit. Here are my assumptions:

1. Start with 700K in a taxable account
2. Sell monthly puts at 7-10% discount to current strike price (to reduce chance of getting assigned)
3. Re-up monthly until assignment occurs
4. Covered calls once assigned, I'm ok with taking losses here on major dips (10%++)
5. Repeat until 700K is exhausted

Here's my thought process. I currently have 700K sitting in BIV (intermediate bonds) and it generates ~1200/mo in dividends. When I retire this year or next, I plan to use that as well as LTCG from my equities to pay for expenses. Since my plan is to spend down my entire portfolio, "wheeling" the 700K seems to generate more income and has roughly the same drawdown, potentially better, over the time I'd use up the funds. Looking at the Feb18 puts for example, I would sell 17 contracts and generate 5k-7.5k in premiums. This would pay a good portion of my expenses and with dividends from my remaining portfolio I'd be fine. I'd need a fairly solid decline in a month to get assigned and I'm ok with spending it all down.

So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
It works until it doesn’t work.

One bad trade can leave you with bag holding shares from assigned puts. Once the price falls enough, you won’t get much premium selling covered calls. Tax drag is also huge since all profits are short term.
sjwoo
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Re: Using the "wheel" strategy for income in retirement?

Post by sjwoo »

I would never buy an annuity myself, but if your intent is to spend down your portfolio, it looks like an annuity at age 65 would generate quite a bit of income:

https://www.annuityexpertadvice.com/how ... -per-month

According to this calculator, somewhere between $3k and $9k (!). Pretty much the opposite of what you propose here, risk wise... But perhaps food for thought.
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Re: Using the "wheel" strategy for income in retirement?

Post by firebirdparts »

jjunk wrote: Wed Jan 26, 2022 1:10 am So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
You could do worse, for sure. The 7-10% discount to the strike price, and monthly, are only two elements to the option price. The other of course is volatility in the opinions of the gamblers. So the amount of cash thrown off is going to depend on the particular underlying and also what everybody is "feeling" about next month.

Just by way of example, SPY is about the least volatile thing to talk about, and so a monthly SPY put today (not a whole month left) yields 1% at a strike of 416 which is only 5.5% discounted and has a delta of .22. Seems okay to me.

If you use option prices in percent of underlying, it makes them more comparable in terms of "likelihood". In theory, I think a 1% a month price is presumed to have the same likelihood of ending up in the money for two dissimilar contracts 1 month out. That's how I compare them, anyway. With the wheel, you don't care as much about being assigned *until* you own the underlying and it's way below what you paid, so that to sell a call, you create a significant risk of taking a capital loss. When that happens, you're not worse off than all the other equity investors, you're just disappointed that the milk cow has gone dry. FWIW. I have experimented with this on SPY quite a bit. Trying to learn by doing.
This time is the same
sonosoldi3112
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Re: Using the "wheel" strategy for income in retirement?

Post by sonosoldi3112 »

What I would do instead is buy QQQX ..a closed end fund that does what you wish to do for you.

They do not sell options on all of the holding ( 55% I think) ... so you do gain some upside on the QQQ holdings.

It offers great income which is ROC of late ( return of capital) so no taxes to pay ... however roc reduces your cost basis ..so after 15 or 16 years you pay the piper .... and it will be very very tax inefficient .. but if you run figures at immediate annuity ... qqqx will probably pay you more per month
and you get to keep the principal ... plus the funds has beaten funds like vanguard wessesley, wellington and schwab SCHD .. or has performed very well in relation to them.

Unlike Annuity ..no guarantee with income but it has a long and great history and holds those companies that comprise Nasdaq 100..

ps reduction in cost basis only begins when you stop reinvesting the distributions and take full income to yourself.
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jjunk
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

Thanks again for all the thoughts and opinions here everyone. I do appreciate it.

Given I'm only 48, I didnt really think an annuity would be a good choice because my payouts will likely be pretty low. I can look into that though and check.

