r/options

What percent of option traders do YOU think engage in wheel trading ie selling puts? why do you think more people don't do it?

Long-term, Gold seems to be in an uptrend and we all could use a bit of gold in our portfolios.... would you consider the Wheel strategy on GLD given current levels? Are there better ways to get exposure to gold and generate some income from it?

Joy

Your option comprises of 2 parts: intrinsic and extrinsic values. Intrinsic value is the per-share difference (difference between underlying price and strike price). Extrinsic contains time-value which is confounded by IV, interest rates, dividends and probabilities. The extrinsic value part is what makes pricing say, a LEAPS contract, very tedious. Perhaps most retail traders ignore it entirely. But you shouldn't, and there is a way to meaningfully set a price target which is fair for you. You don't want to pay more because of the confounding factors.

The easiest way to figure out if your contract is cheap is to work out the borrowing rate of owning the contract. When you buy a deep ITM call instead of shares, you're effectively borrowing the strike price*. The cost of that loan is the time value you pay, plus any dividends you miss from not owning the shares.

Implied borrowing rate ~= (extrinsic value + dividends missed) / strike * (365 / DTE)

Extrinsic value = option price - (stock price - strike)

For example, say SPY is $760, and you are looking at a contract that is 365 DTE and 600 strike. This contract is deep ITM and is priced $188 (i.e. premium is 18,800, I felt like this needed to be said). Let's also assume SPY gives negligible dividends.

Time value = 188 - (760 - 600) = 28

So implied borrowing rate ~= (28 + 0) / 600 * (365 / 365) = 4.6%

What this means is you are borrowing $18,800 @ 4.6% EIR to buy this contract. IBKR's margin loan is roughly 5.4% now since the Fed hiked rates by 25 bps. A short Box Spread can, if you are lucky, give you a 5% EIR - close to the risk-free rate of 4.5-5%. By calculating the implied borrowing rate of the deep ITM LEAPS contract to be 4.6%, we know that the price of that leverage is really cheap.

You can work the math backwards to derive the premium:

Option price ~= (underlying price - strike price) + (strike price * borrowing rate * DTE / 365) - dividends

Note: premium = option price * 100 (I felt like this needed to be said again)

Note that borrowing rate here can be whatever you value to be good. 5% is great in the current market.

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You may also think that OTM contracts are cheaper leverage than ITM contracts, but this may not be true. While you are paying fewer dollars per delta, your contract is also entirely extrinsic value. This means you can get IV crushed very hard and your theta burns much faster than a deep ITM LEAPS. Over the course of a year, that OTM contract premium decays incredibly fast, and therefore it is expensive leverage. So, sticking to deep ITM LEAPS is the way to go.

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* Why are you borrowing the strike price? The person who sold you the call has to hold the shares for you until expiry. They are sitting on that market value for the tenor and should be paid an interest on it. The $28 (see time value example) is exactly what you pay them, per share.

Took me a while to write this. Enjoy.

EDIT: amended the DTE in my equation. thanks u/PapaCharlie9

Nike Q1 FY2027 results came out a couple of days ago, and they are confirming layoffs. Revenues in china plummeted 26%, there overall global revenue dropped 4%. The eps dropped from 1.15 to 1.35 and there 2027 revenue outlook forecasted a high single percentage decline.

Nature of option is to precisely value and control risk. For many strategies, smartly using option structures can reshape your P&L (profit and loss) to be smooth, meaning 1) max loss is limited, 2) no steep loss.

Of course the P&L reshaping has a cost. But this is the key to real profit: a smooth P&L with limited max loss enables you to apply sizable position to produce good profits.

Reason is simple: without limited risk, rational investor will not place a big position, otherwise the account could suffer huge loss if holding long enough. Therefore, many good strategies can only work as "toy strategies".

This also explains the consistency between profit & efficient market theory: your profits are not from mis-priced assets, rather, it's from larger but safer positions.

Actually many successful investors are using this rule (they reshape PL to be smooth but not limited to using options):

* Bridgewater: textbook example of using uncorrelated assets to make smooth PL, then apply leverage. They don't use options because their fund is too large.

* Soros: his book Finance Alchemy recorded his usual portfolio structures: long/short stocks, long/short FXs, long/short interest products, long/short commodities -- overall it produces a smooth P&L allowing him to apply 3x leverage of his fund's capital.

* Cliff Asness (AQR fund): very similar to Bridgewater.

* Buffet: not a typical example but very similar: he finds and holds long-term stable & increasing stocks that are not perfectly smooth but drawdowns are quite limited, then he applied leverage with Insurance Float.

BLUF: LWLG debit spread 7c/10c Jan 2029 easiest 5x you’ve ever seen.

You may or may not have heard of LWLG, but you have heard of data transfer. What’s the bottleneck? Converting data into light.
LWLG is the solution.
The 400G and beyond switch that all the AI and data centers are salivating for.
It’s pre-revenue but it’s the best solution available (if data centers embrace the technology).
Anyway, would you like to 5x your position?
7c/10c Jan 2029 debit spread cost .50
$250 profit per $50 if the stock hits $10. (5X)
Stock just went up about 12% in the past week. (4.94-5.79)
Stock hit $18.71 in May of 2026 (only 5 months ago)

TLDR: if the stock even hits within 54% of what it was 5 MONTHS AGO between now and January 2029 (over 2 years away) you will 5X the position. The risk/reward is crazy.