Inside a Covered Strangle Strategy That Grows Your Stock Portfolio

[00:02] to make a multibagger. I will make a top companies as my multibagger by selling the strangle wheels uh on a share. The goal is to systematically reduce the cost basis of my stock and to generate consistent income based on my option

[00:17] strategies. >> Today we will learn how to grow a stock >> Today we will learn how to grow a stock portfolio faster using options. Welcome to Hamant Swami. >> Hi John. Nice to have you here. You use

[00:30] covered strangles to grow your stock portfolio. Give us the 40 secondond working for you. >> Sure. So my strategy is a modified wheel strategy which I call it as the covered strangle wheel. So uh you know the goal

[00:47] here is not to maximize the short-term gains. The goal is to systematically reduce the cost basis of my um stock and to generate consistent income based on my option strategies >> and I look forward to digging into this

[01:01] but uh first tell us a little bit about yourself especially as an options trader. >> Sure. Uh I am a technology professional and a long-term investor. So my main thesis is to investing through option

[01:14] strategies since my background is in engineering which naturally led me towards the systematic and uh rule-based investing. So uh I would uh like rather than trying to predict short-term market movements I focus on owning um the top

[01:30] companies in my portfolio. And we will get into the details of how you uh do this but uh tell us first a little bit what what are you trying to achieve with this way of trading. >> Many working professionals who do not

[01:44] have time right they want to tend to invest in the stocks and they also do not want to monitor the chart. Uh that was the main reason for me to uh introduce to the options itself. So uh I don't have time as a working

[01:59] professional myself. I do not have a time to look at the chart every day or every minute what is happening but I also want to invest uh in the stocks for the long term like say like horizon of 10 plus years um and most of the times

[02:13] if you observe uh the top companies stay in approximate ranges so during that in approximate ranges so during that time I do not want my capital to be not doing anything so I use option strategies um to build a short-term

[02:28] gains on it uh which effectively makes my cost basis less like regardless of the tax with respect to short-term gains. Uh which makes my uh uh the

[02:40] companies going forward. >> But your long-term goal is to build your stock portfolio step by step and make it bigger and bigger year by year. >> And we will get into the details of how you do this. But uh let's start with the

[02:56] basic. What is a wheel strangle? >> So the traditional wheel uh involves to sell cash secured puts and you get assigned you sell a covered call. But in this a covered strangle wheel you sell a call uh you sell a put and you get

[03:11] assigned a shares and you again sell a call and a put which creates like a two >> So you have like two phases right? You start with uh selling the cash accur and once you are assigned the share you sell

[03:25] both a call and a put as we see explained here. Let's move to your entry mechanics. First what what are your rules for finding the underlying the basic rule what I follow here is uh John I tend to keep 10 plus year of horizon

[03:42] where I want to hold the stock for much larger appreciation. Right? So I do not want to go in a speculative business. I treat my whole investing as a a business

[03:54] purpose right. So I start investing uh in a companies where it's like top 10 and it also need to uh have not a lot of volatility but a decent volatility. So I usually tend to pick like top 10 from S&P 500.

[04:09] >> And these are stocks you want to own for a 10 year or more perspective. So you a 10 year or more perspective. So you have chosen your stock. Now take us through your process of how you both sell the put uh sell the calls and do

[04:23] the wheel strangle. >> Sure. Uh as a phase one begins uh I have created like a very mechanical uh way of doing it. Uh the first step is to sell a

[04:35] put option uh at a target strike price where you want to own that particular stock. Right? it can be at major support. Uh I usually tend to do uh as I said before if it's a major support I tend to do it uh weekly expiries if it

[04:49] is at between uh support and resistance I go and sell for 30 to 45 DD uh DD where uh whenever I have like whenever I see a high IV elevated so I can pick up

[05:01] see a high IV elevated so I can pick up more option premium. Uh so I tend to keep that uh contract until the expiration. So at expiration it can happen like two things. One my uh strike price can be uh above it. So I the

[05:17] stocks will not get assigned to me. So I tend to keep the complete premium tend to keep the complete premium myself. If it's below my strike price uh the stock get assigned which is equal to 100 shares at my target price which was

[05:29] my initial um judgment where I want to own that particular shares at particular uh price. So you repeat this until you are assigned the shares. >> Yes, I if it is not assigned I keep