I'll need to look at QQQX. I was focusing on SPY because of what it holds and the Nasdaq is inherently riskier but I can run some simulations and see.

Overall, seems like the opinions here are to not do this. I will paper trade it for a few months and see what the results look like and then factor in all these other suggestions to see what makes the most sense. I came up with the idea as part of trying to figure out if it's worth playing the ACA MAGI game once we retire. I can either try and pull off a lot of tricks to keep my MAGI low (using the bond fund I hold today as part of that) or I can just generate additional income and pay taxes and live my life. Initially it seemed less stressful to wheel this and get a (somewhat) low risk way to generate income on a month to month basis. Sounds like it might not be as stress free as I was thinking.
sonosoldi3112
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Re: Using the "wheel" strategy for income in retirement?

Post by sonosoldi3112 »

ps ..cefconnect is a good place to look at closed end fund stats.
tvubpwcisla
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Re: Using the "wheel" strategy for income in retirement?

Post by tvubpwcisla »

Make sure you pick equities and indices you don't mind holding onto if they go down and don't recovery for a while (years). Don't ask for advice; rather pick the companies that YOU like. Other than that, there is very little risk to write an options contract to purchase an underlying that you already want at a strike price that you are willing to pay. Just don't sell Cash Secured Puts against anything you don't want to own. It is a great strategy to make a lot of money. Just don't panic when you get assigned the 100 shares per contract. And, you shouldn't, as before entering the contract you were already comfortable with it. After you do get assigned and own the underlying, turn right around and sell Covered Calls against it, collect more premium, and keep that wheel going!

:moneybag
DurangoWino
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Re: Using the "wheel" strategy for income in retirement?

Post by DurangoWino »

I will be doing a version of this once my BP stock gets called away. First and foremost only sell puts on stocks that you want to own. Also only trade large companies that have dividends in the event that your stock drops below where you can sell calls above where you purchased your stock at. Never use growth stocks only value stocks - they are not as volatile. Say a XOM, DAL or BAC versus TSLA.

If you had sold puts on say BP at the start of 2020 you would have had the stock put to you in the mid $30s when Covid hits. Then you would have had to have ridden it down to $14 and endured a 50% cut in the dividend. Two years would pass and you would just now have a stock at $32 where you could sell calls at above or near your strike price where you were put the stock. So basically you would have had to endure a two year period that the only money coming in was your dividend. Hopefully you would not have panicked and sold below $20.

My other suggestion is to look at weekly options where you could roll out a month or two if things go against you on your weekly option.

This strategy works in slightly down, flat and rising markets. It will eat you alive in market crashes or prolonged bear markets. I think you have a couple of more years of the market going up but there will be a point where it crashes and it will be much worse than we have ever seen. And obviously it is not a Boglehead compatible strategy.

Marcus Heitkotter at Rockwell Trading has some good videos on this strategy. Just note that he lost his tail on doing this strategy on RIDE and ARKF recently. So even the best can get destroyed. Good luck!
DanFFA
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Re: Using the "wheel" strategy for income in retirement?

Post by DanFFA »

I'll throw it in here just so you're aware, there is a Rational Reminder thread of a 32-year-old retiring this March on 100% Equities (About a million dollars worth) in factor-based investing that is using factors to the extreme (No total stock market, no QQQ, no bonds or alternatives) in order to take on a lot of risk(for greater return). He is taking smaller income out of the portfolio as well(2 to 4%), as he found he could support his family off only 2% of the portfolio if he had to and preferred to be overly conservative to improve the chances of staying retired as long as he likes.
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Re: Using the "wheel" strategy for income in retirement?

Post by firebirdparts »

Another issue, as far as I know, is that there aren't any ETF's wheeling. There are covered call etf's, and I think in order to keep their situation simple and somewhat predictable (and maybe defensible), they roll their calls every month no matter what. It's not a good strategy really, as far I have seen. Does not perform the way they do it.
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Re: Using the "wheel" strategy for income in retirement?

