This will be a really exciting article because we are talking about rescue missions, and I know that this has been on some of your minds, states Markus Heitkoetter of Rockwell Trading.
The Wheel Strategy is a great strategy. I love it. I’m trading it a lot because it has an incredibly high winning percentage. It’s all fun and games as long as it works, but sometimes trades get in trouble, especially after last week.
I’ve been in quite a few tech stocks this week, like Apple (AAPL), and some of them took a beating. Situations like this are where many traders don’t know how to fly a rescue mission and salvage a trade that is in trouble.
In this article, I want to show you the following three things:
- What is a rescue mission?
- How to fly a rescue mission
- When exactly should you do this?
The Wheel Strategy Overview
For those of you who might be new to The Wheel Strategy, let me first give you a brief overview of what it is and why I love trading it so much.
There are three steps to The Wheel Strategy.
Step Number One is you sell put options and you collect premium.
For Step Number Two it depends on where this stock is on expiration day, you may or may not get assigned. Meaning, if the stock is closing below your strike price on expiration day, you will own their shares if that is the case.
Then for Step Number Three, if you are assigned, you sell covered calls and collect more premium. If you’re not getting assigned, then you just go back to step number one and sell more puts.
The Wheel Strategy is an easy-to-understand strategy and it’s also very, very lucrative if done CORRECTLY. Now, here is the problem. The problem starts if you are assigned, and after assignment.
One problem that can come up is if you can’t get enough premium for the calls. For me, when I’m selling calls, I want to see at least 30% annualized, and if I don’t get at least 30% annualized, then I won’t do it.
Another thing to keep in mind is, you don’t want to sell below the assigned strike price.
What is a Rescue Mission?
So before asking the question, “Do I need to fly a rescue mission?” let’s first talk about what a rescue mission is.
Just so you know, “rescue mission” is not an official trading term. This is just what I named it for trades that are in trouble.
So here is how “rescue missions” work. You sell MORE put options below the assigned strike price. What is the advantage of this?
First of all, you collect more premium, and that’s what we are doing with this strategy, after all. This is a premium-generating strategy.
Here is the other advantage. If you are getting assigned, you lower your cost basis. So, let me explain to you exactly what that means.
Let’s use my position in Lordstown Motors Corp. (RIDE) as an example. I got assigned at the strike price of 21.50, and right now, it is trading at 16.50 (at the time of this writing on March 8, 2021).
A possible idea here is that we are selling more puts at 11.50 and we would collect more premium.
Now if we were to get assigned then we would own 100 shares at $21.50, and if we get assigned here, we will own another 100 shares at $11.50. This means that if we take the average of these two prices, $33, divided by 2, we have $16.50.
Our average price for our shares is now $16.50, which means we have lowered our so-called cost basis. Therefore, we are making it easier to get out of the trade because, in this case, RIDE would not have to go all the way up to $21.50 again, it would only need to go up to 16.50.
I recommend that you sell the same amount of puts that you have sold previously, or more if you have the buying power. But the most important thing here is for me at least to follow The Wheel Calculator.
This is a tool that I like to use to know exactly whether the expected reward is worth the risk. I want to make at least 30% annualized, and if I can’t then it would not make sense for me at all.
You see, it’s super easy. Now, the next question is when should you do this?
When Should You Fly a Rescue Mission?
When should you fly a rescue mission? First let’s talk about the concept and then I will show you some trades that I’m currently in.
It’s all fun and games if our trades are going our way and the markets want to give us money, but sometimes you have tough days and weeks. This is why I’m here for you, because I want to help you through these tough times by showing you what I personally do.
When should you fly a rescue mission? There are a few important things to remember.
First of all, you only do this if you can get enough premium for selling the calls. Think about it this way, you are already assigned, right?
You sell put options, you get assigned, and when you get assigned, you want to sell calls and collect more premium. So as long as you can get enough premium for the calls, don’t worry about it.
Here is another important thing. WAIT! Do NOT fly a rescue mission too early.
When you do this, you’re losing buying power. You need to “keep your powder dry.” When exactly do you do this?
Here is a rule of thumb that I like to do:
Only consider this if the stock went down at least 30% from your assigned price. Let’s look at my position with AAPL as an example.
AAPL is taking a beating today (March 8, 2021). The strike price that I was assigned was $133, and right now, AAPL is trading at around $117. It is only down 12%.
What does this mean? This means no rescue mission for AAPL just yet. Either wait until APPL bounces back a little bit, to make a move, or wait until AAPL is down at least 30%, otherwise, you’re doing it too early.
So let’s take a look at my trade with VanEck Vectors ETF (GDXJ). This is a trade where I got assigned at $48, and last week I was able to sell calls.
GDXJ is currently trading around $45 so right now we are down 9%. So this means for me also no rescue mission.
Remember to keep your powder dry. Don’t fly them too early. This is one of the biggest mistakes that traders do, yes, sometimes it sucks.
Another trade I want to look at is my trade with RIDE. I got assigned at $21.50 and right now we are down to $16.22. This is down a little bit more than 24%. At about 24% we don’t fly a rescue mission, but we can start thinking about it.
Let’s take a look at what’s happening with my account.
As you can see right now, AAPL is down $13,000, GDXJ down $6,600, & RIDE down about $25,000.
Now, keep in mind, this here is a $250,000 dollar cash account, $500,000 in buying power. I know that this looks ugly because it’s a larger account. But if you think about it, with AAPL down $13,000, based on the buying power, it’s down only about 2.6%.
