Running the Wheel options cycle means that sometimes you’re going to be forced to buy shares of a stock. You’ll then sell calls at or above your break-even price until eventually your shares are called away. What do you do if it seems like this will never happen? What do you do if the price of the stock continues to drop well below your original strike price?
This has happened to me in the past several times. The most recent case was with FUBO, a streaming cable TV company (that I have no affiliation with). Things started off (as usual) with a put that I sold in late February 2021. FUBO was around $43 and I sold the $39 strike put for $127 in premium. Unfortunately, FUBO dropped below my strike and at expiration I was forced to buy 100 shares at $39.
I started selling covered calls, but FUBO continued to drop. It was hovering around $30 when news of a hedge fund imploding caused the price to drop to the low 20s (apparently the hedge fund had to liquidate $3 billion in stock, much of which was tied up in TV-related stocks). What was I supposed to do now? My original strike price ($39) was offering zero premium for covered calls. I had three choices: sell covered calls further out in time (not 1 week expiration, but maybe 2-4 weeks would offer better premium); sell covered calls at lower strike prices (which would risk losing profit); or sell new puts to try to extract more premium and potentially dollar-cost-average down.
I ended up going with choice #3 because of how much FUBO had dropped. I figured at worst, I would get assigned (and forced to buy more shares) in the low 20s. This would result in my average buy price dropping from $39 to the low 30s. Call premiums at these lower strikes would surely be higher.
So for the next month and a half I “wheeled” two more puts on FUBO. I was assigned at $22 and even at $19. Importantly, I continued to earn premium each week with these new puts. And when I was assigned at the two strikes above, I sold covered calls at these lower strikes to collect more premium. Eventually these new covered calls were assigned (forced to sell my shares–exactly what I wanted). So I was left with my original 100 shares which I had bought at $39…except my break-even price had dropped so much due to all the premium I had been collecting. The figure below shows how my realized profit (essentially just the total premium for FUBO), unrealized profit (which depends on the share price of FUBO), and the Total profit (the sum of the realized + unrealized) changed over time.
You can see that after more than three months of negative profits, the combination of FUBO’s share price coming back a little (not even all the way to where it was before!) + the continued collection of premium finally brought my total profit above zero. And in June my shares were finally called away at $34, leaving me with a final profit of around $800.
This is a great example of why selling puts and calls is so powerful. As long as you are collecting premium every week, you are lowering your break-even price and giving yourself a better chance to come out profitable in the end. For a full list of all my FUBO trades, see below.