Post by Kbg »

Options are very efficiently priced these days. Repeated and frequent index options selling at the end of the day nets about the same as the index with a better sharpe ratio and is not tax efficient unless done in a retirement account. Single stock options are a great deal for market makers but not you.

One thing that IS useful is to rebalance with options when reducing to your allocation target via covered calls. Increasing allocation via puts makes sense as well depending on account type. In a retirement account generally not a good idea as you will have to “cash secure” your puts which is a performance drag. Of course if you have a bond component (retirement account) then you could turn some of it into cash for put selling and take the premium as your “bond interest.”

The above method simply adds a little to the bottom line for something you would do anyway and is employed widely by professional investors. It also implies larger account size so that the allocation swings are not crazy big.

I have not looked into all of the funds mentioned above, but generally funds that do this type of thing provide what I described in the opening with larger fees than an associated index fund and oftentimes with quite a bit worse performance than a comparable index (of which there are several) that track this sort of thing. In short, not a good deal once costs are factored in.

There is an excellent series on the earlyretirementnow website describing “a” method of option selling. If anything you should learn from it there is a lot to learn.

Practically speaking it’s a lot of work to do correctly in a way that maximizes potential profits and will become a part time job.
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jjunk
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

One thing I should have clarified with my original post was that I only plan to do this using SPY. I dont plan to stock pick or try and read trends or whatever. I was purely looking at this as a way to generate income. I might be better suited with just keeping things the way they are but this seemed good on paper initially so I thought I'd ask for opinions.
DurangoWino
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Re: Using the "wheel" strategy for income in retirement?

Post by DurangoWino »

One suggestion is to set up a paper trading account and trade that account like a live account to see how your strategy is working. The Rockwell group I mentioned I think allows you to set up the paper accounts. If you are consistently making money for a couple of months give a live funded account a go.
tvubpwcisla
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Re: Using the "wheel" strategy for income in retirement?

Post by tvubpwcisla »

You pretty much can't lose if you are only doing on SPY. You want to hold that anyway. It's a great strategy.
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Re: Using the "wheel" strategy for income in retirement?

Post by tvubpwcisla »

You might also want to consider VTI for the wheel.
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Re: Using the "wheel" strategy for income in retirement?

Post by Sandtrap »

jjunk wrote: Wed Jan 26, 2022 1:10 am I realize that options trading isnt really something Bogleheads typically do but I've been contemplating an idea as a means to generate income for retirement expenses. I'm sure I'm missing something with this plan and I am going to paper trade it for a while. My main goal is income, so I'm fine with not capturing upside or additional profit. Here are my assumptions:

1. Start with 700K in a taxable account
2. Sell monthly puts at 7-10% discount to current strike price (to reduce chance of getting assigned)
3. Re-up monthly until assignment occurs
4. Covered calls once assigned, I'm ok with taking losses here on major dips (10%++)
5. Repeat until 700K is exhausted

Here's my thought process. I currently have 700K sitting in BIV (intermediate bonds) and it generates ~1200/mo in dividends. When I retire this year or next, I plan to use that as well as LTCG from my equities to pay for expenses. Since my plan is to spend down my entire portfolio, "wheeling" the 700K seems to generate more income and has roughly the same drawdown, potentially better, over the time I'd use up the funds. Looking at the Feb18 puts for example, I would sell 17 contracts and generate 5k-7.5k in premiums. This would pay a good portion of my expenses and with dividends from my remaining portfolio I'd be fine. I'd need a fairly solid decline in a month to get assigned and I'm ok with spending it all down.

So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
How dependent are you on this 700k in retirement????

How long, many years, does it have to last as a must have?

This is the “elephant in the room”.
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wolf359
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Re: Using the "wheel" strategy for income in retirement?

