Hello again everyone and welcome back. I wasn’t able to go to church today because my football team was having an end of the season party. So, I had to listen to a sermon online and the message was about, NOT loving this world. In brief, it’s a difficult task because we serve a Savior that tells us to love everyone and it’s easy for us to just fall right in, loving everyone and everything. As investors or traders we’re particularly close to the sun on this topic. I’d say most of us are in this game for financial freedom and if/when we make it, where will our love be? On Jesus or on the financial rewards? I pray tonight we all recognize that one without the other is no reward at all.
With that, I talked a bit about trading SCHG in my previous post; My Top 10 ETF’s by Total Return. This got me thinking about the wheel strategy and my own personal experiences with it. I’ve had great trades, good trades, ok trades, and outright terrible trades. The more I thought about it, the more I was reminded that often just buying and holding shares performs substantially better. That of course led me to ask the question, why would I trade the wheel strategy at all?
Ultimately, I decided the wheel strategy underperforms…unless…there is an immediate need for income. In today’s post I’m going to discuss what I mean and why the wheel strategy may or may not make sense. Before I do, here is further discussion of what I’m sharing in this post from Reddit.com.
The Wheel Strategy vs Buy/Hold Investment
First, I’ve been trading the wheel strategy for years and generally speaking, it’s my most successful options strategy. However, it’s also burned me more than any other strategy. In terms of the amount of money lost. That led me to break out my Signature Series – Wheel Strategy Spreadsheet to back-test SCHG’s performance vs just buying and holding the shares. What I found was exactly what I’ve described above. The wheel strategy underperforms…unless there is an immediate need for cash.
Now, before I share the results its important to remember that I could have approached this in any number of ways. I could have rolled positions, closed losses, opened additional positions, etc. All of which could have impacted the figures below. However, for the test I wanted to keep it simple so I had clear data to share.
Wheel Strategy Approach
- Trade SCHD and SCHG only
- Only 1 put or 1 call open at a time per symbol
- No rolling or closing losses
- Must accept assignment or exercise
- Start January 10, 2025 – October 31, 2025
Buy/Hold Approach
- Buy 100 Shares of SCHG
- Buy 100 Shares of SCHD
- Start January 10, 2025 – October 31, 2025
Wheel Strategy vs Buy/Hold Results
| Description | Wheel Strategy | Buy/Hold |
|---|---|---|
| Total P/L | $352.08 | $536.82 |
| Percentage ROR | 6.4% | 9.8% |
| Total Cashflow (Dividends or Premiums) | $432.08 | $84 |
What we can see from these result is crystal clear but it depends on which direction you’re looking from. On one hand, just buying the shares would have yielded the highest return on investment. On the other, the wheel strategy generated an additional $432.08 in cashflow. Meaning, for the patient investor the wheel strategy is a waste of time. For the income investor, buy and hold would probably be viewed the same.
Therefore, my conclusion is, the wheel strategy underperforms…unless there is a need for the income being generated. In theory, selling shares from the buy/hold side if income were needed would be the better play. Though that may draw down potential returns to a point more in line with the wheel strategy returns. Regardless, in a bull market, buy/hold is the better choice.
Still, I wasn’t satisfied with this outcome, so I dug in a little further.
Bull Market vs Bear Market
Here is where the rubber meets the road. The wheel strategy dramatically outperformed just buying and holding if the market wasn’t moving higher. If SCHD or SCHG traded sideways or declined the wheel strategy dramatically outperformed. Let me explain.
You may have wondered why I included SCHD above when I hadn’t talked about that one in my previous post. Well, I included it to see what the return would be because I knew price had remained mostly flat this year. In fact, slightly lower as my return on the 100 share investment was -$38.65. Not a great investment from a buy/hold perspective. However, during this same period I was able to return $182.82 using the wheel strategy.
Additionally, I could have used that $182.82 to buy more shares and increase my dividend. Which would in turn increase my total return and compound ability.
Final Thoughts
Yes, the wheel strategy underperforms…unless; there is a need for immediate income, the market is flat, or the market is falling. In each scenario the wheel strategy would be preferred to just holding the shares. Still, if time isn’t an issue and you have the ability to wait for the market to grow, selling shares to generate capital would perform better. Additionally, you wouldn’t tie yourself to a particular strike price and would have more flexibility to buy or sell as prices change.
Admittedly, I didn’t love these results, because I’ve spent years trading the wheel strategy. Still, it’s nice to know what to expect going forward.
Until the next post.
God bless,
Jeff