So being down $25,000 overall based on the $500,000 account, it’s down about 5%. For me, it’s not a big deal. This is not really a huge amount for me, with a big account.
Now, I did enter Snap Inc. (SNAP) today, and SNAP right now is down. I’m a bit surprised that it kept plummeting, but we can talk about this in a little bit.
Just remember, you don’t want to fly rescue missions too early. This is the number one mistake that I see.
If you see that you’re down 5%, that should not freak you out, and if it does, then you may have made a mistake with the stock selection.
I talked about stock selection in the previous article.
Also, despite your best efforts, you can’t rescue every trade.
If you entered into a stupid trade, you’ve got to cut it loose or HODL, Hold On For Dear Life.
How to Fly a Rescue Mission
I want to show you some very specific examples of trades that were sent to me where people asked, “OK, so how do I rescue this?”
Let me show you the first trade here with ProShares Trust (TQQQ). This is where a trader got in right here at 104. The trade here was to sell the 104 put, and this is where I’m saying, “what the heck were you thinking?”
I mean, this is where they probably got a little bit too greedy and now, they are in a whole world of pain, and you know what? Rightfully so.
This will help you to avoid these mistakes next time.
What are we always talking about? Where should you sell puts? You should sell puts where you see some support.
Where do you see support right here? Well, I see some support at around 84. So support 84, and not at 104. If they had sold the 84 put instead of the 104 put, they would have been just fine.
Now, let me show you another trade for Workhorse Group Inc. (WKHS).
I heard from a trader who was sold the 38 put. This is where I say, “What the heck? Where on this chart do you see support?”
I don’t know about you, but I see way more support at around the 20 mark, and if you would have sold a 20 put on WKHS, you would have been just fine. This is where some traders get blinded by the premium that you can get, but don’t do this.
One of the key things is you’ve got to sell at major support and resistance.
5 Stocks NOT to Sell Puts On
These are five stocks that you should not sell puts on when trading The Wheel Strategy.
The first type of stock to not sell puts on is Reddit stocks.
Reddit stocks are stocks being hyped on Reddit like GameStop (GME), AMC Entertainment (AMC), BlackBerry (BB), & Bed Bath & Beyond (BBBY).
All of these are “Reddit stocks,” and if you have been trading these you’re probably in a world of pain.
This is where you probably can’t rescue every trade, and as I said earlier, all you can do here is to cut it loose and learn from your mistake or hold on for dear life.
You might be in this trade for a long, long time, and at some point, you might have to cut it loose anyhow, because honestly if you traded GME and if you sold puts, there’s not much you can do. You can’t rescue trades like this.
The next one is stocks with earnings before expiration. Don’t do this.
I mean, if you did it, you made a mistake. Learn from your mistake and you might have to take a loss here. The important thing is you’ve got to follow the rules. If you don’t follow the rules it’ll be really tough.
Stocks with a so-called Phase 3 clinical trial and this is especially pharmaceutical stocks, they can go crazy.
An example of this is Sarepta Therapeutics Inc. (SRPT). This was probably a stock where you thought you would be safe, but if you did a little bit of research, you saw that it had a clinical trial.
Results were due and it didn’t go well, as you can see. This stock plummeted from 170 to 90, and will this ever recover? I don’t know, but if they had a failed clinical trial, they might not.
They may recover a little bit, but you might have to cut it loose.
The next stock that you shouldn’t sell is crazy stocks. A stock that appeared on my scanner was Aphria Inc. (APHA).
If you look at the chart you see that this stock went from about $5 to $32. Don’t trade something like this. This is absolutely crazy.
Number five, stocks with premiums that are too good to be true, because if it is too good to be true, which would be the stocks above, then it usually is.
Summary
Yes, you can fly rescue missions, and they make sense, but you need to make sure that you don’t trade stupid stocks. It’s important that you don’t make these mistakes.
The other important thing is you need to have a plan before you sell puts.
I’ll give you a plan right now.
On March 8, 2021 I traded SNAP.
What I did with SNAP is that I traded a strike price of 49, this is where I already know when and where I will fly my rescue mission. As you can see, there is more support at 38, so this would be a possible level for a rescue mission.
Now, it doesn’t really qualify for my at least 30% down, but you get the idea, right? 34 is your 30% down level, and this is where we can start flying rescue missions.
My point is, I know where to fly rescue missions before I’m selling.
It’s super important that you have a plan before you sell puts. You have to know where the next support level is. The next support level is where you would fly a rescue mission.
Also, very important: Don’t panic and fly a rescue mission too early. You’ve got to keep your powder dry.
Based on my experience and the results that I want to achieve for myself, I am fine on any account. It doesn’t matter what I’m trading, whether I’m trading the PowerX Strategy, The Wheel Strategy, whatever I trade I’m fine with the drawdown of 20%. If I’m trying to make 30% per year, for me that is OK.
I was on track to make probably 50% or 60%. The risk is part of our deal as traders and the reward is always a function of the risk. The more risk you are willing to take, the higher the reward, the less risk, the less reward.
If this drawdown makes you uncomfortable, you may consider trading another trading strategy that has a lower drawdown, but therefore also a lower reward.
So this is where if you want to have a drawdown of 10% per year, 20%, five%, or if you don’t want to have a drawdown at all, consider putting it into a savings account, then you never have a drawdown.
Learn more about Markus Heitkoetter at Rockwell Trading.