Post by wolf359 »

jjunk wrote: Wed Jan 26, 2022 3:03 pm One thing I should have clarified with my original post was that I only plan to do this using SPY. I dont plan to stock pick or try and read trends or whatever. I was purely looking at this as a way to generate income. I might be better suited with just keeping things the way they are but this seemed good on paper initially so I thought I'd ask for opinions.
I've looked into this strategy as well. If you're going to do it, go about it seriously. Some thoughts:

CAN YOU SUSTAIN THE RISK?
You're considering putting up $700,000. To me, that's a significant amount of money. Can your retirement survive without it? Yes, obviously you will take measures to reduce risk. Selling cash-secured puts and writing covered calls are individually conservative strategies. But when executing any strategy you need to make sure that you can still meet your retirement objectives if something goes wrong and you lose money. At the very least you lose the opportunity cost of deploying this money elsewhere. One of the biggest benefits of buy-and-hold investing Boglehead style is compounding. The wheel strategy does not compound your money, especially if your intended usage is to generate income to spend.

ACTIVE TRADING STRATEGY
This is an active trading strategy that is more complicated than buy and hold. Before you commit significant money to it and rely on it for income, you should know how to execute it.
  • Find the right broker - Use a brokerage firm that specializes in options. Vanguard or Robinhood are not suitable firms. I personally selected TD Ameritrade. Two mentors use Schwab.
  • Find a mentor - Find someone who is actually using this strategy successfully. I don't recommend paying someone to be a mentor. I was lucky that two family members do this. I also know someone at work. I do my own homework, but they're someone that I can ask questions to when certain situations come up.
  • Practice, Practice, Practice - Paper trade the strategy before committing money to it. TD Ameritrade's Think or Swim trading platform lets you paper trade. It works and looks like the actual trading system. You can see how you do before you commit real money. It accounts for commissions and execution time.
  • Go small before you go big - Start with small amounts of capital before you commit larger amounts. Build your comfort level.
  • Take your time to learn - You will probably need to trade at least 5 or more years before you're actually good enough to rely on it. I wouldn't say that you're experienced enough until you've been trading real money and gone through a full market cycle (bull and a bear).
  • Research everything - You need to know how your index works. You need to know how to select strike prices and dates. You need to know if you need to take corrective actions when the trade goes against you. You need to know what indicators to watch. Trading just before certain major announcements will affect the prices you get.
  • Have a written plan - This is critical. Active trading is more subject to emotions than buy and hold. You have to have a rational course of action when things go wrong. With active trading, it's also about preserving the capital.
PROBABLY DOESN'T BEAT BUY AND HOLD
This is highly dependent on how well you wheel, but don't be surprised if a simple buy-and-hold strategy outperforms wheeling on a long-term basis. My Boglehead portfolio has outperformed the best performing of my mentors over the long term. The reason I am still interested is for income diversification -- I'm still in my learning period and am still paper trading. At certain points in the market cycle, an option-based income strategy works better. I want to learn how to tap it.

DIVERSIFY YOUR INCOME STREAMS
Max out social security. Explore a real estate rental property or two. Learn how to live off a portfolio using SWR or VPW. Identify other option income strategies. I'm looking at options for income to supplement other income streams. In addition to the Wheel strategy, there are also credit spreads like the iron condor. Even though income investing doesn't necessarily beat buy-and-hold for total return, it does allow me to generate funds from a portion of my portfolio so I can avoid selling the buy-and-hold part at the wrong time.

HAVE A TAX STRATEGY
2 of my 3 mentors are retired, and this is the main source of their taxes. Doing this in a taxable account in addition to a full-time job will result in a high tax rate. (That's another reason I'm still paper trading.)
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Scott S
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Re: Using the "wheel" strategy for income in retirement?

Post by Scott S »

It sounds like a bunch of work, and immediately went over my head (which doesn't take much.) :wink:

When doing your "paper trading", it may be good to track the hours you spend managing your trades, so you can figure out how well you are getting "paid" for your efforts.
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wolf359
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Re: Using the "wheel" strategy for income in retirement?

