Proven Investment Strategy

Today we’re going to continue a proven investment strategy that’s given us consistent trading profits. We currently own 800 shares of MBUU in this portfolio. We’ve worked our cost basis down to $26.81 per share with these wheel trades. Let’s walk through the concept of the wheel trade, then we’ll discuss the trade we did today.

A wheel trade is when we sell to open a cash secured put option that is out of the money. We wait for that trade to expire, and if it expires worthless out of the money we sell another put option that is out of the money. We repeat this process until we are assigned shares. By the time we get shares we’ve built equity in our position with the option premium. Then we sell to open another put option below the money to create more cash flow from the option premium. We also sell covered call options at our assignment strike or higher on a portion of our position. This proven investment strategy helps us create consistent cash flow on a monthly basis.

As long as the underlying security trades in the range between our put and call strikes we’ll keep the option premium from both trades, we’ll keep all of our shares, and we won’t have the obligation to buy more shares. If the trading price rises above our call strike we’ll have the choice to either sell some our shares or roll the covered call to a higher strike price that is further out in time. If the trading price falls below our put strike we’ll have the choice to either take the shares or roll the trade down to a lower strike price that is further out in time. We’re only doing these trades on a company we want to own. And we’re only selling put options at a price we’re comfortable paying for shares of the company.  

Now back to our 800 shares of MBUU. We currently have two covered calls for the $45 strike, one for the $37.50, and another for the $35 strike. Each of those contracts shares the 11/21 expiration date. This morning Trump talked about raising tariffs on China again and the market has been slumping. Today MBUU is trading near the low from the Trump Dump back in early April. Prior to that the last time MBUU traded at this level was during the Covid Crash during Trump’s first term. MBUU had an investor day at the end of September during which the company shared their plans for the future. Here’s one of our recent posts on that walks through our proven investment strategy on MBUU.

We’re comfortable MBUU will be a bigger, stronger company ten years from now. They’ve built their capacity and still have a strong balance sheet. That, along with their variable cost structure, gives us confidence that they’ll be in a position to take advantage of an eventual upswing in consumer sentiment. So we’re going to sell some puts on MBUU.

When we sell to open a put option contract we’re making a promise to buy 100 shares of the underlying company at the strike price on or before the option expiration date. We’re using the $27.50 strike price, so we’ll need 100 times $27.50. That means we’ll need at least $2,750 available in our brokerage account for each put option we sell to open. That capital will be tied up until the expiration date, which is 1/21. Today is 10/10, so that’s 42 days from now. Now let’s walk through how we determine our annualized return.

The trade lasts 42 days. There are 365 days in a year, so we divide 365 by 42 and we get 8.7. That becomes our time multiplier. Then we compare the options premium we’ll receive for entering the contract to the strike price, which is the capital we’re risking when we enter the contract. In this case the option premium is $1.54 and our strike is $27.50. So we divide $1.54 by $27.50 and we get 0.056. Then we multiply that by our time multiplier of 8.7, and that gives us 0.487. That’s an annualized return of 48.7%. And the down side is that we’ll have the obligation to buy shares of MBUU at $27.50, which we feel is a favorable price. Here’s the option contract return calculator we use.

If the trading price of MBUU drops below our $27.50 strike price we’ll have the choice to either buy the shares at $27.50 or roll the trade to a lower strike price with an expiration date that is further out in time. If we take the shares at $27.50 our cost basis will actually be lower than that. Remember the option premium we brought in when we sold to open the contract? That stays in our account regardless of happens with the trading price. So our actual cost for the shares will be the $27.50 strike price minus the $1.54 in option premium. That works out to $25.96 per share. We like that price even more than we like $27.50.

Weekly Option Trade Recap

We currently own 800 shares of MBUU in this portfolio. We have two calls at the $45 strike, one at $37.50 and one at the $35 strike, all for the 11/21 expiration date. Today we sold to open three contracts of the $27.50 put option for the 11/21 expiration date. This proven investment strategy brings our basis on MBUU down to $26.23 per share. Here’s the template we use for tracking our trade history.