Most investors lose money not because they’re bad at trading—but because they’re trading in markets where they might not belong.

You’ve been introduced to the mechanics from the previous posts:

• the Wheel generates income,

• LEAPS provide convexity,

• stops protect capital.

• You also got a taste of position sizing, Greeks, and risk management.

But there’s a question we haven’t addressed: Which stocks deserve your capital?

This is where many options strategies often suffer. Traders apply technically sound methods to fundamentally bad selections. They wheel penny stocks because the premium looks juicy. They buy LEAPS on hype cycles because everyone’s talking about it. They chase momentum in sectors they don’t understand.

The Wheel + LEAPS barbell isn’t a substitute for conviction. It’s an amplifier of conviction. And conviction without edge is just expensive hope.

This post is about developing real edge—the kind that comes from years in an industry, not from reading headlines. The kind that lets you see what others miss. The kind that makes the difference between getting lucky once and compounding for decades.

You are either a contrarian, or you are a victim - Rick Rule

What Edge Actually Means

Edge isn’t simply:

• Reading more Bloomberg articles

• Following “experts” on Twitter

• Backtesting technical indicators

• Having strong opinions loudly

Edge is:

• Information asymmetry - You know something the market hasn’t priced in

• Analytical asymmetry - You interpret public information better than consensus

• Temporal asymmetry - You understand the timing of events before they’re obvious

• Structural asymmetry - You see how systems interact when others see isolated events

Real edge is uncomfortable. If your thesis feels obvious and everyone agrees, you don’t have edge—you have confirmation bias.

My Solar Industry Edge: A Case Study

I spent 10 years in the solar industry. Not reading about it—working in it. Factory visits in Globally including China, India, Korea, The USA, Europe and Southeast Asia. Conversations with CTOs and heads of R&D about roadmaps. Negotiations on manufacturing equipment and timelines. Witnessing the technology transitions from multi-crystalline to PERC to TOPCon, and ground zero for “Made in China 2025”

How did all that exposure affect the way I see the world around me? I’ll give a few examples below and perhaps you can use it as input as you build equivalent edge in your own domains.

Edge Type 1: Understanding How IP Really Develops

What mainstream thinks: “Company X has patents, therefore they have a moat.”

What I learned: IP development follows cultural and economic logic that differs drastically by geography.

Western companies (US/Europe):

• Pursue margin through differentiation

• Patent defensively and offensively

• License reluctantly, sue aggressively

• Innovation = proprietary technology you can wall off

Chinese companies:

• Pursue scale through process optimization (give beta product away for free just to get in the door. Then iterate like you will not believe possible)

• Patent to meet KPIs, not for enforcement

• Technology sharing within “guanxi” networks

• Innovation = manufacturability at impossible cost points at unbelievable scale. During this process, new IP (at scale for scale) is generated.

Real-world example:

Western solar companies spent billions developing high-efficiency cell architectures (SunPower, First Solar, QCells). They protected IP fiercely. Chinese manufacturers reverse-engineered the concepts, filed their own patents around the edges, and scaled production so aggressively that they made the technology commoditized within 3 years.

The Western companies kept their “moat.” They also went bankrupt or got acquired at distressed prices.

The insight: In sectors with fast manufacturing learning curves, IP protection means less than production scale and supply chain control. You don’t want to own the company with the best patents—you want to own the one that can deliver at $0.10/watt when competitors are at $0.15/watt.

Trading implication: When everyone was bullish on SunPower’s technology moat in 2015, insiders knew that Chinese manufacturers would close the gap and avoided the stock despite premium valuations. When First Solar pivoted to CdTe thin-film (genuinely differentiated tech with trade secret protection), astute investors paid attention—that was a real moat that the chinese were not (yet) trying to get across.

Edge Type 2: Culture as Competitive Advantage

The framework:

Different cultures optimize for different variables, and this creates structural advantages in different industries and innovation phases.

Western approach:

• Brand and margin focus

• First-mover advantage valued

• Innovation through disruption

• Tolerance for spectacular failures

• Capital rewards moonshots

Chinese approach:

• Market share and cashflow focus

• Fast-follower with scale advantages

• Innovation through iteration and manufacturing excellence

• Intolerance for public failure (massive failures are mitigated avoiding public fallout)

• Capital rewards execution and scale

How this plays out:

Tesla vs BYD (EVs):

• Tesla: Premium brand, software differentiation, FSD moonshot, 25%+ gross margins

• BYD: Volume play, vertical integration, battery tech, <15% margins but 5x Tesla’s unit sales. Software for free.

Both are “winning,” but they’re playing different games. Tesla captures consumer surplus in wealthy markets. BYD captures volume globally and has lower cost structure.

The question isn’t “who wins?”—it’s “which game are you betting on?”

Solar example:

US/European companies: Focused on residential rooftop (premium, branded, high touch) Chinese companies: Focused on utility-scale (commodity, volume, low touch)

When utility-scale became 90% of global capacity additions, Chinese manufacturers won by default. Their cultural wiring was aligned to the actual market structure.

Trading implication:

I avoid investing in US solar manufacturers since utility-scale has become dominant. I focus on Chinese manufacturers with supply chain control (polysilicon producers, wafer manufacturers) and where I have insights into their philosophy and culture.

Culture isn’t destiny, but it’s a massive tailwind or headwind depending on market structure.

Edge Type 3: Identifying Real Bottlenecks

This is where edge becomes extremely valuable—and where many investors ignore.

Markets assume substitution happens quickly once there’s demand. “Markets work”. Reality is far messier.

Solar bottleneck: Silver

Most investors know solar uses silver. Few understand:

• Silver paste in cells is ~4-12% of module cost depending on the silver price.

• Reduction efforts have been ongoing for a decade

• Substitutes (copper, aluminum) exist in theory, but have real life drawbacks.

• In practice, efficiency loss from substitution outweighs cost savings

• Manufacturing line retooling takes 18-24 months minimum

• Quality control challenges with new materials are severe

What this meant:

When solar installations were projected to grow 30% annually from 2020-2025, I could calculate that silver demand from solar would become a meaningful percentage of total silver supply. The market wasn’t pricing this in because “substitution will happen.”

I knew from conversations with technical insiders and from conferences: substitution is hard. The technical path exists, but implementation at scale with quality assurance? That’s years away, not quarters.

Trading implication:

If one bought LEAPS on silver miners (SILJ, individual producers) in 2020-2021 when silver was languishing, your would have done well. Not because of monetary theories or inflation—because you’s know industrial demand was structurally understated. When silver ran from $18 to $30+, the LEAPS paid multiples. As of writing, Silver is now close to $70 per oz.

This is edge: seeing a bottleneck others dismiss as “solved” when you know it isn’t.

AI bottleneck: Electricity, not chips

This is my current high-conviction edge thesis.

Mainstream narrative: “AI is constrained by chip supply. Once NVIDIA delivers more H100s/B200s, we’re good.”

What I see: AI datacenters require massive amounts of electricity—far more than previous datacenter generations, and we will want as many of them as possible. Inference at scale requires similarly enormous power.

The problem:

• US (and much of the western world’s) grid infrastructure is aged and capacity-constrained

• New power plants (gas, nuclear) take 5-10 years to permit and build

• Renewables are intermittent and don’t provide base load for 24/7 training runs

• Grid interconnection queues are 3-5 years long in many regions

What this means: Companies with access to cheap, reliable, base-load power have structural advantages. Chips matter, but power is the actual bottleneck.

Where to find this edge:

• Which countries/regions have excess power capacity?

• Which companies own or have contracts for dedicated power?

• Where is nuclear being built fastest?

• Is copper maybe needed for said grid upgrades?

• Which AI companies have vertically integrated power solutions?

Trading implication:

I’m long uranium (URNJ, URNM) and select power infrastructure plays (PAVE, COPX). I’m watching which AI companies announce dedicated power deals. When Microsoft or Google signs a 20-year contract with a nuclear plant, that’s a signal.

In 2-3 years or sooner, “AI power constraint” will be conventional wisdom. By then, the opportunity is priced in. Edge is seeing it now.

EV bottleneck: Geography-specific feasibility

Mainstream narrative: “EVs are the future globally.”

What I see: EVs work brilliantly in some geographies and are near-useless in others.

Where EVs make sense:

• Temperate climates (battery performance stable)

• High electricity grid reliability

• Dense urban areas with charging infrastructure

• High gasoline prices with cheaper electricity tariffs

• Government subsidies to offset upfront cost

Where EVs struggle:

• Extreme cold (Canada, Scandinavia, Russia—range drops 40%+)

• Unreliable grids (much of Africa, South Asia, Latin America and increasingly the Western world)

• Long-distance driving cultures (rural US, Australia)

• Low gasoline prices (Middle East, parts of US)

The edge:

EV adoption will be far more heterogeneous than bulls assume. Companies that understand regional differences will win. Companies that assume “one model fits all” will waste billions.

Example: BYD’s strategy of offering plug-in hybrids (PHEVs) alongside full EVs is smarter than Tesla’s EV-only approach for markets with unreliable charging infrastructure. Consumers in these markets get electric driving in cities and ICE range for long trips.

Trading implication:

I’m selective on EV exposure. I avoid pure-play EV companies with single-geography focus. I prefer companies with diversified powertrains (Toyota’s hybrid approach, BYD’s PHEV strategy) or battery/charging infrastructure plays (CATL, charging network operators).

Edge Type 4: Uranium—Questioning the Conventional Wisdom

Mainstream narrative: “Nuclear is expensive and takes forever to build. Renewables are cheaper.”

What I learned by asking questions mainstream doesn’t:

Question 1: Where does the “nuclear is expensive” data come from?

Mostly from US and Western European projects (Vogtle, Olkiluoto) that suffered massive cost overruns due to:

• Regulatory complexity (each plant is bespoke)

• Loss of manufacturing expertise (no plants built for 30+ years)

• Legal challenges and delays

• First-of-a-kind engineering risk

But look at:

• China: Building reactors for $2,000-3,000/kW in 5-6 years

• South Korea: $2,500-3,500/kW in 6-7 years

• Russia (pre-sanctions): Similar economics

• UAE (using Korean technology): On time, on budget

The insight: Nuclear isn’t inherently expensive. Western nuclear is expensive because of regulatory accretion and lack of manufacturing scale.

Question 2: Why is no one talking about the cost of intermittency?

Renewables look cheap when you compare $/MWh in isolation. But they produce power when nature decides, not when demand exists.

The hidden costs:

• Battery storage to bridge gaps ($200-400/MWh for 4-hour storage)

• Grid overbuilding (need 2-3x capacity for reliability)

• Gas peaker plants as backup (capital cost + fuel cost)

• Grid stability issues (frequency regulation, voltage control)

• Curtailment (throwing away excess power during high production)

When you add these costs, renewables aren’t obviously cheaper than nuclear for base load power.

Question 3: If renewables are so cheap, why are electricity prices rising in renewable-heavy grids?

• Germany: Highest electricity prices in Europe despite massive renewable buildout

• California: Grid instability despite 40%+ renewable penetration

• Texas: Grid failures during extreme weather despite wind/solar growth

The pattern: Societies that pursue intermittent power pay through:

• Higher electricity prices (directly)

• Lower industrial competitiveness (indirectly)

• Grid instability (hidden cost of economic disruption)

Trading implication:

Go long companies in jurisdictions with non-intermittent power:

If your thesis is that reliable, cheap power is a structural advantage for heavy industry, you want exposure to:

• Countries investing in nuclear (China, India, UAE, potentially US with SMRs)

• Industries that benefit from cheap power in these countries (aluminum smelting, data centers, semiconductor fabs)

• Avoid long-term industrial plays in Germany/California/similar if power costs are structural headwind

The uranium trade:

Everyone knows AI drives power demand. Fewer people have worked through:

• Global uranium supply deficit (mines take 7-10 years to ramp)

• Utilities signing long-term contracts at $70-90/lb (spot is ~$80-85/lb currently)

• New reactors in China, India, Eastern Europe coming online 2025-2030

• Western countries restarting nuclear programs (France, UK, US)

I’m long uranium miners (URNJ, NXE, DYL ) not because I “like nuclear”—but because I’ve done the work to understand the supply/demand mismatch that most investors dismiss with “but renewables are cheaper.”

This is edge.

The Four-Step Framework for Building Your Own Edge

You don’t need 10 years in an industry to develop edge. But you do need to go deeper than mainstream sources. Here’s the systematic approach:

Step 1: Choose Sectors Where You Have Interest + Access

Interest matters because:

• Edge takes years to develop

• You need intellectual curiosity to sustain research

• You’ll read 10,000 pages on the topic—make sure you care

Access matters because:

• Edge comes from information asymmetry

• You need exposure to industry insiders, not just journalists

• Primary research > secondary research always

How to find your sectors:

Ask yourself:

• What industries have I worked in?

• What sectors do my friends/family work in?

• What technologies am I genuinely curious about?

• Where do I have 1st or 2nd-degree connections to insiders?

Examples:

• You worked in healthcare → pharma, biotech, medical devices

• Your spouse is in logistics → shipping, freight, supply chain tech

• You’re obsessed with space → SpaceX, Rocket Lab, satellite internet

• Your friend runs a restaurant → food supply chains, agricultural commodities

Start with 2-3 sectors maximum. Edge requires depth, not breadth.

Step 2: Develop Information Asymmetry Through Primary Research.

Secondary research (necessary but insufficient):

• Industry reports

• Company filings (10-Ks, earnings calls)

• Sell-side analyst reports

• News articles and trade publications

Primary research (where edge actually develops):

• Factory visits (see operations firsthand)

• Conversations with industry insiders (CTOs, supply chain managers, engineers)

• Expert networks (GLG, AlphaSights, Tegus)

• Trade shows and conferences (where real operators talk)

• Customer/supplier interviews (understand the value chain)

My solar example:

I didn’t develop edge from reading Greentech Media or BloombergNEF . I developed edge from:

• Walking through cell manufacturing lines in Asia

• Asking insiders: “Why can’t you substitute silver faster?”

• Understanding why polysilicon producers had pricing power in 2020-2021

• Seeing which companies had vertically integrated supply chains

You can’t get this from Bloomberg.

Action steps:

1. Identify 5-10 people in your target sector: Engineers, operators, former executives, suppliers

2. Ask better questions: Not “Is the industry growing?” but “What’s the bottleneck nobody’s talking about?”

3. Visit physical operations if possible: A factory tour teaches you more than 100 earnings calls

4. Join industry associations/forums: Where operators actually discuss problems

Budget for this:

If you’re managing $500K+, spending $2,000-5,000/year on expert networks and research is trivially justified. One avoided mistake pays for it 10x over.

Step 3: Understand Cultural and Structural Dynamics

Every sector has implicit assumptions based on where the industry developed.

Questions to ask:

Cultural:

• Which geographies dominate this industry? Why?

• What cultural values drive their approach (margin vs scale, IP vs execution)?

• Is this a “US innovation + China manufacturing” industry or something else?

• How does regulation differ by geography, and who benefits?

Structural:

• What are the real bottlenecks (not the ones everyone talks about)?

• Where does the value accrue (upstream materials, midstream manufacturing, downstream brands)?

• How fast can supply adjust to demand shocks?

  Share

Step 4: Stick to Your Circle of Competence

The Warren Buffett principle:

“Know your circle of competence, and stay within it. The size of that circle is not very important; knowing its boundaries, however, is vital.”

In practice:

Do:

• Trade only sectors where you have genuine edge

• Be patient for opportunities within your sectors

• Build deeper expertise over time (edge compounds)

• Admit when you don’t understand something

Don’t:

• Chase hot sectors you don’t understand

• Assume you can develop edge quickly

• Trade based on headlines or momentum

• Delude yourself that reading Seeking Alpha = edge

My approach:

I have deep edge in:

• Solar (10 years in industry)

• Commodities and mining (macro understanding + supply chain knowledge)

• Chinese equities (language skills, business culture understanding, geopolitical analysis)

I have moderate edge in:

• Energy (oil/gas fundamentals, geopolitical implications)

• Semiconductors (supply chain dynamics, geopolitics)

• Uranium (research-based, but not insider knowledge)

I have no edge in:

• Biotech (can’t evaluate science)

• Most consumer brands (don’t understand marketing/brand value)

• Fintech (regulatory complexity beyond my knowledge)

I only run the Wheel + LEAPS on sectors where I have edge. I might miss opportunities in biotech or fintech, but I won’t blow up from ignorance.