Post by wolf359 »

Scott S wrote: Thu Jan 27, 2022 10:29 am It sounds like a bunch of work, and immediately went over my head (which doesn't take much.) :wink:

When doing your "paper trading", it may be good to track the hours you spend managing your trades, so you can figure out how well you are getting "paid" for your efforts.
That was the intent of my post.

It's not as simple as it looks at first glance.

It doesn't beat buy-and-hold in the long term (although YMMV.)

It's an active approach, which by definition isn't passive. It's by no means day trading, but you have to pay more attention than you do to a Boglehead portfolio. You can't tell if it's for you until you actually try it.

If used for something like income in retirement, you have to address what happens if you are incapacitated. Can your spouse take over this strategy?

Personally, I like playing with numbers and strategies like this. The time managing the trade is intellectually stimulating. But it's definitely not for everyone.
aristotelian
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Re: Using the "wheel" strategy for income in retirement?

Post by aristotelian »

Have you compared the income from this strategy versus simply purchasing a SPIA?
rangerrick9211
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Re: Using the "wheel" strategy for income in retirement?

Post by rangerrick9211 »

I'll be the contrarian and recommend you go for it.

The wheel isn't that difficult to grasp. In fact, I'd recommend an even easier income idea of simply selling cash secured puts.

Forget SPY. Sell against SPX or ES. European options so you don't get exercised early. Taxes are easy: 60/40 treatment per 1256/Form 6781.

Yes, it's active. But it's 10 minutes a week across 3 days. I sell 2-3 DTE, 30 delta OTM puts. My "cash" collateral is fixed income (preferred/munis). For my mileage, assuming returns = FI dividends + FI returns + premium against FI; it's held with my index funds in tax advantage.

I'm not RE, so my I'm still injecting cash on a normal basis. But 100% will be my first line of income in RE.
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jjunk
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

wolf359 wrote: Thu Jan 27, 2022 9:54 am
jjunk wrote: Wed Jan 26, 2022 3:03 pm One thing I should have clarified with my original post was that I only plan to do this using SPY. I dont plan to stock pick or try and read trends or whatever. I was purely looking at this as a way to generate income. I might be better suited with just keeping things the way they are but this seemed good on paper initially so I thought I'd ask for opinions.
I've looked into this strategy as well. If you're going to do it, go about it seriously. Some thoughts:

CAN YOU SUSTAIN THE RISK?
You're considering putting up $700,000. To me, that's a significant amount of money. Can your retirement survive without it? Yes, obviously you will take measures to reduce risk. Selling cash-secured puts and writing covered calls are individually conservative strategies. But when executing any strategy you need to make sure that you can still meet your retirement objectives if something goes wrong and you lose money. At the very least you lose the opportunity cost of deploying this money elsewhere. One of the biggest benefits of buy-and-hold investing Boglehead style is compounding. The wheel strategy does not compound your money, especially if your intended usage is to generate income to spend.