[05:44] repeating this process in the phase one until I get assigned for 100 shares. >> So once you are assigned your shares you go to what you call step two. What what >> So the phase two starts beginning as soon as you get assigned with 100

[05:58] soon as you get assigned with 100 shares. Um the leg one is you own a 100 shares now. Now now you want to do a standal. So the leg two will be you sell a call above your uh stock price and you sell the put below your stock price. So

[06:13] entry mechanism is similar to the put option you sold earlier. Uh I usually tend to sell the 45 DTE with 20 to 30 delta on it uh with same put and call

[06:25] and I collect those premium uh to reduce my break even on the actual investment uh which got assigned with 100 shares. So when you sell another put that means you are prepared to take ownership of another 100 shares.

[06:40] another 100 shares. >> Yeah remember uh my goal is to invest on a good company stocks. So uh I have a set amount of uh capital which I want to deploy. So instead of go and buying all together directly I tend to do a ladder

[06:55] system. So I go and sell a put option. So when I do the leg three of selling an another put I'm basically I know at the beginning itself if my strikes get logic. >> All right so before we go on let's just

[07:11] repeat this steps. >> Sure. Uh so this is a landwing strategy as you say uh at the phase one you sell a put if the sell is uh if the hood

[07:23] option you s breach you get assigned with 100 shares right that's the second block which you see you own 100 shares now and the phase two begins now which you sell a call above your stock price and you sell the put below your stock

[07:37] and you sell the put below your stock price. This keeps on repeating until you start owning the shares on your portfolio. Once this ladding strategy uh improves like you sell a call and you sell a put

[07:51] on your stock price, there can be a four scenarios uh which can go right. One the stock goes up. Other thing you you can see a stock always in a flat uh between your call option and a put option which is an ideal scenario for our strategy.

[08:07] Other one is a small dip uh where your put get challenged and other one can be a sharp drop where your put breaches and you start get to assign it uh new 100 shares. These are the four scenarios which can go in your plan. So we know

[08:21] our plan before entering the trade itself. So let's take those scenarios one by one and what what you actually do. The first

[08:33] you said the stock goes up. I guess that's uh one of the preferred scenarios. >> Yeah, this is one of the good scenario for us. One is because when the stock goes up, your put option premium which

[08:46] you collected will be completely yours. You don't have to give back anything uh when you sell it back when you buy back the sold put and also uh your hairs can

[08:59] be at the same u range. it can move up or down or it can have some of the appreciation. So you tend to keep your shares in your portfolio and also your call option if it is breached you tend

[09:12] to keep the premium but if the call option is threatened you can roll out to strategies >> in this scenario will you you will >> in this scenario will you you will normally try to avoid your shares being

[09:26] taken away >> yeah that's the main goal I will not let my shares to go away with the call like when the call gets breached I tend to roll or do my adjustments. >> But when you roll up and out, are you

[09:41] a condition for you? >> It's not a condition for me because my main goal is to keep the shares in my portfolio and minimize uh the break even and also have a kind of an so when I roll in if I receive a credit it's good

[09:58] but most of the time when you sell for next month you will receive a credit or a bit of a credit. The next scenario is that the stock stays flat. that the stock stays flat. >> Yeah, this is uh even better uh

[10:12] >> Yeah, this is uh even better uh scenario. When the stock stays flat, that means you have your uh strangle which you sold a put and a call in your probability range. Right? So you tend to keep both the call option premium and a

[10:26] put option premium. you tend to collect the whole um uh premium which you sold and the cost basis will be much lower for your invested capital. >> So this you can just keep going week after week after week.

[10:40] >> So what I tend to do is uh once it reach the 50% or 60% of the premium which I receive I tend to roll it to next month. So I keep repeating it if it stays flat. >> Then we have the third scenario where you have a small dip in the market. What

[10:56] situation? >> So when there's a small depth, which usually happens, the premium you collected against the put or a call will act as a cushion for your drop, right?