Your job: Define your own circles explicitly. Write them down. Update them as you learn. And stay within them.

Red Flags: When You Don’t Have Edge

Be brutally honest with yourself. You don’t have edge if:

❌ Your thesis comes entirely from reading the same sources everyone else reads
❌ You can’t articulate a detailed bear case for your bull thesis
❌ You’ve never spoken to anyone who actually works in the industry
❌ Your conviction comes from “everyone’s talking about it”
❌ You can’t explain why the market is wrong and you’re right
❌ You’re trading based on price action, not fundamentals
❌ Your research is “I read some articles and it seems interesting”
❌ You don’t know the actual bottlenecks, lead times, or supply chain dynamics

If 3+ of these apply, you’re speculating, not investing with edge.

When to Admit You Don’t Have Edge—And What to Do Instead

It’s okay not to have edge in most sectors. The entire market doesn’t need to be your opportunity set.

If you lack edge in a sector but want exposure:

Option 1: Index/ETF exposure (Are you sure? Option 3 is recommended)

• Broad sector ETFs (XLE for energy, SMH for semis, GDXJ for junior miners)

• Run the Wheel on ETFs (less conviction needed, lower IV usually)

• Accept market returns instead of trying to beat the market where you’re not informed

Option 2: Proxy through a sector you DO understand

• Don’t understand biotech? But you understand healthcare economics? Trade UNH or CVS.

• Don’t understand AI chips? But you understand power? Trade uranium or utilities.

• Find adjacent exposures where your edge applies

Option 3: Don’t trade it

• Seriously. Just skip it.

• There will always be another opportunity in your circle of competence.

• Forced trades outside your edge are where you lose money.

Putting It Together: How Edge Integrates with the Barbell Strategy

Now you see how everything connects:

The Wheel: Apply to stocks where you have moderate-to-high edge

• You’re comfortable owning at the strike (you understand the business)

• You know what “cheap” looks like in the sector (valuation edge)

• You recognize when premiums are elevated (IV edge from sector knowledge)

LEAPS: Apply to sectors where you have high-conviction thesis AND edge

• You see a structural trend before the market (information asymmetry)

• You understand the timing and bottlenecks (analytical edge)

• You’ve done primary research to validate the thesis (work others won’t do)

Stop Losses: You know when your thesis is broken (not just price action)

• You understand fundamental deterioration vs noise

• You can distinguish “business broken” from “market overreacting”

• Your edge tells you when to exit vs when to add

Example: My Current Portfolio Structure

Wheel positions (70-80% of capital):

• Gold miners (GDX, GOLD) - I understand supply constraints and monetary dynamics

• Energy (XOM, CVX) - I understand oil/gas fundamentals and geopolitics

• Commodities ETFs (COPX, SILJ) - I understand supply/demand dynamics

LEAPS positions (10-15% of capital):

• Uranium (CCJ, URNM) - High conviction on supply deficit + AI power demand

• Chinese tech (BABA, PDD) - Mean reversion thesis + understanding of Chinese business culture

• Gold (GLD) - Monetary thesis + dedollarization trend

Cash reserve (10-15%):

• Waiting for opportunities within my circle

• Not chasing sectors I don’t understand

Notice what’s missing: Biotech, consumer discretionary, regional banks, most SaaS, healthcare (except through macro lenses). I don’t understand them well enough to deploy capital.

Your Action Plan: Building Edge Over the Next 12 Months

This isn’t fast. Edge takes time. Here’s the systematic approach:

Month 1-2: Define Your Circles

• List 5-7 sectors where you have existing interest or access

• Rank them by edge potential (access to insiders, relevance to your background)

• Choose 2-3 to focus on

• Write down explicitly: “I have edge in X because...”

Month 3-4: Immersion Phase

• Read 5-10 foundational books/reports per sector

• Subscribe to trade publications (not financial news—actual industry publications)

• Join industry forums, subreddits, LinkedIn groups

• Identify 10-15 key players (companies, technologies, supply chain nodes)

Month 5-6: Primary Research Begins

• Reach out to 5-10 industry contacts (2nd-degree connections are fine)

• Offer value: buy coffee, trade expertise, ask smart questions

• Attend one industry conference or trade show if possible

• Sign up for expert network (GLG, AlphaSights) and do 2-3 calls

Month 7-9: Thesis Development

• Write out 3-5 high-conviction theses in your sectors

• Articulate the bear case for each

• Identify what you’d need to see to invalidate thesis

• Map out bottlenecks, lead times, supply/demand imbalances

Month 10-12: Deployment & Iteration

• Start with small Wheel positions in 2-3 names you understand best

• Allocate 1-2% to LEAPS on your highest-conviction thesis

• Track your reasoning in a journal

• Monthly review: What did I learn? Where was I wrong?

This is a year-long process. But at the end, you’ll have genuine edge in 2-3 sectors—which is 2-3 more than most investors have in any sector.

The Long-Term Compounding of Edge

Edge isn’t static—it compounds.

Year 1: You understand the basics, avoid stupid mistakes
Year 3: You see patterns others miss, know who to call for answers
Year 5: You predict industry shifts before headlines, have information asymmetry
Year 10: You’re one of the handful of people who truly understands the sector

My solar edge took 10 years to fully develop. But year 3-4 was when it became valuable for trading. Year 7-8 was when I could see supply chain shifts before they appeared in earnings.

The beauty of edge: It’s path-dependent and hard to replicate. Someone can’t just “learn” your 10 years of factory visits and CTO relationships in 6 months of reading.

This is your moat as an investor.

Conclusion: Edge Is the Only Sustainable Alpha

The Wheel + LEAPS strategy is powerful. Position sizing is essential. Stop losses prevent catastrophic loss. But none of it matters if you’re trading in markets where you’re just guessing.

The harsh truth: Most retail investors have no edge in most sectors. They’re trading against professionals with information advantages, resources, and teams. It’s not a fair fight.

But you don’t need edge everywhere. You need it in 2-3 places. Build deep expertise in a few sectors, and you’ll have more alpha than trying to play 20 sectors with surface-level knowledge.

Your edge is the difference between:

• Trading on news (reactive, late, information already priced)

• Trading on thesis (proactive, early, information asymmetry)

Your edge is the difference between:

• Hoping your stops save you (risk management after the fact)

• Knowing when your thesis is broken (conviction about what to hold vs exit)

Your edge is the difference between:

• Running the Wheel on random high-IV stocks (hope-based income)

• Running the Wheel on quality names you’d genuinely own (conviction-based income)

Start today: Pick one sector. Go deeper than anyone you know. Do the work others won’t. Build edge that compounds.

Because in the long run, edge is the only thing that matters.

Share

Action Steps:

1. List your potential edge sectors (2-3 maximum, based on background/interest/access)

2. For each sector, write: “I might have edge because...” and “I would need to learn...”

3. Commit to 90 days of deep research in one sector: books, insiders, primary research

4. Set a budget: $500-2,000 for expert calls, conferences, or research services

5. Schedule quarterly reviews: Am I building edge or just consuming content?

Reflection Questions:

• Where do you currently have the strongest edge?

• What sectors do you trade where you have zero edge? (Be honest.)

• What would it take to develop genuine edge in a sector that excites you?

• Who could you reach out to this week to start building sector knowledge?

Remember: The Corolla runs on premium collection. The Lotus needs convexity. But both need you to drive them where you actually know the roads.

Otherwise, you’re just hoping not to crash.

Want guidance developing edge in your chosen sectors? The course includes 1-on-1 portfolio reviews where we identify your existing advantages and build a research plan to deepen them. Remember: edge isn’t taught—it’s built.

From previous posts, we have layered in the different aspects of constructing an anti-fragile portfolio. You’ve built the barbell: steady Wheel income1 on one side, asymmetric LEAPS on the other2. The strategy is sound. Right? Your position sizing is disciplined. You’ve chosen quality stocks you’d genuinely hold long-term.

Then the market does what markets do—it moves violently in a direction you didn’t expect:

Your cash-secured put gets assigned. The stock drops another 15%. Then another 10%. Your premium cushion evaporates. You’re now holding a position underwater, selling covered calls for pennies, wondering if you should “just hold” because “it’s a quality company” and “it’ll come back eventually.”

This is where most Wheel traders fail—not from bad stock selection, but from getting caught by surprise. Remember, process over prediction is what we are going for.

Enter the Stop Loss.

Stop losses aren’t about being right or wrong. They’re about staying solvent long enough to be right later. And when paired with LEAPS on the conviction layer, they create something powerful: a portfolio that’s protected on both sides—downside stops cut losses, upside convexity captures explosions.

You need both.

The Assignment Scenario: What Actually Happens

Let’s walk through the mechanics with a real example:

Setup:

• Stock: Exxon (XOM) trading at $115

• Action: Sell cash-secured put at $110 strike, collect $1.15 premium (1% weekly return)

• Simultaneously: Own or prepare to own 100 shares, sell $120 covered call for $1.05

Scenario 1: Stock stays above $110

• Put expires worthless

• Keep $115 premium

• Repeat next week

• This is the Corolla—steady, boring, profitable

Scenario 2: Stock drops to $108

• You’re assigned 100 shares at $110

• Effective cost basis: $110 - $1.15 = $108.85

• Current price: $108

• Paper loss: $85 (less than 1%)

• Your premium collected cushioned a $2 drop

Now you’re holding shares. You sell a covered call at $115 for $0.90. If called away, you profit. If not, you collect more premium and lower your cost basis further to $107.95.

This is the Wheel working as designed.

Scenario 3: Stock gaps down to $95. Yikes.

• You’re assigned at $110

• Effective cost basis: $108.85

• Current price: $95

• Loss: $1,385 per contract

• Premium collected reduced your loss by ~$115 (about 1% cushion on the assigned value)

Here’s the question: do you hold and “wheel your way out,” or do you cut the position?

The Cushion Effect: Premium as Your Safety Margin

One of the Wheel’s under appreciated benefits is that premium collection reduces your effective loss on any drawdown.

Without premium collection:

• Buy XOM at $115

• Stock drops to $95

• Loss: $2,000 (17.4%)

With Wheel strategy:

• Sell put at $110, collect $1.15

• Assigned at $110, effective basis $108.85

• Stock drops to $95

• Loss: $1,385 (12.7% on assigned value, 12.0% on original capital at risk)

• Premium reduced loss by 4.8 percentage points

If you had been running the Wheel for 4 weeks before assignment:

• Collected $1.15 × 4 = $4.60 in premium

• Effective cost basis: $110 - $4.60 = $105.40

• Loss at $95: $1,040 (9.5% vs 17.4% for buy-and-hold)

• Premium collection cut your loss nearly in half

This cushion is real, but it’s not infinite. The longer you collect premium before assignment, the bigger your buffer. But once assigned and falling, that cushion erodes quickly.

This is why stop losses matter—premium can’t save you from structural collapse.

The Critical Question: When to Stop Out

Most Wheel traders make one of two mistakes:

Mistake 1: No stops at all “I chose quality stocks. I’ll just hold and wheel my way back.”

This works until it doesn’t. Ask anyone who wheeled their way through:

• BP after Deepwater Horizon (dropped 55%, took years to recover)

• Banks in 2008 (many never recovered)

• Energy stocks in 2020 (XOM dropped from $71 to $31 in weeks)

• Any company whose business model breaks (Kodak, Blockbuster, etc.)

Premium collection on the way down feels productive, but you’re collecting nickels while the elevator drops floors.

Mistake 2: Stops too tight “I’ll stop out at -5% to protect capital.”

This turns you into a perpetual loss-taker. Quality stocks that have higher IV routinely pull back 10-15% in normal volatility. You’ll stop out, watch it recover, re-enter higher, stop out again on the next dip. Death by a thousand cuts.

The Solution: Conviction-Based Stops

Here’s my framework:

Rule 1: Set stops at the point where your thesis breaks, not arbitrary percentages

For XOM at $115:

• Technical stop: $110 (4.3% below entry)

  • This is meaningful support

  • Below this, the next support is much lower

  • If I’m running the Wheel selling $110 puts, I’ve already said “I’m happy to own at $110”

• Fundamental stop: Depends on why you hold it

  • Is XOM’s value proposition intact at $110? At $95? At $80?

  • If oil stays above $70/barrel, XOM generates massive free cash flow even at $95

  • If oil collapses to $40 and stays there, the business model changes

The stop should reflect: “Below this price, either my thesis is wrong or the market is offering me a better opportunity elsewhere.”

Rule 2: Coordinate stops with your covered call strikes

If you’re assigned XOM at $110 and you immediately sell a $120 covered call:

• Your upside is capped at $120 (9.1% gain from assignment)

• Your stop should be roughly symmetric: $100-105 (4.5-9.1% loss from assignment)

• You’re defining a range: collect premium between $100 and $120

This creates a bounded position: limited upside (by design), limited downside (by discipline).

Practical implementation:

• Stock assigned at $110

• Sell $120 covered call (8.7% OTM) for $0.90-1.20

• Set stop loss at $105-107 (2.7-4.5% below assignment)

• If stopped out: Loss = $300-500 per contract

• If called away: Gain = $1,000-1,200 per contract

You’re risking $300-500 to make $1,000-1,200. That’s asymmetry in your favor.

Rule 3: Widen stops for higher conviction positions

Not all stocks deserve the same stop discipline.

High conviction positions (your edge):

• Stocks in sectors you know intimately

• Companies where you understand competitive moats

→ Wider stops: -10 to -15%

You have edge. You know the business. You can tolerate more volatility because your information advantage gives you conviction through drawdowns.

Standard Wheel positions:

• Quality names you’re happy to own

• No particular edge, just sound fundamentals

• Diversified across 8-10 positions

→ Tighter stops: -5 to -8%

You’re running a mechanical strategy. No heroics. If it drops meaningfully, exit and redeploy to the next setup.

Example:

I worked in solar for 10 years. I know (better than most) about the supply chains, the bottlenecks, the CTOs, the technology roadmaps. If I’m wheeling First Solar (FSLR) and it drops 12% on macro fear while the fundamentals are intact according to my understanding, I hold—I have an edge.

If I’m wheeling Procter & Gamble (PG) and it drops 8% on consumer weakness, I stop out—I have no edge, and there are always other opportunities.

The Coordination: Running Stops While Calls Are Active

Here’s where it gets slightly complex: you’re holding shares with a stop loss AND you’ve sold a covered call against them.

Scenario: XOM assigned at $110, sold $120 call

If stock rises to $120:

• Shares called away

• You exit at max profit

• No stop needed—the call is your automatic exit

If stock drops to your stop at $105:

• You need to close both positions simultaneously or you end up swimming naked.

• Sell shares at $105 (trigger stop)

• Buy back the $120 call (now cheaper since stock dropped). If this is not closed, you risk unlimited downside if the stock moons.

• Net result: Small loss on shares, small gain on call buyback

  

The mechanical process:

1. Set stop loss as GTC (Good Till Canceled) order at your predetermined level

2. If stop triggers:

   • Shares sell automatically at stop price

   • Immediately buy back the short call (market order)

   • Net P&L = (Stop price - Assignment price) + (Call premium collected - Call buyback cost)

Example math:

• Assigned at $110, sold $120 call for $1.20

• Stop triggers at $105

• Buy back $120 call for $0.30 (stock dropped, call is now worth much less)

P&L:

• Share loss: -$500

• Call gain: +$90 (collected $120, bought back for $30)

• Net loss: -$410 per contract

Without the stop, if the stock continued to $95, your loss would be $1,500 minus whatever call premium you could collect on the way down at lower strikes. The stop saved you ~$1,000+ per contract.

When NOT to Stop Out: The Conviction Override

There’s a critical exception to stop-loss discipline: when you have edge and the thesis is intact.

Signs your stop should be overridden:

1. Business fundamentals haven’t changed

   • Earnings solid, free cash flow intact

   • Competitive position unchanged

   • Management executing well

2. The drop is macro/sentiment driven

   • Sector rotation

   • Fed policy fears

   • Short-term headline risk

3. You have domain expertise

   • You understand the industry better than the market

   • You’ve done primary research (factory visits, channel checks, supplier calls)

   • You see what others don’t

4. The price makes the company MORE attractive

   • If you liked XOM at $115, do you love it at $95?

