Anyone here running the wheel options strategy?

F&O
1

The wheel strategy is quite popular in places like the US to generate a monthly income where you sell cash secured puts, and if assigned shares then do a covered call on those shares until it’s assigned and those shares are taken away. You collect a premium each time and then the whole process starts again.

Is there any hidden pitfalls other than the charges and margin required for covered call as described here.

The shortcomings are:

  1. 0.35% charges for physical settlement (0.25% brokerage + 0.1% STT).
  2. This is a big one, covered calls require 40% cash margin :exploding_head:

I have read elsewhere here on the forums that the cash margin for covered calls is for M2M losses. But Varsity says options doesn’t have M2M.

Regarding this I have two questions:

  1. Why does the RMS treat a covered call (using shares in DEMAT) as naked call until assignment? That makes no sense at all :face_with_monocle:
  2. If there is indeed some M2M type loss possible for the broker, why not remove the possibility to square off the short contract and make it mandatory to hold it till expiry? :thinking:

I would appreciate your thoughts on this, especially if you were/are running the wheel.
Thanks! :hugs:

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I run the wheel strategy, and I don’t understand why my position is treated as a naked call. They could simply block the shares in my account. After all, my liability is limited to delivering the shares equivalent to my position size at the agreed price.

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Apparently the FnO space in India is full of speculators, hence the 92% net loss reported by SEBI in 2024. No option provided by most brokers (haha, pun intended) to use options the smart way to generate cash flow.

I have researched into this, contacted many brokers and only found one domestic brokerage that does not require cash margin to run covered calls.

TastyTrade is an international broker that allows you run CSP and CC with their lowest level cash only accounts (no margin account provided for Indian users!)

According to domestic broker Shoonya’s support:


If client have same qty in holding and he is doing short sell for the same in option or future, then there are two cases.

    If POA is not linked, Margin requirement starts increasing one week before expiry for IN the Money contract and client have to maintain the cash accordingly.
    If POA is linked then there is no need to maintain cash as if the contract closed In the money it will settled with holding. he send the mail on support that he is holding a position for which he do have holdings as well.

Zerodha team should allow covered calls without cash margin and encourage responsible strategies to trade FnO. :slightly_smiling_face:

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