[11:09] The break even is already extended. So you don't have to panic or do uh roll it, right? Then you can still be profitable or neutral even below the current price uh if it stays uh in that

[11:24] probability of the range. And then we have the scenario I know a lot of wheel traders are worried about and that is when you get a big drop in and that is when you get a big drop in the market. So when there's a sharp drop

[11:36] right if if your strategy was to own that particular company at that particular stride you absolutely do not need to do anything you can leave it as it is and you can get assigned 100 shares but you will be having unrealized

[11:50] loss at that current moment but at that moment when there's a sharp drop and if at that particular strike you can start with your adjustment strategy. One of the basic which most of the people do is a rolling strategy. I do have other

[12:05] adjustments which I do uh which I uh do the splitting uh of the option premium and I again tend to open up a new uh strangle with the delta noodle. >> Let me interrupt with a quick tip. If you like trading earnings earnings

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[13:17] interview. So maybe we should look at an example of one of the trades that you have uh done for a bit clearer understanding. >> Sure John. So one of the uh example which I have here is for Nvidia which I

[13:32] have uh shares in my portfolio. This was back then when uh Nvidia uh share fell 17% overnight uh when there was uh deepci news. Uh so what happened was on

[13:45] deepci news. Uh so what happened was on Jan 24th which was on Friday uh I sold at the money strike I was a bit aggressive uh to sell a put option I sold uh 140 strike which was at the money and stock was trading around 140.

[13:59] money and stock was trading around 140. So I saw uh I collected a premium of $5 So I saw uh I collected a premium of $5 when I sold 140 uh put uh option. So um my break even would be for the put option is around 135 since I collected

[14:12] option is around 135 since I collected $5 as a premium. Um since uh I have taken the cash recorders 14,000 uh if it is a if it is not a margin account if it is a margin account it would be actually less than that almost 50%. Uh since IB

[14:25] was elevated my premium was also high I was receiving around SI dollars. So I was happy okay uh I have sold the best possible support right but the market possible support right but the market went uh reverse on me. So next two days

[14:38] there was a news uh from China with their deep CI which uh has a much lower their deep CI which uh has a much lower price compared to Nvidia chips. uh all those news which came in in Nvidia uh people panicked and the stock fell from

[14:53] 145 to 118 which was around 17% a single day drop which is not an ideal scenario of course I entered a trade uh because I want to own the share but in one day if the shares fell to 17% uh drop there would be an unrealized

[15:10] loss uh if the shares get assigned uh next Monday uh I did get 100 shares which was assigned uh because uh the price was below uh my 140 put strike um

[15:24] price was below uh my 140 put strike um my unrealized loss was 1,700 uh at the price of 118 price. So as soon as my shares I got assigned I started with the phase two phase two as I explained before I sell a call above my

[15:39] strike price and I sell a put below my strike price. But if you look at this example, stock is trading around 118. If I have stock is trading around 118. If I have to sell uh above my

[15:52] 140 which I got assigned, that will be around 150 or 160. The premium would be around 150 or 160. The premium would be very less which will also not be having a good downside protection. So what I did was I sold uh the strike for the

[16:05] call 140 where I got assigned my put right. uh that means if I send a call that means I'm saying I am I will be giving away my shares at whatever price I bought in >> right and I uh the other leg which I

[16:20] added was a put uh which was at 100 strike since IV was elevated I was getting a good premium of $10 so together if you add the premiums of call and put uh together you will be getting around $14 a premium uh my new break

[16:35] around $14 a premium uh my new break even would be uh 135 which was my initial uh stock put option I sold at 140 I got $5 premium so my break even 140 I got $5 premium so my break even was 135 and my new break uh like the new

[16:48] premium was $40 so my new break even would be $121 >> so that's pretty close to what uh what the price level is at that time then >> yeah yeah the stock was at 118 I collected 121 so I was technically down

[17:02] of only like $2 to $3 since I collected the premium so that's the beauty of doing the covered triangle. Without doing a covered triangle, my cost basis was 135. After doing a covered triangle,

[17:15] I collected a premium. My stock new break even was 121. So all in all, I collected a premium of 1,900. Uh so this was all on that particular day. What happens in next day or next two days? That's a totally a different story. But

[17:30] at partic at that particular day, uh I was okay, right? I collected $1,900. I was down only of what $2 to3 per contract. Uh so as time progressed uh on