   • Are you buying more, or are you scared?

   • Fear = exit. Excitement = hold and possibly add.

   

My Exxon example:

XOM drops from $115 to $95 because oil pulls back from $85 to $70.

What I check:

• Is oil collapse temporary or structural?

• Is XOM’s breakeven still around $40/barrel? (Yes)

• Is the dividend safe? (Yes at $70 oil)

• Am I getting better value at $95 than $115? (Obviously)

Decision: Hold, possibly add at $95 with new CSPs.

But if oil collapses to $40 and stays there, or if renewable transition accelerates and oil demand is structurally impaired, or if XOM’s reserves are being written down—then the thesis is broken. Stop out and move on.

Subscribe now

Part 2: The Asymmetry: LEAPS as Upside Stop Loss

Here’s where the barbell structure reveals its genius: stop losses protect your downside, but what protects your upside?

The problem with covered calls:

You’re assigned XOM at $110. You sell the $120 call. Stock explodes to $140 on geopolitical oil shock.

Without LEAPS:

• You’re called away at $120

• You made $10 per share ($1,000 per contract)

• You missed the move from $120 to $140 ($2,000 per contract)

• Capped upside feels like a loss when you’re right

With LEAPS in the portfolio:

Remember, you’re also holding:

• 1-2% of portfolio in XOM or energy sector LEAPS (maybe XLE or OXY calls)

• Strikes at 20-30% OTM

• 18-24 months to expiration

When XOM gaps from $115 to $140 (22% move):

Your Wheel position: Called away at $120, profit capped

• Made $1,000 per contract on assigned shares

Your LEAPS position: (Let’s say 1% of portfolio = $1,000 in XLE $50 calls when XLE was at $42)

• XLE moves to $55 (31% move, tracking oil spike)

• $50 calls now worth ~$6-7 (from ~$2.50)

• Your $1,000 LEAPS position → $2,400-2,800 (140-180% gain)

Net result:

• Wheel profit: $1,000 (capped but collected)

• LEAPS profit: $1,400-1,800 (uncapped, explosive)

• Total: $2,400-2,800 vs the $3,000 you’d have made holding shares uncovered

You didn’t get 100% of the move, but you got 80-93% of it while having:

• Collected premium the whole way

• Limited downside with stops

• Defined risk in LEAPS (could only lose the $1,000 allocated)

This is the upside gap protection.

The LEAPS act as an inverse stop loss—instead of preventing losses below a price, they capture explosive gains above a price. Your Wheel position can be capped at $120, but your LEAPS keep running to $140, $160, $200.

Feeling the Balance: A Complete Example

Let me show you how this all works together in a realistic scenario:

Portfolio: $100,000

• $95,000 in Wheel base (10 positions at ~$9,500 each)

• $5,000 in LEAPS (5 positions at $1,000 each)

Position: Exxon Wheel

• Entry: XOM at $115

• Week 1-3: Sell $110 CSPs, collect $1.15/week × 3 = $3.45

• Week 4: Assigned at $110, effective basis $106.55

• Sell $120 covered call for $1.20

• Stop loss set at $104 (worst case: -$255 loss from basis)

Position: Energy LEAPS

• XLE at $42

• Buy $50 calls (19% OTM) for $2.50, 18 months out

• Position size: $2,500 (2.5% of portfolio. High conviction)

• Max loss: $2,500

Scenario A: Market sells off, XOM drops to $95

Wheel:

• Stop triggers at $104

• Net loss after buyback of call: ~$350

• Loss: 0.35% of total portfolio

LEAPS:

• XLE drops to $38 (10% drop)

• Calls worth ~$1.20 (down 52%)

• Paper loss: approx $1,300

• Total portfolio loss: 1.3.%

You lost money, but you lived to fight another day. The combination of stops and defined-risk LEAPS kept damage minimal. To keep losses minimal, consider getting into LEAPS that are less than 1.5% of total portfolio value.

Scenario B: Oil spikes, XOM surges to $145

Wheel:

• Called away at $120

• Profit: $120 - $106.55 + $1.20 = $14.65 per share = $1,465

• Return: 13.75% on capital deployed

LEAPS:

• XLE surges to $58 (38% move)

• $50 calls worth ~$9-10 (from $2.50)

• Profit: $6,500-7,500 (650-750% return)

Total profit: $7,965-8,965 (7.97-8.97% of total portfolio)

You captured the move despite being capped on the Wheel position.

Scenario C: Slow grind up, XOM moves from $110 to $125 over 6 months

Wheel:

• Called away at $120 in month 3

• Profit: $1,465

• Repeat with new CSPs at higher strikes

• Collect another 12 weeks of premium = ~$1,200-1,500

• Total: $2,665-2,965

LEAPS:

• XLE grinds to $53

• Calls reach breakeven, slight profit

• Roll out and up to $55 strikes to extend runway

• Small gain or scratch, but preserved capital

Total: ~$2,700-3,000 (2.7-3% portfolio gain over 6 months)

The Wheel did its job: consistent premium in a grinding market. Corolla. Do this often enough and you might get a Land Cruiser :)

Business Model Risk: When to Exit Permanently

Stop losses handle price volatility. But some drops aren’t volatility—they’re permanent capital destruction.

Red flags for permanent exit:

1. Competitive moat eroded

   • Blockbuster vs Netflix

   • Kodak vs digital cameras

   • Traditional auto vs Tesla/Chinese EVs

2. Structural demand collapse

   • Coal in renewable transition

   • Traditional retail vs e-commerce

   • Legacy media vs streaming

3. Management/governance breakdown

   • Serial earnings misses

   • Executive departures

   • Accounting irregularities

Example: Energy transition risk

I’m bullish on oil in the 2020s due to underinvestment and geopolitical shifts. But I’m watching for:

• Faster-than-expected EV adoption

• Battery technology breakthroughs

• Policy changes that strand oil assets

If those materialize, I don’t care what XOM trades at. I exit the thesis entirely and redeploy to where secular winds are favorable.

The mental model: Stop losses protect you from being wrong on price. Thesis exits protect you from being wrong on fundamentals.

Position Management Rules: Your Checklist

Here’s the systematic approach:

Weekly:

• Review assigned positions against stop levels

• Check if covered call strikes need adjustment

• Confirm thesis hasn’t changed (earnings, news, sector developments)

Monthly:

• Evaluate if premiums collected justify holding assigned positions

• Consider taking profits on winning LEAPS (50% off at 2x gains or roll them out)

• Rebalance if LEAPS have grown beyond 25% of portfolio. For example, I bought gold physical ETFs when my GLD LEAPS went vertical.

Quarterly:

• Deep review of each Wheel position thesis

• Ask: “If I didn’t own this, would I buy it today at this price?”

• If answer is no, exit regardless of stop level

• Review correlation between Wheel positions and LEAPS to ensure balance

Annually:

• Audit full portfolio for concentration risk

• Review which stops were hit and why (learn from patterns)

• Adjust stop-loss percentages based on market regime (tighter in high volatility, wider in low volatility)

Putting It All Together: The Balanced Portfolio

The beauty of the complete strategy is how each piece protects against the failure mode of the others:

Wheel income: Protects against LEAPS going to zero LEAPS convexity: Protects against Wheel capping gains Stop losses: Protect against thesis-breaking drawdowns Premium cushion: Protects against normal volatility Position sizing: Protects against single-position blowup

When XOM drops 15%, your stops cut the loss and premium softened the fall. When XOM surges 30%, your LEAPS capture it even though shares were called away. When XOM grinds sideways, your Wheel collects 1-2% weekly like clockwork.

You’re not trying to predict which scenario happens. You’re positioned for all three.

Conclusion: The Art of Losing Small

Risk management isn’t sexy. Stop losses don’t make for exciting dinner party stories. Nobody brags about the trade they cut at -5%.

But the traders still standing after 20 years? They all have stop-loss discipline.

The Wheel strategy generates income. LEAPS provide convexity. But stops—stops keep you alive when you’re wrong. And in markets, being wrong is inevitable. Being catastrophically wrong is optional.

Your edge isn’t in never getting assigned. It’s in knowing exactly what to do when you are.

Your action steps:

1. For every current Wheel position, define your stop level today

   • Write it down

   • Set the GTC order

   • Don’t adjust it emotionally

2. For every new CSP you sell, decide before entry:

   • What’s the stop level if assigned?

   • What’s the call strike you’ll sell?

   • What’s the thesis that would make you exit entirely?

3. Review your LEAPS positions:

   • Are they sized to lose without destroying your base?

   • Do they correlate with Wheel positions to capture upside gaps?

   • Do you have a plan to take profits at 2x, 3x gains?

4. Backtest your emotions:

   • If XOM drops to $95 tomorrow, will you actually follow your stop?

   • If it surges to $140, will you be okay being capped?

   • If your LEAPS expire worthless, can you still sleep?

If the answer to any of these is no, your position size is too large.

Remember: The Corolla gets you there safely. The Lotus adds speed when conditions are right. But the brakes—the brakes keep you from driving off a cliff.

Use them.

Here is a beginner rider (yours truly) practicing emergency braking in an empty carpark. Stopping well reduces the chance of catastrophic losses :)

Conclusion

The 8 Commandments of the Wheel-with-LEAPS Barbell

1. Premium cushions but doesn’t protect you. Stops do.

2. Stops should reflect thesis breaks, not percentages.

3. Stops must coordinate with covered call strikes.

4. You must close the short call if the stop hits.

5. Conviction earns wider stops; normal names earn tight ones.

6. LEAPS capture upside your covered calls cap.

7. LEAPS must be sized small (≤1.5–2%) so a wipeout doesn’t hurt you.

8. Your job isn’t avoiding losses — it’s avoiding large losses.

Disclaimer

This publication is for educational purposes only and does not constitute financial, investment, or trading advice. Views are personal and may change without notice. Options and derivatives involve substantial risk and are not suitable for all investors; you can lose the entire amount invested. Past performance is not indicative of future results. Conduct your own research and consider consulting a licensed financial professional before making decisions. I may hold positions in securities mentioned.

Want to practice stop-loss scenarios before real capital is at risk? Subscribe to the course for interactive simulations of assignment, stops, and portfolio management under stress. The goal isn’t theory—it’s muscle memory for when markets move against you.

You’re mastering the Wheel—selling premium month after month or week after week, lowering cost bases, collecting time decay like rent. Your portfolio grinds upward with the reliability of a Toyota Corolla. But what about that Lotus? It still calls to us no matter how responsible we might be.

The wheel is great at smoothing portfolio volatility with income, but what happens when you’re right about a major trend? What if you correctly identify the next bull market in energy1, the remonetization of gold, or China’s reemergence —but your strategy caps your upside at 1-3% monthly premium?

You need convexity. But you also need to avoid blowing up your account chasing it.

Enter LEAPS: Long-term Equity Anticipation Securities. These are simply options with 9+ months until expiration, but their strategic role is more profound than they sound. For me, LEAPS have transformed the Wheel from a cash-flow grinder into a barbell strategy: steady premium income on one side, asymmetric upside on the other.

So how do we do it? How can we grow by LEAPS—with strictly defined bounds.

Disclaimer: This is educational content, not investment advice. Options involve risk; losses can exceed premiums paid when using spreads or complex strategies.

The Problem with Unlimited Conviction

Most traders lose money in one of two ways:

Path 1: The Premium Seller’s Ceiling You run a perfect Wheel for three years. Every month, like clockwork, you collect 1.5-2.5% returns. Compounding works beautifully—until a macro shift happens. Gold doubles. Your uranium thesis plays out. Chinese tech rips 150%. You made your premium, but you capped all your gains at strikes that got called away early.

You were right. You just didn’t have the position structure to capitalize. Trust me when I say, that hurts. A bull market kicks everyone off their back, even those on the Wheel Strategy.

See below for a concrete example:

Path 2: The Directional Trader’s Crater You’re convinced about a trend, so you lever up: concentrated stock positions, margin, maybe weekly calls for “efficiency.” The thesis is sound. The timing isn’t. A 30% drawdown wipes you out before the trend even starts. Or worse—you’re right on direction but wrong on timing, and time decay or volatility crush kills you anyway.

You were right. You just didn’t have the risk management to survive. Again, look at the gold chart above. While it was happening, a drop from $2100 to $1600 in less than a year can really test one’s resolve.

The barbell solves both problems.

The Barbell Structure: Antifragility in Practice

Think of your portfolio in two distinct sleeves:

Sleeve 1: The Base (90-95% of capital)

• Running the Wheel on quality names

• Cash-secured puts and covered calls

• Collecting premium, lowering cost bases

• The Corolla: steady, predictable, income-generating

• Maximum risk: assignment and holding through drawdown (which you’re fine with because you chose quality)

Sleeve 2: The Convexity Layer (5-10% of capital)

• Long-dated calls (LEAPS) on high-conviction themes

• Defined risk: you can only lose what you pay

• Asymmetric payoff: potential 2x, 5x, 10x+ returns

• The Lotus: exciting, explosive, but with strict capital bounds

The beauty? The base funds the convexity layer. Your wheel premium becomes the capital you allocate to LEAPS. If every LEAP goes to zero, your base strategy keeps grinding. But when you’re right, the LEAPS can multiply your portfolio several times over.

This is Nassim Taleb’s barbell strategy applied to options: maximum safety plus maximum opportunity, with nothing in the middle.

See above for some data on a portfolio that implemented LEAPS with the wheel beginning in June 2023. Drawdowns were reduced (Income is a good pillow), and LEAPS allowed for large portfolio value increases.

Subscribe now

Why LEAPS Specifically?

Good question. I mean, why not just buy shares in your high-conviction ideas? Why use options at all?

Because LEAPS give you leverage without the margin risk.

Consider two scenarios:

You’re bullish on Uranium mining. You have $10,000 to deploy.

Option A: Buy shares

• $10,000 buys ~140 shares of CCJ at $70

• If CCJ doubles to $140, you make $10,000 (100% return)

• If you’re wrong and CCJ drops 50% to $35, you lose $5,000 (50% loss)

Option B: Buy LEAPS

• $10,000 buys ~25 contracts of CCJ $80 calls expiring in 18 months at $4.00 per contract ($400 per contract × 25 contracts = $10,000)

• If CCJ doubles to $140, your calls are worth at least $60 each = $150,000 (1,400% return)

• If you’re wrong and CCJ drops or stays flat, your maximum loss is still $10,000 (100% loss of that position)

Notice the asymmetry: with shares, you risk 50% to make 100%. With LEAPS, you risk 100% of a defined amount to make 500%+ returns. The second structure has convexity—and crucially, your maximum loss is capped at exactly what you chose to allocate.

The key insight: LEAPS can only hurt you as much as you let them. Shares plus margin can wipe you out.

How to Select LEAPS: The 4-Filter System

Not all LEAPS are created equal. Here’s my framework for choosing positions that balance conviction with survivability:

Filter 1: High-Conviction Macro Themes

Only buy LEAPS on trends you’d bet your reputation on. This isn’t for hunches. Examples:

• Gold remonetization amid dedollarization (GDX, GDXJ, GLD, SILJ)

• Uranium supply deficit meeting AI data center demand (URA, CCJ, URNM, U.UN)

• Chinese equities mean reversion after multi-year compression (KWEB, FXI, 9998.HK, 3067.HK)

• Bitcoin as digital gold in sovereign debt crisis (BTC, IBIT)

If you can’t write a three-paragraph bear case and still believe in the bull case, don’t use LEAPS.

Filter 2: Time Horizon (12-24 months minimum)

The further out, the more time you buy for your thesis to play out. My preference:

Sweet spot: 18-24 months

• Survives multiple volatility cycles

• Less daily theta bleeding than shorter options

• Still has enough liquidity for exits

• Captures full cycle moves (not just momentum bursts)

Avoid 6-9 month LEAPS unless you have edge on timing. Remember: you’re using these for structural trends, not quarterly earnings.

Filter 3: Strike Selection (20-40% OTM)

This is where discipline matters.