ACTIVE TRADING STRATEGY
This is an active trading strategy that is more complicated than buy and hold. Before you commit significant money to it and rely on it for income, you should know how to execute it.
  • Find the right broker - Use a brokerage firm that specializes in options. Vanguard or Robinhood are not suitable firms. I personally selected TD Ameritrade. Two mentors use Schwab.
  • Find a mentor - Find someone who is actually using this strategy successfully. I don't recommend paying someone to be a mentor. I was lucky that two family members do this. I also know someone at work. I do my own homework, but they're someone that I can ask questions to when certain situations come up.
  • Practice, Practice, Practice - Paper trade the strategy before committing money to it. TD Ameritrade's Think or Swim trading platform lets you paper trade. It works and looks like the actual trading system. You can see how you do before you commit real money. It accounts for commissions and execution time.
  • Go small before you go big - Start with small amounts of capital before you commit larger amounts. Build your comfort level.
  • Take your time to learn - You will probably need to trade at least 5 or more years before you're actually good enough to rely on it. I wouldn't say that you're experienced enough until you've been trading real money and gone through a full market cycle (bull and a bear).
  • Research everything - You need to know how your index works. You need to know how to select strike prices and dates. You need to know if you need to take corrective actions when the trade goes against you. You need to know what indicators to watch. Trading just before certain major announcements will affect the prices you get.
  • Have a written plan - This is critical. Active trading is more subject to emotions than buy and hold. You have to have a rational course of action when things go wrong. With active trading, it's also about preserving the capital.
PROBABLY DOESN'T BEAT BUY AND HOLD
This is highly dependent on how well you wheel, but don't be surprised if a simple buy-and-hold strategy outperforms wheeling on a long-term basis. My Boglehead portfolio has outperformed the best performing of my mentors over the long term. The reason I am still interested is for income diversification -- I'm still in my learning period and am still paper trading. At certain points in the market cycle, an option-based income strategy works better. I want to learn how to tap it.

DIVERSIFY YOUR INCOME STREAMS
Max out social security. Explore a real estate rental property or two. Learn how to live off a portfolio using SWR or VPW. Identify other option income strategies. I'm looking at options for income to supplement other income streams. In addition to the Wheel strategy, there are also credit spreads like the iron condor. Even though income investing doesn't necessarily beat buy-and-hold for total return, it does allow me to generate funds from a portion of my portfolio so I can avoid selling the buy-and-hold part at the wrong time.

HAVE A TAX STRATEGY
2 of my 3 mentors are retired, and this is the main source of their taxes. Doing this in a taxable account in addition to a full-time job will result in a high tax rate. (That's another reason I'm still paper trading.)
Thanks for the detailed response! Very good advice here for sure. I am paper trading on TOS right now using this strategy. My broker is Schwab though and I'm happy with their platform (plus they'll own TOS in a few years once the merger is complete). I plan on paper trading this on TOS and in Excel to see how it does.

As for other questions asked: yes, I will need this money in retirement and its currently sitting in bonds. My intent was to replace/exceed the income being paid by my current BOV holdings which understanding I'm taking more risk to do so. This represents ~20% of my overall portfolio, so it is not an insignificant amount. As for losses, while I am not ok with losing all of it, I am ok with losing some of it as is my spouse. I havent looked at European options, thats something else I can look into. This is not something I undertake lightly. The remainder of my portfolio is indexed across TSM and TBM so this would be the only actively traded position we have. I also like the mentally stimulating aspect of it. I guess I could still get that from paper trading it though if thats all I really wanted out of the exercise.

I'm not sold on the idea but I do find it very compelling. Again, thanks everyone for the excellent feedback and advice.
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Re: Using the "wheel" strategy for income in retirement?

Post by bugleheadd »

Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
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Re: Using the "wheel" strategy for income in retirement?

Post by TheDoctor91 »

There are 0 backtest that I’ve ever seen that show this to produce better returns than holding the underlying. If anyone has one I’d love to see it.
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Re: Using the "wheel" strategy for income in retirement?

Post by arcticpineapplecorp. »

Think this is the website:
https://www.thewheelstrategy.com/

This is what the website says:
It’s one of the best options strategies available, having relatively lower risk and higher profitability than many of the other popular option strategies out there.

The Wheel Strategy can also be considered as an improved version of the traditional Buy&Hold strategy. It looks to consistently invest in high-quality stocks or index funds ETFs and, at the same time, collect additional premium on top of that...

In essence, you keep selling options on stocks that you are bullish on, to generate monthly income...

The Wheel Strategy is great for generating semi-passive steady income consistently throughout the year, with lower risk than many other option strategies, and usually widely exceeding the results of a simple Buy&Hold strategy.
wonder how it got its name? Rinse and repeat he says, like round and round?

