The “Income Grid” Wheel Strategy

The Wheel Strategy is one of the most popular Option trading strategies amongst new traders and even veteran traders.

However, there is one big flaw in this strategy.

And that is when the market crashes.

When the market is always going up, it’s easy to be profitable using this strategy.

However, when the market started to crash in 2022, tons of people reached out to me telling me that they are stuck with their Long stock position.

That’s because the current price of the underlying stock has dropped significantly lower than the price they got assigned at.

And since their entry price is so far above where the current price is at, they aren’t able to sell Covered Calls.

So how do you prevent this from happening in the first place?

By using what I call The “Income Grid” Wheel Strategy.

The “Income Grid” Wheel Strategy

If you’re not familiar with how The Wheel Strategy works, here’s a diagram to illustrate it:

To execute The Wheel Strategy, there are just three simple steps.

Step 1: Start off by selling a Cash Secured Put. If it expires worthless, sell another Cash Secured Put until it gets assigned.

Step 2: Once you’re assigned on the Cash Secured Put and you’re now Long 100 shares, you then sell a Covered Call. Similarly, if your Covered Call expires worthless, sell another Covered Call until it gets assigned.

Step 3: Once you’re assigned on the Covered Call, your position is now flat. Go back to Step 1 to reinitiate The Wheel Strategy again.

That’s it.

Here’s a trade example to illustrate how this works.

The Traditional Wheel Strategy Trade Example

Let’s assume that we have $10,000 to trade The Wheel Strategy, and we will use AT&T as an example for this trade.

Let’s say we have identified $19.50 as a place where we want to sell our Cash Secured Put at.

Next, we want to identify how many Cash Secured Puts we will sell.

Because we have allocated $10,000 to trade this strategy on this stock, that means we’re able to sell 5 Cash Secured Puts:

$10,000 / ($19.50 x 100 shares) = 5.13

Now, let’s say after we sold the Cash Secured Puts, AT&T goes down and closes at $19.00 at expiration.

That would mean that we would now be Long 500 shares at $19.50.

The next step would be to sell Covered Calls.

And because we have 500 shares, we can sell 5 Covered Calls.

For this example, we will sell the 5 Covered Calls at the same strike where we were assigned on the Cash Secured Puts.

So we sell the 5 Covered Calls at $19.50.

And if the stock goes above $19.50 at expiration, we will have our shares called away and we can restart The Wheel Strategy again.

Now, this is the ideal situation.

But what if the stock doesn’t go up?

What if the stock kept going down after we got assigned on the shares?

As you can see in the chart above, if you had traded The Wheel Strategy on AT&T, you would now be stuck with your 500 shares.

Because the entry price is so far above the current price, selling a Covered Call at $19.50 would not yield any decent premium.

And if you’re considering selling an In-The-Money Covered Call, you may risk locking yourself in a loss if the stock rallies past your Covered Call and you’re unable to roll it.

At this point, you’re only left with three options:

• Option 1: Cut loss. This is something that many people dread because it would result in a big loss. So instead, most people do the next option.
• Option 2: Hold and wait till the stock comes back up. This is pretty much a hope-and-pray situation because if the stock never comes back up, then you’re pretty much holding it forever. I’ve had many people tell me they’re stuck in a stock where it has dropped more than 70% from its entry price.
• Option 3: If you have more capital and you’re 100% confident that the stock will go back up, then you can consider using the Stock Repair Strategy. But you have to be sure about the stock you chose because if you’re wrong and it continues going further down, you could lose even more money.

So what’s the solution to prevent such situations from happening when you’re trading The Wheel Strategy?

The solution is The “Income Grid” Wheel Strategy.

The “Income Grid” Wheel Strategy Trade Example

So what’s the difference between the traditional Wheel Strategy, and the “Income Grid” version?

The difference is that with the “Income Grid” version, we do not put all our eggs into one basket with our entries.

Using the same example above, that means we do not sell the five Cash Secured Puts at one strike price.

Instead, we split them up into five different levels.

These levels are what I call the “Income Grid” because each time the stock gets to any of these levels, you’re able to sell either a Cash Secured Put or Covered Call and collect a premium.

So using the same example, instead of selling five Cash Secured Puts at $19.50, we sell just one Cash Secured Put first.

This will be Level 1 of the Income Grid.