OTM (50%+): Cheap, lottery ticket behavior. Low probability, usually expires worthless even if you’re directionally right but magnitude is off. Only go this far out if you have an extreme edge.

ATM or ITM: Expensive, high Delta, behaves too much like shares. You lose the leverage benefit and pay excessive premium.

The Comfort Zone: 20-40% OTM

• Meaningful discount to stock purchase

• Requires conviction (not speculation)

• Still participates strongly if the trend confirms

• Reasonable implied probability of profit

Example: GDX trading at $70

• Very aggressive: $100 strike (43% OTM)

• Strong conviction: $85-95 strikes (21-36% OTM)

• Too conservative: $70 strike (ATM) acts like expensive shares

Filter 4: Capital Allocation (Never more than 1.5% per position)

This is the risk management that keeps you alive.

Individual position sizing:

• Maximum 5-10% of total portfolio in LEAPS positions

• Prefer 1% for most positions, higher % only for highest conviction

• Absolute maximum of 10% total portfolio in all LEAPS combined (entry cost basis)

Example portfolio: $100,000 total

• $95,000 in Wheel strategy (base layer)

• $5,000 in LEAPS (convexity layer)

  • $1,000 in GDX calls (gold thesis)

  • $1,000 in URNJ calls (uranium thesis)

  • $1,000 in BABA calls (China thesis)

  • $1,000 in IBIT/Bitcoin calls (digital gold thesis)

  • $1,000 in cash reserve or opportunistic position

If all five LEAPS go to zero, you lose $5,000 (5% portfolio drawdown). Painful, but survivable—your Wheel base kept compounding the entire time. But if even two of those 5x while others expire worthless, you’ve turbocharged your portfolio.

Filter 5: Implied Volatility (IV) As A Gatekeeper

IV is the price of uncertainty. Pay too much, and your LEAPS fight a headwind from day one; pay too little, and you may be buying a stagnant thesis. Treat IV as a gatekeeper, not a guess.

Principles:

• Price the thesis, not the excitement: Elevated IV means you’re paying for headline risk and recent moves. If the story is already “hot,” wait for IV to cool.

• Duration dampens noise: Longer-dated options reduce daily theta and Vega shocks, but they don’t eliminate overpaying. A bad entry on IV is still a tax.

• IV must match the regime: Structural themes can tolerate mid-range IV; short-lived momentum can’t.

Operational Guardrails:

• Prefer mid-range IV: Deploy when IV sits near its 6–12 month median. Avoid the top quartile unless you have a timing edge or pair with premium-selling overlays.

• Stage entries around catalysts: Build partial positions pre-catalyst, add on post-event IV crush if thesis remains intact.

• Liquidity first: Choose underlyings with tight spreads and active LEAPS chains. Wide spreads multiply the IV tax.

Tactics To Improve IV Entry:

• Deploy on pullbacks: Enter after a volatility spike subsides or on mean-reversion days when IV normalizes.

• Ladder in: Split entries (e.g., 40/30/30) across weeks to average IV and avoid single-print overpayment.

• Think about alternative vehicles. For example, gold mining ETFs have higher implied volatility compared with the underlying metals (GDX vs GLD), so when buying LEAPS for an outsized move, GLD would be way more attractive. GDX on the other hand would be way better for The Wheel.

Example:

• Uranium ETF (URA) spikes 18% on news; IV Rank jumps to 75. Rather than buying full-size LEAPS at peak IV:

  • Take a starter 0.3% position

  • Wait for consolidation and IV Rank to fall toward 40–50

  • Complete the allocation, or use a short call overlay to offset rich premiums

Bottom Line: IV is the toll booth. Pay it wisely. Enter when enthusiasm is priced fairly, size down when IV is stretched, and use duration plus overlays to keep convexity without donating to the volatility gods.

Reminder on antifragility: limited downside, unlimited upside, and you stay in the game. Consistent Convexity is the goal.

Portfolio Math: How the Barbell Compounds

Let’s walk through a realistic two-year scenario to see how this works:

Starting capital: $100,000

• $95,000 in Wheel strategy

• $5,000 in LEAPS (5 positions at $1,000 each)

Year 1:

Wheel performance:

• Monthly premium: 2% average

• Annual return: ~26% (compounded, accounting for some assignments)

• Ending value: $119,700

LEAPS performance (scaled to $1,000 tranches):

• Position 1 (GDX): +200% → $3,000

• Position 2 (CCJ): +50% → $1,500

• Position 3 (BABA): -80% → $200

• Position 4 (GBTC): +300% → $4,000

• Position 5 (Opportunistic): -60% → $400

LEAPS total: $9,100 (from $5,000)

End of Year 1: $128,800 (+28.8% total portfolio)

Year 2 strategy:

• Roll Wheel base to $119,700 (the larger base now compounds)

• Take $4,000 from LEAPS gains → reallocate to 4 new LEAPS positions ($1,000 each)

• Let remaining $5,100 in winning LEAPS run with trailing stops

Illustrative outcomes in Year 2:

• New LEAPS basket: two double (+100% → $4,000), one -60% ($400), one expires worthless ($0) → $8,400 total

• Running LEAPS (house money): blended +50% across the basket → $7,650

Wheel performance Year 2 (on $119,700):

• ~26% compounded → $150,822

End of Year 2:

• Wheel: $150,822

• LEAPS: $8,400 + $7,650 = $16,050

• Total: $166,872 (from $100,000)

That’s the barbell in practice: the base keeps grinding, LEAPS take bounded shots, wins fund new shots, and the portfolio compounds even when several LEAPS go to zero.

Common Mistakes when LEAPing (And How to Avoid Them)

Mistake 1: Over-allocating to LEAPS “I’m so convinced about uranium, I’m putting 50% of my portfolio in CCJ calls.”

You might be right about uranium and still lose everything to timing, volatility crush, or general market selloff. Keep strict position limits. Conviction is not the same as sizing.

Mistake 2: Buying Too Short-Dated “These 6-month calls are cheaper than the 18-month ones.”

They’re cheaper because they’ll probably expire worthless. Sounds obvious but greed has a seductive way with us. Remember: you need time for structural trends to overcome noise. Pay up for runway—it’s the only way to survive being early.

Mistake 3: Chasing Momentum with LEAPS “This stock is up 40% this month, time to buy calls!”

LEAPS are for trends you identify early, not momentum you’re chasing. If IV is already elevated because the move happened, you’re paying peak premium. Better to wait for consolidation or deploy into weakness. OTM CSPs might be a better bet.

Mistake 4: Treating LEAPS Like Lottery Tickets “I’ll just buy a bunch of far OTM calls and see what hits.”

This isn’t a casino. Every LEAPS position should map to a thesis you’ve researched and would defend. Spray-and-pray destroys capital. Concentrated conviction with position limits builds wealth.

Mistake 5: Not Taking Profits “My LEAPS are up 300%, I’ll just let them ride.”

Options can go to zero. When you’ve made 2-3x on a position, consider taking half off or rolling it further out if your thesis is still in play. Let winners run, but lock gains when volatility gives you outsized returns early. The goal is portfolio growth, not bragging rights.

Real Example: The Gold LEAPS Trade

Here’s how the gold thesis looks with tighter sizing, IV discipline, and clear exits.

Setup (January 2023):

• Thesis: Gold remonetization amid dedollarization2, BRICS expansion, persistent central bank buying

• Underlyings considered: GLD (lower IV, tighter spreads) vs GDX (higher IV, higher beta)

• IV filter: GLD favored for LEAPS due to lower IV and deeper liquidity; GDX better for running the Wheel

• Entry: GLD trading at ~$170

• LEAPS: Bought January 2025 $200 calls at ~$6.00 (IV near its 12-month median)

• Position size: $1,000 (1% of $100k portfolio) → ~1 contract + starter

• Max loss: $1,000 (defined)

Scenario A: You’re wrong (GLD stalls or drifts lower)

• Calls decay toward $0 into late 2024

• Loss capped at $1,000

• Wheel base keeps compounding; portfolio impact limited to -1%

Scenario B: You’re right (GLD trends to ~$200–210 by mid-2024)

• Calls worth ~$10–13 intrinsic + time value

• Position value: ~$1,700–$2,200 (70–120% gain)

• Action:

  • Take 50% off near 100% gain (lock ~$500–$600 profit)

  • Let remainder run with 30–40% trailing stop on option value

  • Optional roll: out-and-up to Jan 2026 $210–220s on strength to extend runway

Higher beta alternative (for illustration): GDX

• Entry: GDX ~$32, Jan 2025 $40 calls ~$2.50 (higher IV)

• Position size: $1,000 (1% of portfolio) → 4 contracts

• If GDX reaches $45–50 by mid-2024, calls trade ~$5–10

• Actions mirror GLD: trim half near 2x, trail remainder; consider poor man’s covered call overlay during IV spikes

Catalyst & IV management:

• Avoid peak IV entries after headline spikes; stage entries (e.g., 40/30/30) over weeks

• Add on post-event IV crush if thesis intact

• Favor GLD for LEAPS when IV in GDX is stretched; use GDX for Wheel premium generation

Takeaways:

• Vehicle matters: GLD for convexity at reasonable IV; GDX for income via the Wheel

• Sizing saves you: 1% tranches keep you antifragile

• Process over prediction: trim, trail, or roll when the trend confirms; cut if thesis breaks

Integration: How LEAPS and the Wheel Work Together

The magic happens when you connect both sides of the barbell:

Strategy 1: Premium Funds Conviction

• Each month, allocate 20-30% of Wheel premium to LEAPS

• $2,000 monthly premium → $400-600 toward new LEAPS

• Over 12 months, you’ve built $5,000-7,000 in convexity positions

• Your base strategy literally funds your asymmetric bets

Strategy 2: LEAPS Profits Expand the Base

• When a LEAPS position doubles or triples, take profits

• Reallocate 50-70% back to Wheel strategy (larger base = more premium)

• Use 30-50% for new LEAPS positions

• Virtuous cycle: bigger base → more income → more LEAPS → bigger wins → bigger base

Strategy 3: Hedge with Correlation

• If running the Wheel on miners (GDX, GOLD), buy LEAPS on gold (GLD) or related commodities

• Your base collects premium, your LEAPS capture sector momentum

• Both profit from the same thesis at different risk/return profiles

Strategy 4: Tactical Adjustments

• When IV spikes on your LEAPS (earnings, macro event), consider selling calls against them (poor man’s covered call)

• Collect premium on volatility while maintaining long exposure

• Requires active management but can smooth returns

Position Management: When to Exit

LEAPS aren’t set-and-forget. Here are my rules:

Take 50% off or Roll and add 12 more months at 100-150% gain Lock profits when they appear. Options can evaporate quickly. Half off or rolled protects capital while leaving upside open.

Full exit to cash or longer dated LEAP at 200%+ if less than 6 months remain
Time decay accelerates. Don’t get greedy when theta is screaming.

Cut losers at -50% if thesis breaks If fundamentals change (not just price action), admit you’re wrong. Redeploy to better opportunities.

Roll out and up if winning early Position up 100% but still 12+ months left? Consider rolling to higher strike further dated to capture more upside with less capital at risk.

The goal is not to maximize every trade. It’s to protect capital and harvest enough asymmetric wins to transform portfolio compounding.

Advanced: Funding LEAPS with CSP Premium

Here’s the purest expression of the barbell strategy:

Week 1-4: Run cash-secured puts on quality underlyings

• Collect $2,000 in premium

End of Month: Allocate to LEAPS

• $500 to GLD calls (gold thesis)

• $500 to URNM calls (uranium thesis)

• $500 to BABA calls (China thesis)

• $500 reserve for opportunistic entries

Result: Your Wheel strategy has zero downside (CSPs on stocks you’d own anyway) and now funds your convexity layer. Even if your LEAPS go to zero, the premium came from time decay you collected anyway. It’s genuinely house money.

Over 12 months, that’s $6,000 deployed into asymmetric positions that cost you nothing from your principal. This is an example of how you grow portfolio value without increasing risk.

The Psychology: Why Most Traders Fail at This

The barbell requires emotional discipline most traders don’t have:

Tolerance for small losses: You need to watch LEAPS positions drop 50-100% without panic-selling. If you sized correctly, this is just part of the process.

Patience for Wheel grinding: Premium selling isn’t exciting. You need to embrace 2% monthly returns coupled with drawdowns. All while your friends brag about 50% weekly gains (before they blow up).

Taking profits early: When LEAPS go up 200%, you’ll be tempted to “let it ride.” You need to lock gains even when it feels like you’re leaving money on the table.

Rebalancing discipline: When LEAPS outperform, you need to reallocate to the base instead of chasing more convexity. The boring decision is usually the right one.

The traders who succeed with this strategy are the ones who treat it like a business: mechanical execution, disciplined position sizing, unemotional rebalancing. The ones who fail are chasing excitement or trying to predict timing.

Your edge isn’t prediction. It’s structure. It is process. Sowing those seeds in fertile ground and letting time do its thing.

Conclusion: Bounded Bets on Unbounded Outcomes

The Wheel gives you consistency. LEAPS give you growth. Together, they create a portfolio structure that’s antifragile: robust to volatility, positioned for asymmetry, and systematically exploiting both theta decay and convexity.

You’re not trying to predict the market. You’re not levering up on conviction. You’re simply:

1. Running a profitable base strategy that generates cashflow with buy and hold assets

2. Taking small, defined bets on high-conviction trends

3. Sizing so no single position can hurt you

4. Capturing asymmetric upside when you’re right

5. Surviving comfortably when you’re wrong

This is how you grow by LEAPS—with strictly defined bounds.

Your next steps:

1. Audit your portfolio: do you have income stability or just directional bets?

2. Identify 3-5 macro themes you’d defend for 18-24 months

3. Build your base with the Wheel (or strengthen existing positions)

4. Allocate 2-5% into your first LEAPS position on your highest conviction theme

5. Set calendar reminders to review positions quarterly, not daily

And remember: the Corolla gets you there. LEAP into that Lotus when your convictions have played out over time.

Want to pressure-test your LEAPS strategy before deploying real capital? Subscribe to my course for scenario-based quizzes and access to the LEAPS sizing calculator. The goal isn’t more knowledge—it’s better execution under uncertainty.

2

Ordering Chaos

The Golden Rule

There are a few golden rules that get mentioned here and there. The most common association people have to THE golden rule is probably this one…

Read more

4 years ago · NutterProjects

Ordering Chaos

What the Price of Gold is Not (Yet) Telling Us

What does this chart of gold say about the world we live in — and the one that’s coming…

Read more

9 months ago · 1 like · NutterProjects

Disclaimer once again: This is educational content, not investment advice. Options involve risk; losses can exceed premiums paid when using spreads or complex strategies.

Most people think options are complicated because of the Greeks.
The truth? Greeks aren’t math—they’re gut feelings expressed numerically.

You already understand them intuitively:

• “This stock is moving a lot lately.” → Implied Volatility (Vega)

• “I want the price to move up quickly.” → Delta

• “Time decay is killing my trade.” → Theta

• “My option exploded on a small move!” → Gamma

Once you understand these forces, strategies like the Wheel, credit spreads, and earnings volatility suddenly make sense.

Subscribe now

The Shop Owner Story

Remember our teaware shop analogy? Let’s add a twist:

You run a tea shop (selling teas and pots).
Your scout calls you every morning with a “forecast”:

• “Expect stable market prices today. It is off season.”

• “Storm coming—prices may swing.”

• “Time is short—options decay faster now.”

• “A small move could have a big effect.”

That scout’s updates are the Greeks—they tell you how sensitive your options are before things happen.

Learning Outcomes

After this lesson, you’ll be able to:

1. Understand Delta, Gamma, Vega, Theta, and Rho in plain language.

2. Know which Greeks matter for Wheel trades.

3. Choose strikes intentionally, not randomly.

4. Understand how implied volatility affects pricing.

5. See why high-IV trades are both opportunity and risk.

The Greeks Explained

1. Delta — “Direction and Likelihood”

• Measures how much your option moves when the stock moves.

  • it’s an approximation that varies with moneyness, IV, and time.

  • Definition: The rate of change of an option’s price with respect to the price of the underlying asset; formally, the first partial derivative of the option value with respect to the underlying price.

