Hi everyone,
I'm fairly new to options trading, roughly one year experience if we can call it that. I started as a degenerate gambler, eventually gained some money but I knew it was just random guessing. I also had more success with my stock positions over the last 5 years.
I recently invested some money into a stock and I'm willing to keep it in the long run, basically bullish on it long term, short term I can't tell. Despite that I do not mind selling to take advantage of fluctuations and adding up to my position as well.
My understanding is that I can do that with the wheel strategy.
Example: I have currently 100 shares of stock X at 100 cost basis. Let say it trades at 100 as well. I do have additional cash which I could use to buy 100 more shares now.
I'd like to profit from relatively high IV, I would sell a CSP as well as a CC.
For instance: 100P @ 3.00 and 105C @ 2.00. Collecting premium, I can say that my new cost basis is now 95$.
I identified 3 cases.
1. put is assigned: I have now 200 shares with cb at 97.5$
2. call is assigned: I have no more share but made 1000$ profit (so far)
3. both are assigned: my understanding is that it can't happen simultaneously, but in a (not so) crazy week it could be that I'm assigned early on either side and at the endbas well (or both early I guess it doesnt matter). I concluded that this is equivalent to say that I own now 100 shares at 90$ (+ cash obviously)
I think I need a reality check. Is my math sound? Is it somewhat in line with my initial motivation to own the stock but also securing some profits along the way? I am not very well aware of the wording but is that "hedging"?
Cheers
Posted by lildarlin23
1 Comment
Yes, your general theories are correct. Though I would put very, very little thought to the third circumstance. You’re also forgetting the case that it ends between 100 and 105 in which case you still keep the $5 in total premium and have all your shares.