Consider Wheeling XOM Options for Income and Potential Share Acquisition

Subject: Analysis of "The Wheel" Strategy for a $500k Portfolio Aiming for VOO Accumulation

Observation: There's a lively discussion about using a $500,000 cash portfolio to implement "The Wheel" options strategy. The main goal is to gradually build a $500,000 position in VOO through daily dollar-cost averaging (DCA). The Wheel strategy is meant to generate extra income or potentially lower the effective purchase price of the underlying assets. While some participants are aiming for high annualized returns (like 25% from wheeling), others are more cautious, pointing out that such returns are often overly optimistic and come with significant risk and advanced skill requirements.

Key Assets & Strategies Discussed:

• Primary Target Asset for Holding: VOO (S&P 500 ETF).
• Assets Mentioned for "The Wheel" Strategy:
  • Broad Market ETFs:
    • SPY (S&P 500 ETF): Known for its superior options liquidity compared to VOO. The strategy involves selling cash-secured puts (CSPs) and, if assigned shares, selling covered calls (CCs).
    • SPX (S&P 500 Index): Noted for potential tax advantages on options. The strategy is similar, but SPX is cash-settled.
  • Individual Stocks:
    • XOM (ExxonMobil): Suggested for selling CSPs with strikes in the $95-$105 range. If assigned, proceed to sell CCs. This aligns with previous analyses highlighting XOM as a good candidate for wheeling due to its characteristics in the energy sector.
    • GME (GameStop): Often mentioned with a humorous or high-risk connotation. Wheeling GME could offer high premiums but comes with substantial volatility and risk.
    • WOLF (Wolfspeed, Inc.): Suggested for high-premium CSPs but also flagged as high-risk.
    • UNH (UnitedHealth Group): Noted for recent high implied volatility (IV) in its options, which can mean higher premiums but also implies higher perceived risk or expected price movement.
    • Top VOO Constituents: A general suggestion to wheel large, liquid stocks that are components of the VOO index.
    • QQQ (Nasdaq 100 ETF), GLD (Gold ETF): Mentioned in the context of a "Double Ferris Wheel" strategy to generate income and add shares.
• Alternative Options Strategy:
  • A strangle strategy on SPY (selling both a put and a call, typically 45 DTE and 1 standard deviation OTM) was also mentioned as a possibility.

Sentiment Analysis:

• VOO Accumulation: Generally bullish, with DCA seen as a sound method for long-term acquisition.
• "The Wheel" Strategy:
  • Positive: Viewed as a viable method for income generation and potentially acquiring desired stocks/ETFs at a lower net cost basis.
  • Cautious/Skeptical: Significant skepticism about consistently achieving high annualized returns (e.g., 25%+) solely through wheeling without taking on considerable risk or possessing advanced trading skills. The risk of underlying assets dropping below put strikes is acknowledged.
• Specific Assets for Wheeling:
  • SPY/SPX: Positive sentiment for options trading due to liquidity (SPY) and potential tax efficiency (SPX).
  • XOM: Considered a reasonable candidate for wheeling, particularly for investors comfortable with the energy sector's volatility and outlook.
  • GME/WOLF: Perceived as highly speculative and risky for a core wheeling strategy.

Investment Recommendation & Plan Outline:

For an investor with $500,000 cash aiming to build a VOO position via DCA while using "The Wheel," the strategy should be approached as a means to supplement income and potentially enhance the VOO accumulation, rather than relying on aggressive return targets from the Wheel itself.

1. Core Investment Plan: VOO Accumulation via DCA:

   • Maintain the primary strategy of dollar-cost averaging into VOO (e.g., $100/day or $2,200/month). This provides systematic market exposure and mitigates timing risk for the core VOO holding.

2. Supplementary Strategy: Implementing "The Wheel" for Income Generation:

   • Option A: Wheeling Broad Market ETFs (Recommended for Core Wheeling Activity):
     • Underlying: SPY is recommended due to its high options liquidity, closely tracking VOO. For investors in taxable accounts prioritizing tax efficiency, SPX options (Section 1256 contracts) could be considered, noting SPX is cash-settled (no share assignment).
     • Execution: Systematically sell cash-secured puts (CSPs) on SPY, typically 30-45 days to expiration (DTE), at strike prices where the investor would be comfortable acquiring SPY shares (e.g., slightly out-of-the-money).
     • Income Use: Use premiums received from CSPs (or CCs) to augment the VOO DCA purchases or to acquire additional VOO shares.
     • If Assigned SPY Shares: Sell covered calls (CCs) against the assigned SPY shares, ideally above the cost basis, to generate further income.
   • Option B: Wheeling Select Individual Stocks (Satellite Allocation):
     • Underlying: Consider allocating a smaller portion of the capital to wheeling specific, well-understood, liquid stocks like XOM (e.g., CSPs at $95-$105 strikes). Other VOO constituents that the investor is bullish on and comfortable owning long-term could also be candidates.
     • Risk Management: Individual stocks carry idiosyncratic risk. This portion of the wheeling strategy should be smaller than the ETF wheeling portion. Avoid highly speculative names like GME or WOLF for this strategy unless a very small, high-risk capital allocation is explicitly intended.

3. Key Considerations & Risk Management for "The Wheel":

   • Realistic Return Expectations: Aim for supplementary income from the Wheel strategy (e.g., an additional 3-8% annualized on the capital allocated to wheeling) rather than the highly optimistic 25% figure. Higher returns invariably mean higher risk.
   • Capital Allocation: Do not commit the entire $500,000 cash balance to securing puts. A prudent approach would be to allocate a portion (e.g., 25-50%) of the capital to the wheeling strategy, ensuring ample cash remains for the ongoing VOO DCA and to manage potential assignments without disrupting the core plan.
   • Understand the Risks: The value of the underlying asset can fall below the CSP strike price, leading to assignment of shares at a net cost basis that may be above the current market price. Selling CCs limits upside potential if the stock price rallies significantly.
   • Active Management: The Wheel is an active strategy requiring ongoing monitoring of positions, market conditions, and decisions on rolling or closing options.
   • Tax Implications: Be mindful of tax consequences, especially for short-term gains from options premiums. SPX options offer potentially more favorable tax treatment (60% long-term, 40% short-term capital gains) in the U.S.
   • Portfolio Diversification: If wheeling individual stocks, consider diversifying across a few different companies/sectors rather than concentrating heavily on one.

This approach balances the primary goal of VOO accumulation through DCA with the active income-generation potential of the Wheel strategy, grounded in realistic expectations and prudent risk management as suggested by the broader discussion.