• Roughly indicates probability of finishing ITM.

• Wheel tip: For Cash Secured Puts (CSPs) or Covered Calls (CC), Delta 0.15–0.30 = safe yield, moderate assignment risk. The higher the delta, the higher the assignment risk. You decide according to your own style of trading if you are looking for assignment or not. Delta will help you get the right strike based on your objectives.

Probability of Profit (POP) is something you often see on your trading brokerage applications before entering or during a trade. For a cash‑secured put, it is the chance you end profitable at expiration. It collapses when the underlying makes a sustained, large downward move so that finishing above your break‑even becomes very unlikely.

Key drivers that push POP toward 0:

• Price: A fast drop well below the strike − premium (your break‑even). The deeper below, the lower POP.

• Time: As days pass with price still below break‑even, there’s less runway for recovery, so POP decays.

• Volatility: A spike in IV raises put prices (against you) and widens expected downside; model POP shrinks.

• Gamma near expiry: If the put sits ATM/ITM close to expiration, Delta races toward −1, making further drops crush POP quickly.

• Events: Dividends, earnings, or macro shocks that gap the stock down can instantaneously slash POP.

Mental model: For a put with strike 100 and $2 premium (break‑even 98), a slide to 92 with 3 days left and high IV implies very low probability of finishing at or above 98; POP approaches zero unless price mean‑reverts sharply before expiration.

2. Gamma — “How Fast Delta Changes”

• Measures the rate at which Delta accelerates when the underlying changes in price.

  • Definition: The rate of change of Delta with respect to the underlying asset’s price; formally, the second partial derivative of the option value with respect to the underlying price.

• High Gamma → quick changes in your exposure.

• Concrete Gamma example

  You’re short a 7‑day cash‑secured put on XOM at strike 100 when XOM trades 100.

  • Starting Greeks: Delta ≈ −0.50, Gamma ≈ 0.10 per $1, Theta positive (you collect decay), Vega moderate.

  Now price ticks up to 101.

  • Delta update: Delta moves from −0.50 toward −0.40 because Gamma adds about +0.10 to Delta for a $1 move.

  • Effect: Your short put’s directional risk drops quickly; Probability of Profit (POP) improves, and the option price falls more than you’d expect from Delta alone.

  Price instead ticks down to 99.

  • Delta update: Delta moves from −0.50 toward −0.60 (Gamma subtracts ~0.10 for a $1 drop).

  • Effect: Risk ramps fast near ATM close to expiry; the option gains value sharply against you.

  Why this matters: With only 7 days left and the option ATM, Gamma is high, so tiny price moves cause Delta to swing. This is why managing near‑expiration ATM positions is critical: your exposure can change faster than your intuition based on a static Delta.

• Wheel tip: Watch Gamma when CSPs are near ATM close to expiration. Should not be a worry if not leveraged, and happy to hold underlying for the long term.

  Optional Adventures is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

3. Theta — “Time Decay / Rent You Collect”

• Theta = premium you earn (if selling) or pay (if buying). Tick Tock Theta.

  • Definition: The rate of change of an option’s price with respect to the passage of time, holding other inputs constant; formally, the partial derivative of the option value with respect to time (often expressed per day).

• Concrete Theta example

  • You’re short a 7‑day cash‑secured put on XOM at strike 100 when XOM trades 100. The option’s quoted Theta is about −0.05 per day for the buyer, which is +0.05 per day for you as the seller.

    • Day 1, price unchanged at 100: the option’s extrinsic value drops by roughly $0.05 purely from time passing.

    • Day 2, still 100: another ~$0.05 decay. Cumulatively, about $0.10 has decayed even with no price or IV change.

    • Final 2–3 days: Theta accelerates; the daily decay might rise toward ~$0.07–$0.10 per day at-the-money, so your premium erodes faster as expiration approaches.

    Why this matters: Theta benefits option sellers when the underlying and IV stay stable, but the effect can be overwhelmed by price moves or IV spikes. Near expiration and at-the-money, the “rent you collect” from time decay is strongest, which is why Wheel trades often target shorter durations.

• Decay accelerates as expiration nears.

• Wheel tip: Your income engine—collecting time decay systematically.

  

4. Vega — “Volatility Sensitivity”

• Measures how options react to changes in implied volatility.

  • Definition: The rate of change of an option’s price with respect to the underlying’s implied volatility; formally, the partial derivative of the option value with respect to volatility. Note: “Vega” is conventional but not a Greek letter.

• Concrete Vega example

  You’re short a 7‑day cash‑secured put on XOM, strike 100, with XOM at 100. The option shows Vega ≈ 0.04. That means for each 1 percentage point change in implied volatility (IV), the option’s price changes by about $0.04.

  • IV rises 5 points (e.g., 25% → 30%) with price unchanged:

    • Option value increases by roughly $0.20 (0.04 × 5). As the seller, that move is against you because the premium inflates when IV climbs.

  • IV falls 5 points (e.g., post‑earnings IV crush: 30% → 25%) with price unchanged:

    • Option value drops by about $0.20. As the seller, that helps you: premiums deflate and you can buy back cheaper.

  Why this matters: Near events (earnings, macro announcements), IV can jump or collapse even without price movement. Short‑dated, at‑the‑money options typically have meaningful Vega; selling premium into high IV captures more extrinsic value but exposes you to adverse IV expansions before the crush. Pair this with your Delta/Gamma view so you’re not surprised if price and IV move together.

• Implied volatility is the market’s forecast of future price variability.

  Implied volatility is the volatility figure backed out from current option prices using a pricing model like Black‑Scholes‑Merton. It reflects traders’ collective expectations of how much the underlying will move over the option’s life, not what has happened historically. Higher implied volatility means richer premiums; lower implied volatility means cheaper options.

  • Higher IV → options are more expensive.

• Wheel tip: Sell puts/calls when IV is high to get paid more; avoid selling in low IV.

  

5. Rho — “Interest Rate Sensitivity”

• Interest rate related. Minor for short-dated options.

  • Definition: The rate of change of an option’s price with respect to the risk‑free interest rate; formally, the partial derivative of the option value with respect to the interest rate.

• Concrete Rho example (1‑year OTM LEAPS)

  You buy a 1‑year out‑of‑the‑money call on XOM, strike 120, with XOM at 100. Because it’s long‑dated, the option has meaningful Rho ≈ +0.30. That means for each 1 percentage point increase in the risk‑free rate, the call’s price rises about $0.30; a 1‑point decrease lowers it by ~$0.30, holding price and IV constant.

  • Rate hike scenario: Risk‑free rate moves from 4% to 5% (+1 pp).

    • Call value increases by roughly $0.30 from Rho alone. Intuition: higher rates raise the present value benefit of deferring payment for the stock, so calls gain.

  • Rate cut scenario: 5% to 4% (−1 pp).

    • Call value decreases by about $0.30. Intuition: lower rates reduce that carry benefit, so calls lose; conversely, long‑dated puts with Rho ≈ −0.30 gain about $0.30 when rates fall.

  Why this matters for LEAPS: Rho grows with time to expiration and matters more when options are OTM and have substantial extrinsic value. For a barbell approach—bullion + long LEAPS—macro rate shifts can move LEAPS prices even without changes in stock price or implied volatility. Manage exposure by noting Rho alongside Delta/Vega when central bank moves are likely.

• Matters for LEAPS or large portfolios with long-duration options.

The Corolla vs Lotus Analogy

• Low Delta/Gamma/Vega = Toyota Corolla

  • Predictable, slow, reliable

  • Selling 0.15–0.20 Delta CSP = high POP, low stress

• High Delta/Gamma/Vega = Lotus Exige

  • Exciting but risky

  • Buying weekly calls, ATM options, chasing earnings, over leveraging using margin.

If you want to keep using the Wheel Strategy sustainably, keep yourself in Corolla territory: consistency > excitement.

Share

What’s Next: Convexity with LEAPS

In the next lesson, we’ll show how allocating a small % of the portfolio to high‑conviction, long‑dated LEAPS can add convexity to an otherwise steady Wheel approach. The idea is simple: keep most capital in “Corolla mode” (consistent premium selling), but use a small, bounded slice for asymmetric upside—the Lotus—without the risk of blowing up. We’ll cover sizing rules, strike and tenor selection, macro considerations, and how to pair LEAPS with your CSP/CC flow so drawdowns remain controlled while upside stays open.

That’s the barbell: use consistent premium from CSP/CC income to stay solvent and compounding, then dedicate a small slice to high‑conviction LEAPS for asymmetric payoff. Income smooths drawdowns and funds mistakes; LEAPS create scalable spikes in portfolio value without levering the whole book—your Corolla carries you, the Lotus only uses bounded capital.

Most investors place limit orders and get paid nothing for doing so.
The Wheel Strategy asks a simple question:

“If I’m committing capital to buy or sell something at a specific price, why shouldn’t I get paid for that commitment?”

To understand this intuitively, let’s use a story that mirrors how real businesses operate — because options are fundamentally commercial contracts.

A Realistic Analogy: How a Shopowner Uses Options Without Knowing It

Imagine you own a small teaware shop.

You want to stock a specific style of teapot, currently selling for 165 yuan in the local market. You tell independent stall vendors (“suppliers”):

“If the price of this teapot ever falls to 150 yuan,
I’m willing to buy any unit you’re trying to offload at 150.
But for that guarantee,
you pay me 5 yuan today.”

Why would a supplier pay you?

Because you’re offering downside protection — they know that if market prices soften, you’re guaranteed to buy from them at 150. That certainty has value, so they compensate you upfront.

What happens next?

1. If market price stays above 150
   No supplier comes back.
   You simply keep the 5 yuan for offering the guarantee.

2. If price drops below 150
   A supplier returns:
   “Market is now 145. As agreed, you will buy from me at 150.”
   You buy it at 150 — and still keep the 5 yuan.

This is selling a cash-secured put:
You get paid to potentially buy something you already want to own.

Now imagine you have inventory — you bought some teapots at your target price.

So you announce to traders at the market:

“If the teapot price rises to 180 within the next week,
I’m willing to sell any inventory at 180.
If you want the right to buy at 180,
pay me 5 yuan now.”

This is selling a covered call.

Again, two outcomes:

1. If price never reaches 180
   No one exercises the right.
   You keep the inventory AND the 5 yuan.

2. If price rises above 180
   A trader returns:
   “Market is 190 now, but I bought the right to buy at 180.”
   You sell at 180 — and keep the premium.

This is the Wheel Strategy:

Get paid to buy inventory,
get paid to carry inventory,
get paid to sell inventory.

It’s just business — applied to markets. Of course, as with all business there is risk involved. You could have an earthquake which is bad for ceramics, or everyone might decide to drink coffee instead of tea going forward. There is always a risk that what you hold for the long term declines in value or goes to 0. Think Enron, Kodak or Motorola.

Why the Wheel Works (The Strategic “Whys”)

1. It Lowers Drawdowns vs Buy-and-Hold

Every premium you collect reduces your cost basis.

Lower cost basis = smaller drawdowns during dips + faster recovery.

2. It Generates Cashflow That Earns Interest

Wheel traders earn:

• Put premium

• Call premium

• Interest on idle cash

This creates multi-layered yield, especially valuable in high-rate environments.

3. It Is Literally a Limit Order That Pays You to Wait

Limit order at 150 = no income

Cash-secured put at 150 = premium income while waiting

Over time, this compounds into a meaningful edge.

4. It Is Emotionally Anti-fragile

You automate:

• your buy price

• your sell price

• your timeframe

No FOMO, no panic, no guessing.

5. It Thrives in Sideways Markets

Most strategies fail when markets chop.
The Wheel makes its best returns in these conditions.

Learning Outcomes

By the end of this lesson, you should be able to:

1. Explain the Wheel Strategy simply and accurately.

2. Select appropriate tickers for Wheel trading.

3. Choose put and call strikes.

4. Manage assignment and rolling intelligently.

5. Avoid the major pitfalls beginners fall into.

6. Calculate expected returns of a Wheel cycle.

Lesson Content

1. What the Wheel Strategy Is

The Wheel has two legs (read the pre-read for this lesson here):

Step 1: Sell Cash-Secured Puts (Get Paid to Enter)

• Pick a stock you’re happy to own.

• Sell a put at the price you’d like to buy.

• If assigned → you own the stock.

• If not assigned → keep premium and sell another put.

Step 2: Sell Covered Calls (Get Paid to Exit)

• Once assigned, sell calls on your new shares.

• If called away → you exit at a profit + premium.

• If not → keep premium and sell another call.

Rinse and repeat.

It’s the most straightforward income wheel in options.

2. Ticker Selection: It Does NOT Have to Be Boring

Great Wheel tickers share these traits:

• Healthy liquidity (both on the underlying as well as the option)

• Strong long-term fundamentals (you are happy to buy and hold, think Warren Buffet type investments)

• Good option volume

• Preferably moderate-to-high IV

• Price that fits your position sizing (100-share units)

Category A: Blue-Chip Workhorses (Low Stress, Lower Premiums)

Moderate premium, high reliability

AAPL
MSFT
KO
COST
JPM
XOM

Category B: Cyclical Cash Machines

Higher yields, still fundamentally strong

GM
MAR
DAL
WHR
PBR

Category C: High-Quality High-IV Tech / China Tech

Great for a dynamic wheel, higher premium

AMD
NVDA
TSM
PLTR
BABA
PDD

Category D: Commodity / Macro Plays (What I gravitate to)

High IV, real cashflow, geopolitical angles

CCJ
FCX
SILJ
GDX
SLB

3. How to Select the Right Strikes

Selling Puts (Entry Leg)

Rule of thumb:

Sell the strike where you’re genuinely happy to buy and hold for 1–2 years or even longer. Remember, if done properly, assignments are wins and not something to be avoided.

Guidelines:

• Prefer OTM puts with strong support beneath

• Avoid earnings unless premiums are irresistible

• Target:

  • 1%+ monthly for blue chips

  • 2–3% monthly for high-IV names

You get paid while waiting for dips.
If no dip comes, you still get paid.

Advanced: Selling an ITM put !! if you believe the trend is strong and you want to get assigned for a discount + take part in any underlying upside.

Selling Calls (Exit Leg)

Rule of thumb:

Sell calls at the price you’d be proud to take profit.

Guidelines:

• OTM for safety

• Avoid strikes below cost basis

• Target resistance areas or your intended exit price

• Monitor upcoming catalysts

Covered calls let you turn dead time into cashflow.

4. Risk Management

1. Use 100-share sizing discipline
   Don’t wheel stocks where 100 shares is too large a % of your portfolio.

2. Avoid existentially risky companies
   No meme stocks, no scams, no companies on bankruptcy watch. I like ETFs for liquidity and low chances of going to 0.

3. Roll carefully
   Roll puts when the strike is breached.
   Roll calls when IV collapses or you want to avoid assignment.

4. Accept assignment proudly
   If you chose the ticker well, assignment is a win.

5. A Complete Example: The AMD Wheel

AMD trades at 105 in May 2025.

Put Leg

Sell the 95 put for 2.30 (Using approximate’s data. For updated data visit our website www.daystoexpiry.com)
Return: ~2.4% for the month.

If not assigned: repeat.
If assigned: cost basis = 95 – 2.30 = 92.70.

Call Leg

Sell the 110 call for 1.80.

If called away:

• Gain: $92.70 → $110

• Plus premiums

Total return ~20%.

Not bad, depending on how long it takes to play out. In this historical example, it took about a month! Talk about volatility :)

The premiums offer buffer when the trade is working against you, but adds to returns if the trend ends up being your friend.

Jumping online to see current ROIs for AMD:

6. Common Mistakes (avoid like the plague)

• Selling puts on stocks you’d never own

• Selling calls too close to ATM and losing shares early

• Running the wheel through earnings blindly

• Wheeling low-quality, hype-driven stocks

• Oversizing positions

• Using margin irresponsibly

Subscribe now

Conclusion

The Wheel turns market uncertainty into structured, repeatable cashflow by paying you to enter, hold, and exit — like a rational shop owner running inventory. Keep your edge by choosing quality tickers, sizing to 100‑share units, and letting premiums steadily lower your cost basis while you avoid earnings landmines and hype.