[17:43] contract. Uh so as time progressed uh on February 18th uh Nvidia started rallying uh not a huge rally. It it started and breached my call option at 140. Uh so I had like two options which is actually good uh good uh scenario for my existing

[17:59] good uh good uh scenario for my existing position. So my uh if I have an option A I can close the strangle meaning um I would leave the call be taken away uh with by shares of uh which I got assigned at 140 right so uh my call get

[18:16] called away my 100 shares will get called away but the put contract on called away but the put contract on February 18th which I sold for $10 was February 18th which I sold for $10 was at $2 now which I made $8 profit and my

[18:28] option contract of call went from four to six which was technically $2 loss on to six which was technically $2 loss on that contract. So net if I add on the $8 profit on my put and loss on $2 I was in 600 profit right with uh at this at this

[18:47] stage my thought process was okay I have received almost 50% of the premium which I got collected now I can uh start fighting in it uh to get because I want to own the shares and uh do an adjustments but what I did was

[19:02] I closed this trade uh because I almost collected like 50% of premium $600 and moved on to sell a spangle at the next month expiry that was the one of the option which I had and which I did because I don't want to give my 100

[19:17] shares which I had collected uh for my long-term investing. >> So you basically rolled the whole strangle to the next month. Yeah, since it was in profit, I was able to roll the whole strangle uh to next month uh with

[19:31] right? >> And the same strikes. >> No, not at the same strike. Uh since the stock was at 140, now I sold at 120 put option and the call option around 160 and I collected around $10 or more and I

[19:48] continued doing that uh based upon where my current stock price is. So where did this trade end? >> This trade will not end because as I said I want to own the shares. So I will never leave my shares get called away

[20:03] but I tend to keep selling strangles against it to collect extra premium if I against it to collect extra premium if I get threatened. The only risk in this trade is my put options. Right? If the stock uh falls

[20:19] as a drop fall my put get breached. What I do then is if I if the put option sold I do then is if I if the put option sold is around 10 and when the stocks fall, if the put option contract went to 15 or $20, I split that premium of $20 into 10

[20:36] and 10 and I sell a call and a put again. So I keep splitting the premium to make it delta new. That's my edges. >> I didn't quite catch what you did now with this splitting. Could you explain it again,

[20:49] it again, >> John? I have a 43D option chain open. Suppose if I have an uh put option which I have sold at 180 strike and call I have sold at 180 strike and call option is $220 sold for $3. And if the

[21:03] option is $220 sold for $3. And if the stock tends to drop towards $180, the stock tends to drop towards $180, the $180 option price would not be $268. It $180 option price would not be $268. It would be almost $6 to $7 now, right? But

[21:15] the call option which I sold for $3 can be $1 or $2 or $1.50. Definitely this option would be in profit. So what I will do is I will close this one. I will

[21:27] will do is I will close this one. I will take out uh this leg and the 180 option which is around $7 when the stock is around 180. I will close that. Think this strike as 180. Now I will close this one and I will split the premium up

[21:45] uh like whatever it's trading around mid is around $8. I will split this premium into four to the put side and four to the call side. So at the end of the day the call side. So at the end of the day I will not leave the premium collected

[22:00] uh whatever I gave back to sell that $180 put option. That's my adjustments. >> All right. And if I understand correctly, those trades that you have here, they they go on and they go on.

[22:14] But have you also grown the number of Nvidia shares during this process when you have been assigned the shares? >> Yeah. Yeah, I have a I have some fixed capital for each stock on my portfolio

[22:28] depending on availability of the uh funds. So I I own uh shares of Nvidia >> and right now it's about 199 or so. So it's pretty good compared to what what

[22:41] it was last year. >> Yeah, absolutely. I can show you. I have downloaded uh the Excel sheet uh from my transaction. So if you look at my uh transaction. So if you look at my uh history, I have done it from uh 2024

[22:56] history, I have done it from uh 2024 and I have downloaded until 2026 of uh yesterday I guess. So all in all, all my premium collected on Nvidia is around $14,800. So I think this account has two lots of

[23:10] Nvidia. That's around 200 shares. Uh so if you think about it uh regardless of the short-term gains tax which I pay I have collected around 15,000 on 200 uh

[23:23] shares of stock. So uh technically for if you think 200 right into 100 that would be around 20,000 as of now. Uh as my shares appreciated

