Investors are always looking for effective trading strategies to help them maximize returns while managing risk. Among the many trading techniques available, the Wheel Strategy offers a unique approach to trading. Although this strategy is often associated with stock options trading, its structured and systematic way of generating steady income makes it quite attractive to cryptocurrency traders.
Once traders master the core principles and implementation methods of the rolling strategy, they can expect to discover new opportunities for wealth growth and ways to add value to their portfolios.
Remember that the Roller Strategy was originally created for options trading. Many investors may think that options trading is complex, but the roller strategy simplifies the process. So, what is the core concept of this strategy?
The roller strategy, also known as the "covering strategy", is a strategy that uses option contracts to buy and sell stocks. The primary goal of this strategy is to earn premiums by selling options while also increasing income by buying or selling the underlying stock at a favorable price.
The roller strategy originated from the use of covered calls in options trading many years ago. Over time, traders have refined this strategy, introducing additional elements such as selling cash-secured puts to realize gains.
A put option gives the holder the right to sell an asset at an agreed price on or before the expiration date. Often used to hedge downside risk or predict asset price declines.
When the price of the underlying asset is lower than the strike price, put options become attractive because the trader can sell the asset at a higher price.
A call option gives the trader the right to purchase an asset at a specific price on or before the expiration date. Often used to predict asset price increases.
A call option becomes valuable if the asset price is higher than the strike price. Because traders can purchase the asset at a lower price.
This involves selling stocks you don’t mind owning at a predetermined price Or put options on cryptocurrencies. This predetermined price is called the execution price. Doing so collects the option premium up front and generates income from the stock immediately.
When you sell a put option, you commit to buying the stock at the strike price. In exchange for the obligation to purchase the stock, you will receive a premium or dividend.
After being assigned to stocks by selling put options, you can sell covered calls on those stocks. This includes selling call options on the stocks you own. If the stock rises above the call option's strike price, you can earn additional premium while limiting potential gains. Simply put, you make a profit when the strike price expires.
This strategy is based on the concept of buying low and selling high. You buy the stock at a discount (i.e., a cash-secured put) and then sell it at above market price (i.e., a covered call). The asset to apply this strategy should be in a bullish or sideways trend.
The most important component of the roller strategy is the strike price. The strike price, also known as the exercise price, is the predetermined price at which you can buy or sell an asset when you exercise an option.
For call options, the strike price is the price at which the holder must buy the underlying asset. For a put option, the strike price is the price at which the holder must sell the underlying asset.
The strike price is specified when an option contract is created and remains unchanged throughout the contract period or until expiration.
The roller strategy combines selling cash-secured puts and covered calls to generate income and potentially buy or sell the underlying stock or crypto asset at a favorable price. For every option contract you sell, you should be prepared and have enough funds to purchase 100 units or 100 shares of stock at the agreed-upon strike price. This ensures that you will be able to meet your obligations if the buyer exercises the option.
The following steps use ETH as an example to outline how the wheel strategy works. In these examples, prices and premiums are hypothetical.
Let’s say you are interested in buying ETH, and the price at the time of the trade is $4,000 per token. You decide to sell a cash-secured put option with a strike price of $3,500 and a maturity of 30 days.
The premium you receive for each option sold is fixed at $200 per token. On most cryptocurrency exchanges that offer options trading, when you place an order, the market will quote the premium you receive. There are two possible scenarios:
If the ETH price remains above $3,500 within 30 days after the expiration date, the put option will be lost value, you get to keep the premium ($200 per token).
You can then repeat the process by selling new cash-secured puts to generate additional income.
If the token price falls below $3500 at expiration, you will be assigned to purchase 100 at a strike price of $3500 per token units of ETH. However, remember that you sold the cash-secured put and collected the premium/profit. Therefore, you are ready to use the cash you set aside as collateral to purchase the token for $3,500. The premium you receive reduces your purchase price, mitigating downside risk.
Selling cash-secured puts is better suited for sideways or bullish market trends. If you are neutral or bullish on an asset, selling cash-secured puts may be your best bet. Otherwise, if the asset's price drops significantly, you must purchase the asset at the strike price at expiration while waiting for the asset's price to recover.
You can use a covered call option after you have been assigned to the underlying asset by executing a put option. This can be used in scenario two of selling cash-secured puts, which is when you are assigned to buy a cryptocurrency. In this case, let’s say you are allocated several ETH units purchased at $3,500 per coin. You decide to write a covered call option with a strike price of $4,000 and a maturity of 30 days, and the premium or profit you receive on each call sale is $300. There are two possible scenarios;
If the price of ETH is still below $4,000 on the expiration date, the call option will expire worthless , you get to keep the premium you collect ($300 per option). You can then repeat the process by writing new covered calls to generate additional income.
If the price of ETH rises by more than $4,000 at expiration, your assets will be recalled at an execution price of $4,000 per token. However, since you sold the covered call, you are ready to sell the token at $4,000, which is your target selling price.
The price you sell ETH increases due to the premium you receive, thus increasing your total return.
In this case, you are expecting ETH to maintain a neutral price. However, please note that if the asset's price rises significantly, you must sell at its recalled strike price.
Once you sell a cryptocurrency or stock at a predetermined price, you can start the process over again by selling a cash-secured put or covered call . You can reuse the wheel strategy on the same asset or on other assets.
Repeating these steps can help traders generate income from selling option premiums while potentially acquiring or disposing of the underlying asset at a favorable price, thus implementing the roller strategy.
When using the roller strategy, you must consider the factors that will affect the trading method while effectively reducing risks. Key factors include risk management, market conditions, stock selection and execution price.
A key component of roller strategies is understanding the capital requirements and risks involved at each stage of the process. Selling a cash-secured put requires maintaining sufficient cash reserves (or deposits) to purchase the underlying stock at the time of transfer.
When writing a covered call option, you need to hold the underlying stock. While this protects against declines, it limits potential gains if the share price rises significantly.
Assess current market trends, levels of volatility, and macroeconomic factors that may affect the performance of the underlying stock. You may also need to adjust your trading strategy to thrive in different market conditions, whether bullish, bearish, or sideways.
To find stocks suitable for implementing the roller strategy, a thorough fundamental and technical analysis should be conducted to determine these stock selections. Look for stocks with strong fundamentals, stable price trends, and ample liquidity. This will help you build confidence in the stock if you want to hold it for the long term.
How much profit this strategy can bring you depends on how well you choose the execution price. Your goal is to strike a balance between generating revenue and managing risk. A higher strike price provides a higher premium, but also carries greater risk. A lower strike price provides more downside protection, but also offers a lower premium. Your execution price may depend on the market outlook, expiration date, volatility levels, and revenue targets.
The roller strategy combines various elements of options trading and is designed to take advantage of market volatility while controlling risk. However, the success of the roller strategy depends on a thorough understanding of its core concepts, as well as consideration of factors such as appropriate execution price and selection of stable assets.
This strategy can be applied to traditional stock and cryptocurrency markets. Used appropriately, this strategy can open the door to long-term financial success.
Author: Bravo
Translator: Sonia
Article reviewer:Wayne, Matheus, Ashely
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