Your next step is simple: define buy and sell levels you’re proud of, then automate them with cash‑secured puts and covered calls. Practice deliberately, track outcomes, and let the multi‑layered yield compound. Even you like, try out our own wheel backtesting tool designed for this purpose. Play around with days to expiries and in/out of the moneyness.

To deepen your mastery, subscribe to my course for access to our quizzes that test your knowledge with realistic examples and step‑by‑step scenarios. It’s the fastest way to pressure‑test your decisions before real capital is on the line.

Share

We’ve included one short explainer and a broker‑grade overview to ground terminology, plus three approachable videos that build intuition for cash‑secured puts and covered calls before connecting the dots to the full Wheel. To anchor the philosophy, there’s an optional tie‑in to Taleb’s barbell idea: keep most capital safe, take small, repeatable risks with asymmetric upside, and avoid hidden leverage. This was also part of the pre-read for chapter 1a.

As you read and watch, focus on: entry criteria, strike selection, duration, assignment mechanics, and position sizing. The goal isn’t maximizing premium—it’s structuring consistent cashflow with defined risk, so you can practice the Wheel deliberately rather than chase volatility.

• Reading:

  • The Wheel (aka Triple Income) Strategy Explained” - Reddit

  • Three Things to Know About the Wheel Strategy” - Charles Schwab

• Video:

  • Covered Calls Explained: Options Trading For Beginners by ClearValueTax (YouTube, ~18 min)

  • Cash Secured Puts Explained: Options Trading for Beginners by ClearValueTax (YouTube, ~11 min)

  • The “Wheel” Options Strategy by Markus Heitkoetter (YouTube, 15 min)

• Optional Reading: Chapter on “Barbell Strategy” from “Antifragile” by Nassim Taleb (to better understand the philosophy)

  • If you couldn’t get your hands on the book, check this blog post for a summary: Exploring The Barbell Strategy To Lower Risk and Increase Upside

• Practical play, head over to daystoexpiry for some fun with backtesting the wheel strategy on your favourite stocks.

  

• Understand calls/puts at a conceptual level

• Grasp the concept of premiums, strike, expiration

• Know who wins/loses under different price scenarios

1. Options as Insurance

You buy protection or you sell it.

2. The 4 Core Positions

Long call, long put, short call, short put (click on each to refresh understanding on what each option position means, and the risk/payout profile. Source: Investopedia)

Long Call:

Long Put:

Short Call:

Short Put:

3. Why Options Exist

Hedging, speculation, income.

Options price the value of flexibility. They let businesses and investors hedge inputs or revenues, cap liabilities, or express upside with limited downside. In practice, they set floors under future receivables and caps over future costs, tailoring risk profiles without changing core operations.

Subscribe now

A classic origin story is Thales of Miletus. Expecting a bumper olive harvest, he paid small premiums to secure the right to use local olive presses at set terms. When demand spiked, he exercised those rights and rented the presses out at higher prices, profiting from optionality rather than owning the presses outright. This mirrors a modern call option: right, not obligation, at an agreed price, benefiting when outcomes go your way.

Perhaps an analogy that is closer to home (cough), a property option to buy (call option) grants the right, not the obligation, to a buyer to purchase a specific home or building at an agreed price within a defined time window. You pay an option fee (premium) to lock terms while you assess due diligence or arrange financing. If the market or your plans improve, you exercise and complete the purchase; if not, you let the option expire and lose only the fee.

How it maps to options:

• Price: the strike is the pre‑agreed purchase price.

• Premium: the option fee compensates the seller for holding the property off the market.

• Expiration: the option period (e.g., 60–180 days).

• Optionality: you control upside (price rises or approvals come through) with limited downside (the fee).

• Variants: options can include assignability (transfer to another buyer), extensions (extra premium), or contingencies (zoning/permits), all akin to contract terms affecting value.​

4. Gym Membership Analogy

Pay to reserve access (strike)

Use it or not (optional)

5. Time Decay

Optionality rots/decays like fruit (or people) :)

“Because every day you wait, a little of that right to act disappears.”

More Analogies

• Airbnb Booking: Pay to reserve. Show up or not — your choice.

  • A refundable booking is like owning a call on staying there at a known price for specific dates. You pay a premium (or accept a higher refundable rate) for flexibility. If market prices rise or availability tightens, you “exercise” by keeping the booking; if prices fall elsewhere, you cancel and sacrifice only the premium. The cancellation deadline maps to expiration, and the value of flexibility rises with volatility in lodging prices/availability. This example nicely captures premium, strike-like certainty, optionality, volatility, and expiration.

• Concert Tickets: Value fluctuates based on demand.

  • A ticket’s value swings with demand (volatility) and collapses after the show (time decay to zero at expiration). If you bought early and demand spikes, you benefit (like being long exposure to upside). As the event approaches with weak demand, resale value drops—mirroring theta.

In this chapter, we’ll break down the original barbell framework popularized by Nassim Taleb — and why it’s the right architecture for a world of regime shifts, not smooth cycles.

The goal: Survive the left tail. Benefit from the right tail. Ignore the middle.

Learning Objectives

By the end of this lesson, you’ll understand:

• The two “buckets” of a barbell portfolio

• Why certain assets are intentionally “hard to kill”

• How cashflow engines create optionality

• Why average, “balanced” portfolios often fail

• Expected value under volatility

• A sample allocation you can adapt

The Barbell Mental Model

Think of your portfolio as split cleanly into two buckets:

1. Core / Durable / Liquid / Hard-to-Kill

2. Tactical / Optional / Upside Exposure / Cashflow

There is deliberately nothing in the middle.

1. The Core Bucket (Hard-to-Kill Assets)

This side exists to protect your downside and extend your runway.

Examples:

• Bitcoin

• Gold

• Physical precious metals

• Cash equivalents

Characteristics:

• High survivability

• Low counterparty risk

• Globally liquid

• No earnings dependency

These assets are the bridge to the upside. Without them, drawdowns destroy you.

2. The Tactical Bucket (Cashflow Engines to Extend Runway)

Used to:

• Generate consistent premium

• Compound income

• Fund asymmetric upside (e.g., long-dated calls)

Examples:

• The Wheel Strategy (options)

• Rental income

• Event-driven equities

• A job? A business?

These are your engines.
The goal is income yield, not home runs.

3. Why the Middle Is Dangerous ⚠️

The “middle” of the barbell is full of assets that seem safe but carry hidden fragility:

• Corporate bonds

• High PE growth stocks

• Balanced stock/bond funds

• Dividend stocks with leverage

• 60/40 portfolios

These break when:

• credit markets freeze,

• liquidity evaporates,

• macro regimes change,

• tail events stack.

They offer:

• low upside,

• hidden systemic risk,

• correlation spikes under stress.

Avoid the mediocre middle. Think about animals on the road with a truck coming around the corner. Sorry Bambi!

4. Expected Value Under Volatility

When volatility increases, distributions get fatter.

• Left tail = ruin

• Right tail = generational upside

The barbell:

• Protects left tail with durability

• Exposes you to right tail with convexity

Expected value rises as volatility rises when you are positioned correctly.

Example: €100K Allocation

Here’s a simplified demonstration:

Core Side (Survivability) — $60K

• $40K Gold/Silver Bullion

• $10K Bitcoin (cold storage)

• $10K Cash buffer

Tactical Side (Income & Upside) — $40K

• $25K Wheel strategy collateral

• $10K rental property equity basis

• $5K long-dated OTM call options (12–18 months+)

Why it works:

• Core keeps you alive

• Tactical pays you to wait

• Optionality creates convexity

• No exposure to fragile leverage

Adapt sizing to risk tolerance. This is not going to fit for everyone, each investor has to come up with their own recipe (that will change as conditions shift)

Concept > numbers.

Key Takeaways

• Durability + Convexity > Diversification

• Expected value increases under volatility

• Middle assets blow up when correlations spike

• You don’t need to predict timing

Survive first. Then position to win.

Reflection Prompts

1. Which of your current holdings are truly “hard to kill”?

2. What assets in your portfolio hide fragility?

3. How much income do you need to cover your burn rate?

4. What engine currently funds your optionality?

Post 1–2 sentences below in comments

💬 Discussion Question (Comment Below)

What asset do you think is safe, but becomes fragile under liquidity stress? Why?

Comment your answer 👇

🧾 Mini-Checklist

You should be able to:

• Clearly define the two buckets

• Identify the dangerous middle

• Understand the power of runway

• Explain expected value under volatility

🏋️‍♂️ Optional Challenge

Re-map your portfolio into three categories:

• Hard-to-kill

• Cashflow engines

• Middle fragility

Then: remove one asset from the middle and redeploy it.

Share the swap if you’re comfortable.

Subscribe now

The next decade will not resemble the previous one:

• Energy scarcity

• Supply chain fragmentation

• Monetary instability

• Technological step-functions (AI, robotics, chips)

Markets probably will oscillate violently, not smoothly.

Your advantage:

• Stop guessing

• Start harvesting volatility

• Recycle it into asymmetric upside

Why This Options Course Exists

• Linear vs Nonlinear Payoffs (straight line vs curve)

• Antifragile vs Fragile vs Robust

• Tail Events: Frequency vs Magnitude

• Regime Change (macro timeline examples)

• Survivability (Runway) > Optimization

• Convexity as a Lifestyle (not a trade)

• Discussion: “Where is your life fragile?”

Key Concepts Introduced

• Convexity vs linearity

• Fragility vs antifragility

• Tail events and regime shifts

• Survivability beats optimization (Remember, the longer the runway the better)

Mini-Reflections

Before moving on, answer, and if comfortable share below in the comments:

1️⃣ Where is your current portfolio fragile?
2️⃣ What would break first in a liquidity shock?
3️⃣ Which assets become stronger with chaos?

These answers shape how you deploy capital later.

After This Lesson, You Should Be Able To:

• Explain convexity in plain language

• Identify antifragile assets and behaviors

• Spot hidden fragility in common portfolios

• Understand why optionality compounding works

This pre-read section prepares you to explore how convex payoff structures and antifragile positioning can protect and profit from uncertainty. You’ll build intuition for asymmetric risk-reward profiles and understand why traditional “balanced” approaches often fail during regime shifts.

1. Conceptual Foundations: Antifragility and Uncertainty

Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder

Required Chapters:

• Book I, Chapter 1: “Between Damocles and Hydra” - Introduction to fragility, robustness, and antifragility as a triad

• Book III, Chapter 13: “Teaching Birds How to Fly” - On lecturing birds how to fly and Aristotle’s practical wisdom

• Book IV, Chapter 14: “When Two Things Are Not the Same Thing” - The barbell strategy and bimodal approaches

• Book V, Chapter 18: “On the Difference Between a Large Stone and a Thousand Pebbles” - Why small is beautiful and the logic of fragmentation

• Book VI, Chapter 20: “Time and Fragility” - Optionality and how time interacts with convexity

• Book VI, Chapter 22: “To Live Long, but Not Too Long” - The benefits of volatility and variability

Key concepts to extract: Barbell thinking (combining extreme safety with extreme risk), optionality as free or cheap convexity, and why volatility benefits antifragile systems.

Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Required Sections:

• Prologue: “On the Plumage of Birds” - The Turkey Problem and inductive reasoning

• Part One, Chapter 1: “The Apprenticeship of an Empirical Skeptic” - Understanding uncertainty

• Part Three, Chapter 11: “How to Look for Bird Poop” - Finding what we need to know vs. what we already know

• Part Four, Chapter 15: “The Bell Curve, That Great Intellectual Fraud” - Mediocristan vs. Extremistan and fat tails

• Part Four, Chapter 17: “Locke’s Madmen, or Bell Curves in the Wrong Places” - The Gaussian blindness

Key concepts to extract: Fat-tailed distributions, why standard deviation misleads in Extremistan, and the dominance of rare events.

Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and Markets

Required Sections:

• Part I, Chapter 3: “A Mathematical Meditation on History” - Alternative histories and path dependence

• Part I, Chapter 5: “Survival of the Least Fit” - Why the best performing may simply be the luckiest

• Part II, Chapter 6: “Skewness and Asymmetry” - Why outcomes matter more than frequency

• Part II, Chapter 8: “Too Many Millionaires Next Door” - Rare events and Russian roulette economics

• Part III, Chapter 11: “Randomness and Our Mind” - Behavioral biases in assessing probability

Key concepts to extract: How we underestimate the role of luck, why asymmetric payoffs matter more than win rates, and our cognitive failures with probability.

2. Practical Applications: Tail Risk and Convex Hedging

Mark Spitznagel, Safe Haven: Investing for Financial Storms

Required Chapters:

• Chapter 1: “The Tao of Risk” - Introduction to the cost-benefit paradox of risk mitigation

• Chapter 2: “Risk Mitigation and Cost-Benefit” - Why “expensive” protection can be cheap geometrically

• Chapter 3: “The Safe Haven Strategy” - Framework for tail risk hedging

• Chapter 4: “The Cost of Insurance and the Benefit of Loss Mitigation” - Understanding drag vs. protection

• Chapter 5: “Local versus Global” - Local arithmetic returns vs. global geometric returns

• Chapter 7: “Fragility and Antifragility” - Spitznagel’s interpretation of Taleb’s framework applied to portfolios

Key concepts to extract: The geometric argument for paying up for convex hedges, how compounding changes when drawdowns are mitigated, and the mathematics of tail risk protection.

Mark Spitznagel, The Dao of Capital: Austrian Investing in a Distorted World (Optional)

Recommended Sections:

• Chapter 2: “The Roundabout” - Austrian capital theory basics and lengthening the production structure

• Chapter 4: “The Austrian Advantage” - Patience, asymmetry, and strategic positioning

• Chapter 6: “Waiting” - The value of positioning and patience in investing

• Chapter 8: “The Homestead” - Antifragility through self-sufficiency and optionality

Key concepts to extract: How roundabout methods create superior long-term results, the role of patience in asymmetric investing, and Austrian economic principles applied to markets.