[23:36] right uh if even if I had bought around like 100 my shares profit net on net is around $10,000 on top of that I have collected 14,836

[23:49] as a premium. Right? So if you look at it net on net Right? So if you look at it net on net my profit is around 24836

[24:01] which is more than the capital I have invested on the shares itself. So this is my multibagger uh sorry this is my multibagger. I will not look for a speculative stock to make a multibagger. I will make a top companies as my

[24:15] multibagger by selling the standal on a share. How many different shares are you doing this on at the same time? >> Depends on the capital. So as of now I have uh legged into all the top seven uh the Frank companies. I have Microsoft. I

[24:32] have some Meta shares. I have some Google and Nvidia. Uh I do have some lower stocks like midcap level stocks like Sofi shares which went from $30 to $18 as of now but still I'm in a profit because I tend to sell this option uh

[24:48] premium against it. >> Let's talk about the risks. What is the worst that can happen with this wheel strangle? >> Yeah, the biggest risk uh from what I observed is owning a stock uh that

[25:02] experiences a prolonged decline. So you have to be uh one thing at the entry itself you have to be sure you are keeping the uh shares for a longer term

[25:14] and you need to invest in good company stock good tech stocks which on year on year have a good growth sales which have a good revenue uh all sort of financial things so I as I said at the beginning I usually tend to go with top 10 of S&P

[25:30] usually tend to go with top 10 of S&P 500 so that's where my edges at the beginning itself. That's why stock selection is the most important part of the strategy. >> I always ask my guests to put their

[25:42] strategy or way of trading on a risk profile scale where one is very low risk and 10 is very high risk. And you can define the numbers as you see fit. Where

[25:55] would you put this strategy on on a certain scale? Honestly John in this strategy uh the main edge here is to pick a good quality stock. If you have pick a good quality stock. If you have done that job well uh the scale of 1 to

[26:10] done that job well uh the scale of 1 to 10 easily this would fit around three. >> low risk. >> What if the whole market crashes and uh you get like a 20 30% fall in the market?

[26:24] >> That's when portfolio hedging comes into place. uh I uh if you I mean if I for my portfolio hedging what I do is I do a delta uh beta waiting with respect to spy and I do portfolio hedging instead of individual stock hedging uh I keep

[26:40] that insurance every year uh so that in any sort of black swan event that will >> let's sum up how you sum up what we have uh been true and what would be your two or three most important takeaways that you really want the audience to remember

[26:55] from this interview. The takeaway on this interview would be the total portfolio growth and the return on capital uh would be I mostly prefer the capital efficiency by selling the option strategies. So that's how I make my cost

[27:11] basis of my stock much lesser by collecting the premium uh by doing this kind of strategies and I do have uh by doing all uh this I also have a cash flow generated every month on month and I do not have to watch this chart every

[27:26] day uh as a busy working professional. I can just watch it like weekly once or price is. So that's the biggest takeaway. >> How does this fit with others option strategies that you do?

[27:40] uh I tend to uh do most of the option strategies for example if also if I have to own like 100 shares I do a zebra strategies uh and uh also do a leap strategy where I sell in far away DT like two years DT uh for example as of

[27:58] today Microsoft which is a head stock for all the people in Twitter or where not I look at that's the value company as of now if you look at their revenue And as a tech professional where my primary uh uh job I focus on most of the

[28:15] Microsoft products uh where my infrastructure is and all lot so I know the value of the company so uh I have a leap options u as of now with the Microsoft and even with the leap option you can do a covered call and a strangle

[28:30] on it u that's the beauty of the strangle what I explained now >> what would be good resources to learn more about this kind of uh trading. >> Honestly, John, when I started uh my option learning process back in like

[28:45] eight years ago or something, uh I was definitely recommending this books which is options as a strategic investment by Lawrence McMillan and options playbook Lawrence McMillan and options playbook you can learn from Brian. uh but uh as

[28:58] of today uh in the world of AI uh you can use claude or chat GPT and um pace around the scenarios uh give a tough questions and see uh what it teaches or

[29:11] you >> and I do as always recommend that you watch some of the other interviews that we have here on theta profits we have we have here on theta profits we have almost 100 interviews published so you

[29:25] should find the strategy that would suit your style for sure.