The Wheel is a well known strategy for selling naked puts and covered calls. It is called “picking up dimes in front of a steamroller”. The reason The Wheel is described as such lies in the fact that this strategy gains a lot of small winnings that are often only to be lost to one big loss.
(If you are able to read Dutch we have a free eBook that describes The Wheel strategy. To download this Dutch eBook, fill in the form below:)
The Bayesian model developed by Trading Behavior Management makes sure that this one big loss is avoided. This achieved by two strategies:
- Select the right stocks that make the probability of this one big loss extremely low.
- Select the right time to sell naked puts or covered calls.
Our results with this tool are:
| Dates | S&P 500 | Trading Behavior Management (as % of the capital requirements of the broker) |
| 1-5-2022 till 1-5-2023 | +1% | +30% |
| 1-5-2023 till 10-10-2023 | +5% | +18% |
The tool looks as follows:
The first four lines are the four indicators for the general market (S&P 500, DOW, Nasdaq and the DAX). A1 to A7 are stocks that have been selected by us, but which are anonymized in this picture. Tesla is added to give an example of a stock where the model shows that it is very unwise to use it for The Wheel.
The first column is called “Continue?” is the probability that the current wave in the day chart will continue. A simplified version of Elliott wave analysis used. As you can see: in this example the S&P 500 and the Nasdaq are likely to continue their wave #1 down, whereas the DOW and the DAX are less likely to continue their wave #1 down.
Whether a wave is continuing or not, is essential for timing the selling of naked puts and covered calls. The best moment to sell naked puts and covered calls is when a wave discontinues and a new wave is started. Rather than buy low and sell high, it is sell puts after a downturn and sell covered calls after an upturn.
The second column is called “Good stock?”. Based on a limited number of financial variables this Bayesian model calculates the probability that a stock is handy to use for The Wheel.
The final three columns are a simplified form of Elliott wave counting for day, week and month charts. These values are used to calculate the likelihood of the current day wave continuing. To be clear: Elliott wave counting is always 100% right. Unfortunately, this is due to the fact that Elliott waves can be renamed after the fact. So Elliott wave counting is made right, after the fact. That is why we don’t use Elliott wave counting for trading and only use wave counting to feed this Bayesian model (among other financial variables) to calculate the probability that a current wave continues or not.
When you want to know more about this tool, please contact us. Every so often we organize a meeting to explain The Wheel and demonstrate how the tool works. When you want to join us at this meeting, fill in the form below.
Logistical details:
- Date: see the form below.
- Time: see the form below.
- Venue: Breintraining coöperatie, Binderij 7-L, 1185 ZH Amstelveen
- Fee: free event.