3. Options Mechanics and Payoff Structures

Recommended Resource: Lawrence G. McMillan, Options as a Strategic Investment (5th Edition)

Required Sections:

• Chapter 2: “Covered Call Writing” (pages 31-67)

  • Focus on: Payoff diagrams, profit/loss at expiration, how upside is capped

  • Assignment mechanics and early exercise considerations

• Chapter 16: “Selling Puts” (pages 258-282)

  • Cash-secured put mechanics

  • Strike selection based on volatility environment

  • Assignment and stock acquisition process

• Chapter 25: “LEAPS” (pages 483-512)

  • Long-dated call options as stock substitutes

  • Time decay characteristics vs. short-term options

  • Creating leverage with defined risk

Alternative/Supplementary: Sheldon Natenberg, Option Volatility and Pricing (2nd Edition)

• Chapter 6: “Volatility” (pages 87-112) - Understanding how volatility affects option pricing

• Chapter 8: “Risk Measurement I” (pages 135-158) - Delta, gamma, and convexity

Online Resources for Visual Learning:

The Options Industry Council (OIC) - www.optionseducation.org

• “Covered Calls” interactive tutorial

• “Cash-Secured Puts” strategy guide with payoff diagrams

• “LEAPS Strategies” comprehensive module

CBOE Learning Center - www.cboe.com/education

• “Understanding Option Greeks” - Focus on gamma as the measure of convexity

• Interactive payoff diagram tools

4. Regime Shifts and the Fragility of the “Middle”

Homework: “Why Balanced Portfolios Break Under Stress”

Assignment: Come up with your own reflections to the following questions:

Key items:

1. The Correlation Breakdown

   • Historical correlation patterns during normal vs. crisis periods

   • Case studies: 2008 Financial Crisis, March 2020 COVID crash, 2022 bond-stock correlation reversal

2. Hidden Leverage in “Safe” Assets

   • Duration risk in bond portfolios

   • REITs, utilities, and dividend stocks as rate-sensitive bets

   • How seemingly conservative positions amplify losses

3. Liquidity Stress and Forced Selling

   • When diversification fails: all assets become correlated to liquidity

   • Margin calls, redemptions, and cascade effects

4. The 60/40 Portfolio Illusion

   • Why the classic balanced allocation is fragile to regime shifts

   • Historical backtest limitations and survivorship bias

5. Barbell Alternative

   • Contrasting fragile “middle ground” with antifragile extremes

   • Maximum safety + maximum convexity vs. moderate risk everywhere

Supplementary Reading:

Artemis Capital Management, “The Allegory of the Hawk and Serpent” (2020)

• Available free at: artemiscm.com

• Section II: “The Dragon Portfolio” - Understanding correlation regimes across inflation and growth scenarios

• Section III: “Volatility and the Alchemy of Risk” - How volatility clustering affects portfolio outcomes

Resolve Asset Management, “The Allegory of the Hawk and Serpent: A Summary” (2020)

• Shorter 10-page digest if time is constrained

5. Mathematical Intuition (No Advanced Math Required)

Jensen’s Inequality

Primary Source:

• Keith J. Devlin, “The Unfinished Game: Pascal, Fermat, and the Seventeenth-Century Letter that Made the World Modern”

  • Chapter 6: “The Measure of Uncertainty” (pages 89-112) - Accessible introduction to expected value and nonlinearity

Online Resource:

• Khan Academy: “Jensen’s Inequality” module (AP Statistics)

  • Video: “Convex functions and Jensen’s Inequality” (12 minutes)

  • Link: khanacademy.org/math/statistics-probability

Course Handout: “Jensen’s Inequality for Investors” (5 pages)

• Visual examples with option payoffs

• Why volatility increases the value of convex positions

• Simple numerical examples without calculus

Kelly Criterion

Primary Source:

• William Poundstone, Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

  • Chapter 7: “Entropy” (pages 109-128) - Kelly’s original insight

  • Chapter 10: “Beating the Market” (pages 163-185) - Application to investing

  • Chapter 16: “Amazon.con” (pages 265-282) - When Kelly sizing goes wrong (over-betting)

Technical Paper (Optional):

• Ed Thorp, “The Kelly Criterion in Blackjack, Sports Betting, and the Stock Market” (2008)

  • Available at: edwardothorp.com

  • Read: Introduction and Section 2 “The Kelly Criterion” (pages 1-6)

Course Handout: “Kelly Sizing and Geometric Growth” (8 pages)

• Derivation in plain English

• Why fractional Kelly is often better

• Position sizing examples for options strategies

Expected Value vs. Path-Dependence

Primary Sources:

Ole Peters & Murray Gell-Mann, “Evaluating Gambles Using Dynamics” (2016)

• Published in Chaos journal, available at: arxiv.org/abs/1405.0585

• Read: Abstract, Introduction, and Section II “Ensemble and Time Averages” (pages 1-4)

• Skip the heavy math; focus on conceptual examples

Nassim Taleb, “Ergodicity” Technical Incerto essay

• Available at: fooledbyrandomness.com (Technical Papers section)

• Or in Skin in the Game, Chapter 19: “The Logic of Risk Taking” (pages 189-208)

Course Handout: “Why Good Bets Can Still Ruin You” (6 pages)

• Coin flip examples with absorbing barriers

• Sequence-of-returns risk in retirement

• Visual demonstrations of path-dependence

• Why time averages ≠ ensemble averages for most real processes

Additional Math Resources:

3Blue1Brown YouTube Channel

• “Visualizing the chain rule and product rule” - Understanding derivatives of payoff functions

• “But what is a convex function?” - Visual intuition for convexity

• Link: youtube.com/c/3blue1brown (search for “convexity” and “derivatives”)

Course Video Lecture: “Gamma and Convexity” (20 minutes)

• Will be posted on course portal

• Covers how second derivatives create antifragility

6. Preparation Questions

As you complete these readings, consider:

1. How does a barbell strategy differ from diversification? What are you giving up, and what are you gaining?

2. Why might an expensive tail hedge be geometrically “cheap” over time? (Reference Spitznagel Chapter 2)

3. What makes an options payoff convex? How does this relate to antifragility? (Reference option payoff diagrams)

4. When do correlations between assets increase, and why does this matter for portfolio construction? (Reference the regime shifts essay)

5. How does Jensen’s Inequality explain why volatility can be valuable rather than merely risky? (Reference your course handout)

6. What’s the difference between a strategy with positive expected value and one that’s geometrically optimal? (Reference Kelly Criterion readings)

7. Learning Objectives

By completing this pre-read, you should be able to:

• Explain the difference between fragile, robust, and antifragile systems using Taleb’s framework

• Identify convex and concave payoff structures in options strategies through payoff diagrams

• Understand why traditional balanced portfolios can be fragile to regime shifts

• Apply basic mathematical intuition about convexity, dispersion, and path-dependence

• Articulate the philosophical case for barbell positioning in uncertain environments

• Calculate basic position sizing using Kelly principles

• Recognize when correlation assumptions break down

8. Reading Schedule Suggestion

Week 1: Conceptual Foundation (8-10 hours)

• Days 1-2: Taleb’s Antifragile chapters

• Days 3-4: The Black Swan sections

• Day 5: Fooled by Randomness sections

Week 2: Practical Applications (6-8 hours)

• Days 1-2: Spitznagel’s Safe Haven

• Days 3-4: Options mechanics (McMillan selections or OIC modules)

• Day 5: Review options payoff diagrams and practice drawing your own

Week 3: Regime Analysis and Math (6-8 hours)

• Days 1-2: Regime shifts essay and Artemis Capital paper

• Days 3-4: Mathematical intuition readings (Jensen, Kelly, path-dependence)

• Day 5: Watch supplementary videos and review course handouts

Welcome to Barbell on Wheels

Modern markets are noisy, fragile, over-leveraged, and increasingly driven by regime shifts rather than normal cycles. Survival — and asymmetric upside — goes to investors who understand convexity: the ability to absorb disorder and get stronger from it.

I have been asked to share the madness of my methods on a few occasions, and here it is!

This first lesson explains the why behind your entire approach.

Who This Course Is For

This course is designed for:

✅ Investors who want to generate consistent income without sacrificing upside
✅ Traders who want to compound optionality using options responsibly
✅ Professionals seeking time-efficient portfolio systems
✅ Builders, founders, and high-agency thinkers attracted to antifragility
✅ Macro thinkers who believe the world is undergoing regime change
✅ Anyone who wants to survive — and benefit from — volatility

It is not for:
❌ gamblers looking for lottery trades
❌ day traders craving adrenaline
❌ people who want certainty, not probability

What You Will Learn in This Course

By the end of Lesson 8, you will be able to:

Understand Convexity & Antifragility

• Identify assets that gain from volatility

• Avoid hidden fragility, leverage traps, and mean-reversion assumptions

Implement the Wheel Strategy

• Sell premium responsibly

• Welcome assignment instead of fearing it

• Monetize sideways markets

Turn Premium Into Optionality

• Systematically fund long-dated OTM LEAP calls

• Build time-based ladders

• Target secular trends, not hype cycles

Engineer That Portfolio Antifragility

• Survive tail events (extend that runway)!!

• Capture explosive upside from macro catalysts

• Avoid capital erosion during chop

Build a Repeatable System

• Understand how rules, dashboards, and personal constraints can help build yourself a unique tailored system.

• Relying on process, not prediction

What You Can Expect From This Course

Across 8 lessons, you’ll get:

📌 Short conceptual pre-reads for each lesson

📌 10 individual lessons to build deep learning and self-awareness

📌 Quizzes to test retention

📌 A capstone trading project (optional) to apply everything, with 1 on 1 guidance

You’ll graduate with:

• A rules-based wheel system to call your own

• A LEAP convexity ladder aligned to your own secular themes

• An intrinsic and intuitive understanding of Convexity and Optionality.

• A personal “Playbook” you will refine over time

Thanks for reading Ordering Chaos! Subscribe for free to receive new posts and support my work.

Click here for the next lesson!

What worked

• Tickers I have been trading most often continue to offer high yields such as GDX, IBIT, and Uranium ETFs such as URA, NXE and URNJ.

• ROI for these trades continue to be in the 1% per week range.

What didn’t work

• All positions seem to be correlated, which makes it difficult to balance the portfolio.

• With GDX correcting massively, puts sold expired very in the money ($80 strike with ETF @ $70)

Next week

• Look to sell calls on positions that have gotten assigned. IBIT, URNJ and GDX in particular.

• I am experimenting with rolling a put at the same strike $80 GDX, rather than taking ownership of the stock which would then be trading at more than 10% discount from the buy in price.

Income Summary (YTD)

• Total premiums: $6,761

• Trades (opened/closed): 4/0

• Weekly ROI: 2.07%

Additional Notes

While volatility is often our friend when we trade these markets selling options, it is dangerous when a short but sharp move happens, without a reversion to the mean. It is in many ways the weakness of the options wheel strategy. What happens when the underlying moves so far away from the buy-in price, that you cannot generate yield selling options at strikes at the previous buy in?

Disclosures

Educational only. Not advice. Options carry risk. I may hold the positions mentioned.

1. The US debt situation is becoming acute, driving a flight to safety toward gold, while traditional safe-haven treasuries remain flat.

2. A potential banking crisis looms as most banks are capitalized by bonds, which may turn into “certificates of confiscation” if debt becomes unsustainable.

3. In inflationary times, capital is shifting to securities with unlimited notional value (e.g., gold, silver, stocks), boosting demand for these assets.

4. Sanctions and supply chain risks threaten stock viability, creating uncertainty across equities.

5. Physical assets like gold, silver, and uranium are safer bets in volatility, with options providing leveraged exposure.

Disclaimer: This is not financial advice. Past performance is not indicative of future results.

YTD Trading Strategy & Performance

I’ve leveraged the fund to gold price exposure to capitalize on this outlook on the market. The original position (top chart, expiring June 2026) delivered a remarkable 1,100% return. I’ve trimmed 75% of that position, reallocating into new GLD trades expiring in 2027 and 2028, anticipating continued strength and volatility in gold prices.

• Initial Investment into GLD: ~$6,000 USD in May 2025.

• Current Exposure: ~$75,000 USD, a 12x increase, showcasing the power of leverage.

• Performance Metrics (from fundseeder.com):

  • Annualized Return: 447.39%

  • Adj. Sortino Ratio: 15.46

  • Return/Max DD: 38.65

  • YTD Return: 86.5% (per track record).

• Simultaneously, I’m running options-selling strategies (covered calls and cash secured Puts) on mining and Chinese tech ETFs to harvest volatility, holding these for the long term. See below for performance on going short options.
  

The fund was on track for a 25% YTD gain before gold’s recent upside volatility accelerated returns.

Historical Context

Compare past drawdowns of (whopping!) 70% when the fund relied solely on long, out-of-the-money positions with significantly less capital under management. The shift to a diversified options strategy has reduced risk while amplifying gains.

More Charts & Data

• Absolute Performance (2025 YTD): Annualized Return 173.24%, with a steady upward trend.

• Interactive Brokers Performance: +140.28% YTD, +38.30% this month.

  

• Covered Call Report: Total premiums $32,469.80, capital at risk weighted around $100,000, average premium $266.15 per week with a weekly ROI 0.79%.

• GLD Options: Significant unrealized P&L (e.g., <100% on GLD calls, 243.4% on GLD Bull Spread).

What I might trade next week:

I am looking for 50% assignment risks in the tickers GDX, SILJ, URA and IBIT amongst others, with both cash secured puts if I do not have a position, or covered calls if I do. These are some I am looking at.

Volatility is extremely high right now, so I am wary of strong whipsaw pullbacks when selling puts. Going further out of the money would cushion any downsides with the tradeoff being lower premiums.

Have fun, and remember, DO YOUR OWN RESEARCH. I am simply sharing what I am doing. Stay tuned for further updates as we navigate this volatile market!

Disclaimer: This is not financial advice. Past performance is not indicative of future results.

Monday, June 16th, 2025

Hi everyone,

If you weren’t entirely offline this weekend, you probably saw the headlines: Israel and Iran are exchanging strikes, and other nations seem to be quietly—or not so quietly—getting involved. I saw reports of countries offering military aid, shipping munitions, and posturing in all the familiar ways.

Given the scale of the news, I expected oil and gold to spike this morning. But when markets opened… not much. Pretty subdued, actually.

Watch the video above for a peek at my usual Monday routine: scanning for weekly options I can sell—cash-secured puts or covered calls—on positions I’m happy to own long-term.

🛠 What I’m Looking At

Here’s a quick walk-through of how I approached today’s trades.

I pulled up the gold chart and zoomed in to 10-minute candles. We came into the weekend around $3,450, and instead of a panic spike, we saw a pullback to around $3,410. Gold didn’t act like war was breaking out. Same with oil.

This divergence between geopolitics and market response can create interesting opportunities for options sellers. Especially if things take a turn. In any case, volatility increases premiums.

🧾 My Watchlist

I'm still bullish long-term on:

• Uranium (URA, URNM, URNJ)

• Gold and silver miners (GDX, SILJ)

• Chinese tech (especially Alibaba)

• Oil Volatility (USO, CL futures options)

I’m not making directional bets here. I’m looking to collect premium by selling puts 5% out-of-the-money or ATM, expiring 18th of July. Here’s a sample of what I found using the app I created, available at https://premium.coverd.io/ if interested:

URNM is tempting, but the liquidity is thin and bid-ask spreads wide. I've traded URNJ recently too, but going forward I'll stick to URA and URNM unless liquidity improves.

Across the board, you are looking at more than 20% ROR in essence to queue up for a better entry position to a long term hold.

💭 A Note on China Risk

With Alibaba, I remain cautious. The US-China relationship is an ever-present shadow. But ironically, with global attention shifting to the Middle East, this might be a window where Chinese tech doesn’t get as much heat.

Famous last words, maybe—but I’d be okay holding BABA at these levels if I get assigned.

🧮 Wrapping Up

Today’s focus was income generation: collect premium while managing risk in a world that isn’t always rational. I’ve entered a few of these trades and will check back Friday with a short update on how they played out.

Thanks for reading—and if you’re trading this week, stay sane and keep your position sizing under control.

—Jason

Enjoying this newsletter?
Share it with a friend or subscribe for weekly market mindset updates from someone who's trading the trades—one optional adventure at a time.

Share Optional Adventures

I have also been trading cash secured puts for a while now, and it has been working out quite well. The image above was taken from my trading account recently. See the yellow section for contributions made from my options trading.

Selling Cash Secured Puts (and covered calls) allows me to potentially acquire long-term investments at a discounted price while earning additional income periodically. The catch? I need to be prepared to purchase the underlying stock if the option is exercised.

My goal is to generate between 0.5-3% a month on my cash reserves, depending on the volatility of the stocks I choose. Over time, this strategy can make a notable difference. It's important to understand that this strategy doesn't eliminate risk. You can still lose money if the stock price drops significantly.

Let me illustrate with a (similar to previous post) example.

Let's imagine I have a particular investment view over the next decade, that is very similar to my friend previously trading in covered calls. Just as he did, I perhaps believe that the world is moving towards a more electrified energy infrastructure and ecosystem.

With such a view, I would be looking to invest in the following (identical thesis to Mr Covered Calls):

• Solar companies (renewable energy generation)

• Copper mining companies (raw materials needed to upgrade the grid for electrical transmission)

• Electric vehicle companies (discharging carbon-free electrons rather than burning carbon molecules)

Some charts of the ETFs that represent these ideas:

• Solar ETF with ticker symbol TAN

• Copper Mining ETF with ticker symbol COPX

• EV and Future Mobility ETF with ticker symbol KARS

Take a look at the Y-axis for prices over time. What stands out to you about these investment vehicles? To me, it screams VOLATILITY!

As observed before, the KARS ETF went from $19 to $55 and back again in less than 4 years. That means one could have gone from driving a Corolla to an electric Lambo in 2 years. It is now 2024, and if that investor wasn't properly hedged or was over-leveraged, they might find themselves kicking some used Nissan Leaf tires in a car lot while reading this.

Enter cash secured puts.

So what is a put? According to Investopedia:

How about a Cash Secured Put?

Essentially, you sell a put option and set aside enough cash to buy the stock if the option is exercised. You earn the premium from selling the put, which can provide a steady income.

”Simply put, if an investor believes a stock is worth buying at a lower price, they can sell a put option at that strike price. If the stock drops to or below the strike price, they buy it at the strike price, effectively acquiring it at a discount (less the premium received). If the stock doesn't drop, they keep the premium as profit.”