First thought I had was, is this strategy trying to reinvent the wheel?
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

TheDoctor91 wrote: Thu Jan 27, 2022 1:52 pm There are 0 backtest that I’ve ever seen that show this to produce better returns than holding the underlying. If anyone has one I’d love to see it.
I know there are folks who claim this "juices" returns so long as you're willing to hold the underlying positions. The covered call portion gets trickier when you have large losses or large capital gains, otherwise its pretty straightforward so long as you dont mind your position being called away and continuing to go up. Of course, you can always buy the same security back in and only miss out on a few days of participation.

In my case, I'm trying to determine if the income generated beats buying and holding my BIV ETF while understanding that my put options being exercised would also swing my asset allocation to a more aggressive tilt if it occurred.
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Re: Using the "wheel" strategy for income in retirement?

Post by secondopinion »

This is not a great "income" strategy for retirement; it is a lot easier to recover from a very bad situation or two when you have plenty of time to recover (put writing recovers slowly). In some regards, you are better taking the other side of the put trade in retirement; of course, increasing bonds would be an easier way to protect retirement (since any options strategy acts like a stock/bond combination [possibly leveraged]).
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Re: Using the "wheel" strategy for income in retirement?

Post by Scott S »

arcticpineapplecorp. wrote: Thu Jan 27, 2022 2:15 pmwonder how it got its name? Rinse and repeat he says, like round and round?

First thought I had was, is this strategy trying to reinvent the wheel?
My wife and I have been watching French costume dramas lately, so my first thought was the torture device that was eventually replaced by the much more humane guillotine... ;)
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Re: Using the "wheel" strategy for income in retirement?

Post by rangerrick9211 »

jjunk wrote: Thu Jan 27, 2022 1:35 pm
bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
Just don't get assigned. :)

Seriously, "cash"-secured SPX.

ERN documents the strategy well: https://earlyretirementnow.com/2021/11/ ... -spintwig/.
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

rangerrick9211 wrote: Thu Jan 27, 2022 3:45 pm
jjunk wrote: Thu Jan 27, 2022 1:35 pm
bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
Just don't get assigned. :)

Seriously, "cash"-secured SPX.

ERN documents the strategy well: https://earlyretirementnow.com/2021/11/ ... -spintwig/.
I should have known ERN would have something on this. Thanks for sharing, I'll definitely read the series.
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Re: Using the "wheel" strategy for income in retirement?

Post by bugleheadd »

rangerrick9211 wrote: Thu Jan 27, 2022 3:45 pm
jjunk wrote: Thu Jan 27, 2022 1:35 pm
bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
Just don't get assigned. :)

Seriously, "cash"-secured SPX.

ERN documents the strategy well: https://earlyretirementnow.com/2021/11/ ... -spintwig/.
How does selling puts work with spx when the put goes in the money on expiration?

Since you don't get assigned shares, do you just realize a loss after exp?

If so, I'd rather sell spy puts.. At least I'd own shares if assigned
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Re: Using the "wheel" strategy for income in retirement?

Post by beCalm »

Yes. Index options are cash settled.
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Re: Using the "wheel" strategy for income in retirement?

Post by sharukh »

jjunk wrote: Thu Jan 27, 2022 5:58 pm
rangerrick9211 wrote: Thu Jan 27, 2022 3:45 pm
jjunk wrote: Thu Jan 27, 2022 1:35 pm
bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
Just don't get assigned. :)

Seriously, "cash"-secured SPX.

ERN documents the strategy well: https://earlyretirementnow.com/2021/11/ ... -spintwig/.
I should have known ERN would have something on this. Thanks for sharing, I'll definitely read the series.

The way I see, not getting assigned is also a big problem.
Say you sold a cash secured put and then SPY had a huge run up like in 2020-21, then you would be better of with buy and hold than selling cash secured puts.

Statistically speaking(in the long run), both wheeling and buy and hold should give you same risk adjusted return. so I dont see any extra benefit with wheeling. its is more work and more to taxes. I would go for buy and hold.
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Re: Using the "wheel" strategy for income in retirement?