And since we can sell five Cash Secured Puts, we will have five “Income Grid” levels.

And if we were to place the Cash Secured Puts at a $2 interval apart from each other, it would be as follow:

• Level 1 – $19.50
• Level 2 – $17.50
• Level 3 – $15.50
• Level 4 – $13.50
• Level 5 – $11.50

This way, even if the market crashes, we’d still be able to collect premiums along the way.

Only once the price goes past our Level 1 Cash Secured Put, then we well Level 2 Cash Secured Put at $17.50.

Now, let’s say the price is in-between Levels 1 & 2 at expiration.

At this point, our Level 1 Cash Secured Put would be exercised and the Level 2 Cash Secured Put would have expired worthless.

So now we will be Long 100 shares at $19.50 and have no Cash Secured Puts on.

At this point, we can do two things:

• Sell a Covered Call at Level 1.
• Sell another Cash Secured Put at Level 2.

As you can see, we can keep selling either a Cash Secured Put or a Covered Call at either of the levels depending on where the price is at.

This way we can always keep collecting premiums without being in a position where we’d be stuck with shares and unable to do anything else.

And if the stock continues to drop, we can activate Level 3 by selling the Cash Secured Put with the strike price of $15.50.

So while we may not be able to sell a Covered Call at Level 1, we can always sell a Covered Call at Level 2 and sell a Cash Secured Put at Level 3.

And if the stock further drops in-between Levels 3 & 4, we can always sell Cash Secured Puts and Covered Calls at those levels until the stock comes back up.

This is certainly much better than putting all your eggs in one basket and selling all your Cash Secured Puts at Level 1, and then getting stuck with shares when the stock crashes.

As you can see in the chart above, AT&T dropped from around $22 to around $16.50.

If you did the traditional Wheel Strategy, you would be stuck in this position at Level 1 and not be able to sell a Covered Call until the stock goes up.

But with The “Income Grid” Wheel Strategy, you would be able to continually sell both the Cash Secured Puts and the Covered Calls, even as the stock tanked.

Furthermore, as the stock goes down and you get assigned on your Cash Secured Puts, you would be lowering the average entry price of your shares as well!

This makes it easier to get out of your shares because the stock doesn’t have to go up as much compared to if you did the traditional Wheel Strategy and got all your shares at Level 1.

The Traditional Wheel Strategy VS. The “Income Grid” Wheel Strategy

So you might be wondering, which is better?

Here are the pros of both strategies.

The Traditional Wheel Strategy:

• Higher profit if Cash Secured Puts expire worthless since all the Puts are sold at one level.
• Not as capital intensive as the “Income Grid” version because you only require one level. So you can only sell just one Cash Secured Put if you’re strapped for capital.
• Performs better when the stock is in an uptrend.
• Prioritizes profits so you make more when the Cash Secured Puts expire worthless.

The “Income Grid” Wheel Strategy:

• No need to time the market well you have more room for error with many “Income Grid” levels. Even if the stock goes far below Level 1, you still have other levels where you can sell Cash Secured Puts and Covered Calls on.
• Always able to sell premium even if the stock crashes.
• Performs better when the stock is in a downtrend. With The “Income Grid” Wheel Strategy, we want the stock to go down so this way it will activate all our levels. The more levels get activated, the more profit to be made.
• Is defensive by nature as this strategy prioritizes risk so you won’t be afraid even if the stock crashes.

Here are the cons of both strategies.

The Traditional Wheel Strategy:

• If you’re wrong on your entry and the stock crashes, you’d be stuck with your shares position for a long time.
• That means you won’t be able to sell any premium if the stock drops a lot.
• Bigger risk to the downside.

The “Income Grid” Wheel Strategy:

• Makes lesser profits if the stock goes up after selling Level 1 Cash Secured Put.
• More capital-intensive as there are several levels in the “Income Grid”.
• Less capital at work if the stock doesn’t drop to the last level. That means your returns will be lower because you will have idle cash in your trading account.

So which is better?

If you’re confident in your strike price selection and that the stock won’t crash past your strike price, then go with the traditional Wheel Strategy.

But if you’re worried that the stock might tank and you’re more risk averse, and you want to continually sell premium regardless of where the stock is trading, then go with The “Income Grid” Wheel Strategy.