The maximum profit of a cash secured put is the premium received from selling the option. For example, if you sell a put option with a strike price of $90 on a stock currently trading at $95, and you receive a premium of $1.00 per stock (100 stocks per options contract), the maximum profit is $100.

So what does this have to do with Tesla and volatile copper mines in Panama, you ask? Remember our 3 different ETFs listed before. Putting them into the options premium calculator over at premium.coverd.io:

As you can see, these ETFs currently generate between 0.4-2% a month in premiums, with the catch being that the investor must be ready to buy the underlying asset at a 10% discount if the option is exercised before the option’s expiry date of 8/16/2024 in this case. This post was drafted on the 15th of July, during market hours.

Assuming these rough premium values stick over a multi-year horizon, and assuming these underlying assets (TAN, COPX, DRIV) continue to thread water violently without going to zero, the investor would be looking at ROI’s in the 20% per annum range approximately. THAT IS NOT TOO BAD, being able to get paid to wait for an investment thesis to work out.

In general, the more volatile an underlying asset, the higher the premiums associated with said security.

So is the cash secured put strategy for you? considering how similar these strategies are, I have listed out the differences between them, so that you are able to better decide when to deploy each strategy.

Differences Between Cash Secured Puts and Covered Calls

Both cash secured puts and covered calls are popular options strategies that allow investors to earn additional income, but they serve different purposes and come with distinct advantages and disadvantages.

Subscribe now

Cash Secured Puts

• Objective: Earn premium income while being prepared to buy the stock at a lower price.

• Requirements: Sufficient cash to buy the stock at the strike price if assigned.

• Profit: Premium received from selling the put.

• Risk: Stock price can fall significantly below the strike price.

• Best For: Investors who want to buy a stock at a lower price and earn income while waiting.

Another Example: A stock is trading at $10. You sell a put option with a strike price of $9 and receive a $0.50 premium per share. If the stock price stays above $9, you keep the premium. If it falls below $9, you buy the stock at an effective price of $8.50 ($9 strike price - $0.50 premium).

Covered Calls

• Objective: Earn premium income on a stock you already own.

• Requirements: Own the underlying stock.

• Profit: Premium received from selling the call plus any stock price appreciation up to the strike price.

• Risk: Limited profit if the stock price rises significantly above the strike price.

• Best For: Investors who want to generate income on stocks they own and are willing to cap their upside.

Another Example: A stock is trading at $10. You own the stock and sell a call option with a strike price of $11 and receive a $0.50 premium per share. If the stock price stays below $11, you keep the stock and the premium. If it rises above $11, you sell the stock at an effective price of $11.50 ($11 strike price + $0.50 premium).

Advantages and Disadvantages

Cash Secured Puts

• Advantages:

  • Potential to buy stocks at a discount.

  • Generates income while waiting for a desired purchase price.

• Disadvantages:

  • Requires significant cash reserves.

  • Risk of stock price falling significantly below the strike price.

Covered Calls

• Advantages:

  • Generates income on existing stock holdings.

  • Provides some downside protection through the premium received.

• Disadvantages:

  • Limits potential upside if the stock price rises sharply.

  • Requires ownership of the stock, limiting flexibility.

Both strategies can be effective tools for generating income and managing risk, depending on your investment goals and market outlook.

This is just a brief intro to the topic, with tons of more in-depth content out there for the curious investor.

Thanks for reading, and good luck with those investments.

Disclaimer: This is not investment advice, and please do your own research. I am currently in a used car lot kicking tires. Bicycle tires.

Extra Resources

• Investopedia: Put Option: What It Is, How It Works, and How to Trade Them

• Investopedia: Covered Call

• Link to free app: premium.coverd.io

• Reddit’s r/options page

• Youtube Videos Explaining the Cash Secured Put Strategy:

Share

I look to generate between 0.5-3% a month on my holdings depending on their levels of volatility. As you can imagine, this ends up making a significant difference over an extended period of time. Please note, this does not mean that your downside is protected. You are still able to lose your whole investment if the underlying you hold goes to zero.

I believe an example would help us here.

Let us play pretend, and imagine that I was someone with a certain investment view over the next decade. Perhaps I believe that the world will now move towards a new energy infrastructure and ecosystem that is more electrified. With such a view, I would perhaps be looking to invest in the following:

• Solar companies (renewable energy generation)

• Copper mining companies (raw materials needed to upgrade the grid for electrical transmission)

• Electric vehicle companies (hopefully discharging carbon free electrons rather than burning carbon molecules)

Here are charts of some of the ETFs that represent these ideas:

Check the Y axis for prices over time. What do you notice about these investment vehicles? For me, it screams VOLATILITY!

The KARS ETF went from $19 to $55 and back again in less than 4 years. That means one would have gone from driving a corolla to an electric lambo in 2 years. It is now 2024, and if said investor was not properly hedged or over-levered, he might find himself kicking some used prius tyres in a used car lot while reading this.

Enter covered calls.

So what is a covered call? According to investopedia:

So in essence, you own an underlying security, and you make an extra income from premiums of options sold against that security.

”Simply put, if an investor intends to hold the underlying stock for a long time but does not expect an appreciable price increase in the near term, then they can generate income (premiums) for their account while they wait out the lull.

The maximum profit of a covered call is equivalent to the premium received for the options sold plus the potential upside in the stock between the current price and the strike price. Thus, if the call is written with a strike price of $100 on a stock trading at $90, and the writer receives a premium of $1.00 per stock (100 stocks per options contract), the maximum potential profit per stock is the $1.00 premium plus a $10 appreciation of the stock—or a total of $1100.”

So what does this have to do with Tesla and volatile copper mines in Panama you say? Remember our 3 different ETFs listed above. Putting them into the options premium calculator over at premium.coverd.io:

As you can see, these ETFs currently generate between 0.8-3% a month in premiums, with the catch being that the investor’s upside for his underlying asset is capped at 10% between now and the option’s expiry date 7/19/2024 in this case. This post was drafted on the 24th of June, before markets opened.

Assuming these rough premium values stick over a multi year horizon, and assuming these underlying assets (TAN, COPX, DRIV) continue to thread water violently without going to zero, the investor would be looking at ROI’s in the 20% per annum range approximately. THAT IS NOT TOO BAD, being able to get paid to wait for an investment thesis to work out.

In general, the more volatile an underlying asset, the higher the premiums associated with said security.

So is the covered call strategy for you?

This is just a brief intro to the topic, with tons of more indepth content out there for the curious investor.

Thanks for reading, and good luck with those investments. Disclaimer: This is not investment advice, and please do your own research. I am currently in a used car lot kicking tyres. Bicycle tyres.

Extra Resources

The uranium sector has been an interesting sector for me since early 2017. I was already working in the renewable energy space and was well aware that the world was on the look-out for carbon lite sources of energy. Nuclear energy (with which Uranium is a raw input) seemed to tick all the boxes:

1. 24 x 7 Base-load energy. Nuclear power plants run all day every day. There  is little need to worry about the sun shining, or the wind blowing.

2. Carbon free. Besides carbon being required to construct the nuclear power plants, and to mine and enrich the uranium, Nuclear energy is carbon free

3. Energy dense, pollution light. Nuclear waste can be safely stored with very little waste produced per unit of energy produced. The amount of electrical energy needed per person in his/her entire lifetime would create waste the size of a can of soda. 

4. Plentiful uranium globally. No need for forever wars in the middle east, or across the Russian/Ukrainian plains for fossil fuels. Allows for nations to create energy sovereignty if they choose, by stockpiling enriched uranium. 

5. We need it to keep the lights on. This is probably the main point for me. 20% of the electrical load in the USA currently comes from nuclear energy. Without enough Uranium, and without enough enrichment, many developed nations will struggle to keep the lights on. Ask Germany. 

6. There is currently a supply demand imbalance. With many nations (hello China) scrambling to build and commission new nuclear reactors, miners have not been able to keep up, with the spot price of uranium not enticing enough to get marginal developers/producers to commit to meeting demand.   

To keep it simple, I believe the chances of the nuclear energy industry going away or shutting down to be pretty slim. Therefore, the price of uranium has to reach a point where mining companies believe a profit can safely be made. Until that time comes, the uranium in the ground will act as a call option on the price of uranium, and the value of mining companies with good deposits should appreciate in price alongside the price of uranium. 

So Why Uranium With Covered Calls?

For my own personal investment strategy, I look to hold undervalued assets that have negligible chances of going to zero, which will pay when they revert to their historical mean in value. These sectors are usually cyclical, or for certain reasons, sentimentally unloved. Due to this, their volatility is usually gut wrenching. To go through 50% drawdowns only to finish the year even is par for the course with such investments. The silver lining in this is that they offer very attractive options premia as a result. Enter the technique of selling Covered Calls. 

My mental checklist for deploying the covered call strategy:

1. Underlying has near 0 chance of bankruptcy or going to zero. 

2. The underlying is a good candidate for a long term buy and hold

3. There is sufficient volatility to generate healthy options premia

4. I am bullish on the sector or security

5. Options volumes and open interest are ‘high enough’

   

Uranium is for the moment unique in that it is not only extremely cyclical, it is also pretty unloved. As we go through prolonged energy crises in the near future, I believe both these aspects will soon turn. By using the covered call strategy, I am able to generate healthy premiums to help with my carrying costs, and also weather the volatility. 

Look at the table above for ROI estimates generated for options expiring roughly one month out. Pretty juicy! I use the coverd app to help me ascertain and judge relative risk and reward quickly, allowing me to compare options pricing between numerous securities (Stocks or ETFs) and expiry dates. 

I will leave this brief intro here for now.

Key sources of additional information:

https://www.uraniuminsider.com/ (I am a happy subscriber of Justin’s newsletter)

https://www.gorozen.com/ (Great information with podcasts and reports on the natural resources sector)

https://twitter.com/quakes99 (The OG of uranium twitter)

Recent Media of interest:

1. https://financialpost.com/feature/nuclear-energy-surge-starts-uranium-golden-age

2. https://www.energy.gov/ne/articles/sapporo-5-leaders-make-significant-progress-securing-reliable-nuclear-fuel-supply-chain

3. https://nypost.com/2024/04/17/business/john-catsimatidis-red-apple-group-to-roll-out-of-small-nuclear-reactors/

Disclaimer: I am only sharing my thought process, and my own investment strategy. I do not in any way want to influence your own financial decisions. Please speak with a certified financial advisor and/or do a ton of your own due diligence before risking any of your own capital. 

The first silver I ever purchased was in 2008. I was living in Sweden at the time, with all my savings denominated in Australian dollars. I was an exchange student in Stockholm, and I was living month to month, making sure my Scandinavian expenses never exceeded my small Australian allowance. Then the financial crisis hit, and the Australian dollar crashed. I had very luckily exchanged 6 months of expenses into Swedish Krone just 2 weeks before the FX move. Had I not, I would have had to pack my bags for home and cut my time abroad short. It made me ask a simple but profound question. “What is money?” 

How did all my hard earned savings nearly disappear? If someone loses, another wins. How does that exchange occur? 

This was when silver (and gold) entered the conversation for me. I never looked at fiat currencies the same way again. Why save your money in a unit of account that the governments promise to debase? 

Back to the trade idea. Silver has a few very unique properties that piques and holds onto my interest.

1. Silver has historically been money on countless occasions across countless locations. Did you know, the Chinese word for bank 银行 literally means “silver business/trader”. Another teaser, what does the French word for money have in common with Lionel Messi’s home country? Ever wonder where the phrase “cold, hard cash” came from? Silver is a precious metal, we have just somehow forgotten about it. 

2. Electrical conductivity. Silver is known to be a unique metal for industrial purposes due to how conductive it is. It is used in all forms of electronics and electrical goods. It is currently being consumed heavily by the solar industry due to this property, with year on year consumption growing exponentially. 

3. Silver is usually used in small amounts for it’s applications in electronics (or in solar). Imagine if there was $0.30 worth of silver in a mobile phone worth $500-$1,000. The price of silver could move 10x without the manufacturer worrying about margins getting impaired. Silver is somewhat demand inelastic with respect to price.   

4. Due to its electrical conductivity, it will feature prominently in the race to electrify our grids. Would Tesla or BYD cut down on performance, substituting with copper instead of silver if there was no strong price incentive to do so?

5. Silver is mostly mined as a by-product. Why is this important? Silver is mined mostly as a by product in Lead-Zinc or Copper mining. Due to this, the decisions these mines make to ramp up or slow down depends on minerals such as Lead, Zinc or Copper. An increase in silver’s price might not mean we see a linear ramp up in silver production. Silver is somewhat supply inelastic with respect to price! 

6. There is currently a supply demand imbalance. The World Silver Survey announced a 265.3m oz market imbalance for 2024. This is now the third year in a row where this is the case. For context, mining production was estimated to be 830 million ounces, with recycling approximated at 179 million ounces.   

In a nutshell, Silver is a critical mineral used in a myriad of applications. The more the world modernises (cell phones, solar panels, smart grids) the more silver will be needed. Supply will have to meet demand, or prices will rise to damped demand. As mentioned before, silver is relatively inelastic when it comes to signals, so prices will have to move really strongly to make an impact. Similar to other minerals we follow, silver in the ground will act as a call option on the price of silver, and the value of mining companies with good deposits should appreciate in price alongside the price of silver. 

So Why Silver for Coverd Calls?

For my own personal investment strategy, I look to hold undervalued assets that have negligible chances of going to zero, which will pay when they revert to their historical mean in value. These sectors are usually cyclical, or for certain reasons, sentimentally unloved. Due to this, their volatility is usually soul wrenching. To go through 50% drawdowns only to finish the year even is par for the course with such investments. The silver lining in this is that they offer very attractive options premia as a result. Enter the technique of selling Covered Calls. 

My mental checklist for deploying the covered call strategy:

1. Underlying has near 0 chance of bankruptcy or going to zero. 

2. The underlying is a good candidate for a long term buy and hold

3. There is sufficient volatility to generate healthy options premia

4. I am bullish on the sector or security

5. Options volumes and open interest are ‘high enough’.

Silver is for the moment interesting in that it is not only extremely cyclical (look at a long term chart), it is also pretty unknown and undiscovered. Silver is still only 60% of its 1980 high. Name one item you know that is 40% cheaper than it was in 1980. Even the Nikkei can’t claim that throne :) 

As we go through prolonged monetary and energy crises in the near future, I believe both these aspects will soon turn. The simple questions are: 

1. Is the world going to need more electronic and electrical goods?

2. Will solar panel production continue to grow? 

3. Could prolonged high inflation and reckless monetary policies motivate precious metals purchases?

I personally believe that the chances are tilted towards positive answers for the questions above. By using the covered call strategy, I am able to generate healthy premiums to help with my carrying costs, and also weather/mitigate the volatility until price rises to stifle demand or increase supply. 

Look at the table above for ROI estimates generated for options expiring roughly one month out. I use the coverd app to help me ascertain and judge relative risk and reward quickly, allowing me to compare options pricing between numerous securities (Stocks or ETFs) and expiry dates. 

I will leave this brief intro here for now. Looking forward to hearing from you, and perhaps learning about an interesting idea or two from your end.

Key sources of additional information: 

https://www.silverinstitute.org/

https://www.silverbullion.com.sg/why-buy-precious-metals

Recent Media of interest:

1. https://x.com/SilverBullionPL/status/1781304940537024749 Twitter thread detailing the recent 2024 silver institute report. 

2. https://www.visualcapitalist.com/sp/silver-through-the-ages-the-uses-of-silver-over-time/ Uses of silver over time, presented as usual excellently by the people at visual capitalist

3. https://www.visualcapitalist.com/silver-series-new-energy-in-solar-and-ev/ Another visual capitalist masterclass detailing silver use in Solar and EV industries

4. https://www.pv-magazine.com/2024/04/19/pv-industry-demand-for-silver-could-rise-by-20-this-year/ PV Industry demand for Silver could rise by 20% this year

Disclaimer: I am only sharing my thought process, and my own investment strategy. I do not in any way want to influence your own financial decisions. Please speak with a certified financial advisor and/or do a ton of your own due diligence before risking any of your own capital. 

Subscribe now