Post by jjunk »

sharukh wrote: Thu Oct 13, 2022 11:22 pm
jjunk wrote: Thu Jan 27, 2022 5:58 pm
rangerrick9211 wrote: Thu Jan 27, 2022 3:45 pm
jjunk wrote: Thu Jan 27, 2022 1:35 pm
bugleheadd wrote: Thu Jan 27, 2022 1:15 pm Be prepared to be assigned and hold the stock

I sold spy puts near the top. I was assigned now I'm holding with unrealized loss of 10%. I don't mind though because spy is diversified and if need be I can hold spy long time. I will never sell for a loss.

But now I won't sell covered calls on my shares because I won't get much premium out of it. So I wait until it fully recovers before selling cc's.

So not likely to get a steady income wheeling

You probably will get more income sticking with your bond dividends of 1200 a month

Unless you do something riskier like sell 10 $700 TSLA puts expiring next Fri. You can collect around $4000
Yup, I'm aware of getting assigned but that's one reason I chose the 10% gap in the strike price. For example, my paper trade right now is the Feb18 396Put. I sold 17 for a $3,655 premium with a Delta of -.11. If this were real world, I'd be totally fine owning a ton of SPY at a 17% discount from all time highs. But your point is well taken, I'd have to be prepared to hold for a potentially long time if I was assigned. I believe I am but that's a lot easier said than done when you're playing on paper. :sharebeer
Just don't get assigned. :)

Seriously, "cash"-secured SPX.

ERN documents the strategy well: https://earlyretirementnow.com/2021/11/ ... -spintwig/.
I should have known ERN would have something on this. Thanks for sharing, I'll definitely read the series.

The way I see, not getting assigned is also a big problem.
Say you sold a cash secured put and then SPY had a huge run up like in 2020-21, then you would be better of with buy and hold than selling cash secured puts.

Statistically speaking(in the long run), both wheeling and buy and hold should give you same risk adjusted return. so I dont see any extra benefit with wheeling. its is more work and more to taxes. I would go for buy and hold.
I tend to agree. What I ended up doing was investing most of my free cash into the AA I use and I left ~10% of my portfolio as options trading money. However I only trade SPY and TLT now since getting assigned would just put them into my AA. It's worked out fine so far with my covered calls making a little extra income in the recent downturn and my cash secured puts on TLT generating more yield than holding TLT when I don't get assigned. It's not a perfect thing but it keep my brain active and "scratches" the itch I had when I originally posted. I like that it also keeps my AA where I want it without getting stuck holding 10,000 shares of something like Gamestop or AMC. :sharebeer
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Re: Using the "wheel" strategy for income in retirement?

Post by goblue100 »

randomguy wrote: Wed Jan 26, 2022 10:05 am
jjunk wrote: Wed Jan 26, 2022 1:10 am So aside from a major monthly crash or 08 level recession, this seems like it would generate better income with me likely getting assigned 2-4x/yr. Is there anything else I'm missing from a risk perspective?
I think that is the pretty big aside. Every time I look at options strategies, you do well up until you don't and then you give back most of the gains.
This. You are staking your mind and your assessment of risk/reward against some of the best minds the business schools graduate. You really think you know more than they do?
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Re: Using the "wheel" strategy for income in retirement?

Post by moviegeek »

I have been wheeling SPY for about one year. Some good comments in this thread already so I won't repeat what has been written.

One thing I have realized is that I am not comfortable deploying 100% of my account balance in options. The reason is, if I get assigned on a downtrend, I will want to buy more SPY contracts to lower my cost basis.

Also, you will want some cash available to buy to close...BTC. You might find your position deteriorating but have an opportunity to exit the position on a big green day. The Tasty Trade folks recommend always buying to close around 50% profit on options. They have some good videos worth watching. Of course they make money when we BTC.

I usually sell CSPs on SPY with a Delta of -0.16 to -0.25.
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