HL Financial Strategies 101: What Can Go Wrong (And How to Think About It)
Part 5 of the Series
Welcome back everyone! Hope the month has been good to you all. It’s about a week passed Lunar New Year, and we are now in the year of the fire horse, which will be a very special year for me indeed! Hopefully this year brings everyone lots of good fortune! :D Let’s continue on with the series.
In the last post, we talked about capital requirements and realistic return expectations. Now we need to talk about something even more important than the actual system itself:
Risk.
Risk is everything, especially when it comes to options trading. This is one of the biggest differences in blowing your entire account up or preserving your capital. If you’ve been reading up to this point, you may feel that the Wheel Strategy is pretty much a sure thing, with minimal to low risk. It certainly can be, but despite all that, it is not “low risk.”
In short, it is defined and structured risk. But it is still risk. And understanding that is what makes the income durable. Let’s go over the steps.
First: Assignment During a Sharp Downturn
The biggest test of the Wheel happens during market corrections. As of today, we’re kind of in one now, with all of the talks about AI completely “destroying” sectors, and SaaS stocks getting sold off.
When you opt to sell a put, you’re agreeing to buy a stock at a certain price.
If the market drops hard and fast, you won’t just get assigned — you may get assigned into a position that immediately trades lower.
This is uncomfortable (speaking from experience).
Even if you:
Chose a solid company
Selected a reasonable strike
Collected good premium
You can still be down, on paper. This is where the stock selection proves its value, and is essential to the strategy.
If you sold puts on something speculative or unstable, that drawdown can feel catastrophic.
If you sold puts on a company you genuinely believe in long term, it becomes manageable.
Assignment is not the risk. Assignment into the wrong stock is.
Second: Capital Gets Stuck
One of the most overlooked risks of the Wheel is opportunity cost.
If you’re assigned shares during a downturn, your capital becomes tied up.
You may:
Be waiting weeks or months for recovery
Be unable to deploy that capital elsewhere
Miss other opportunities
The Wheel assumes patience, and you have to have plenty of it. Again, going back to the first step, if you sold puts on a company you genuinely believe in long term, this isn’t a problem, but even then it becomes a psychological game.
If you don’t have the temperament or capital cushion to wait, the risk becomes magnified.
Third: Rolling Too Aggressively
I don’t think we covered rolling, but in a nutshell, it’s closing your current position and opening another. Basically, a CSP with a $200 strike price is opened, the stock begins to fall, and to avoid assignment, you open a $190 strike instead and take the net credit in premiums, aka “rolling” the position.
Rolling can be a great tool, as long as you know the opportunity costs.
If not, it’s also one of the easiest ways to damage the strategy.
Beginners often:
Roll too early
Roll too often
Roll simply to avoid assignment
Roll and end up breaking even
Rolling should improve your position. It’s not to just delay discomfort. If I were to realize a loss by rolling, my new position should at least capture that difference and include profits.
The famous Warren Buffet quote always comes to mind when this comes into play: “Rule No. 1: Don’t lose money - Rule No. 2 Never forget rule No. 1” This resonates with me a lot because in the short term, a roll may be a realized loss, but the final outcome should never be a loss.
Fourth: Volatility Cuts Both Ways
Previously, we’ve discussed premium at length. The stock has to have an enticing enough premium so that this makes it even worth the effort. But remember, that cuts both ways! High volatility inflates premium — but it also increases downside speed.
A stock that pays 5% monthly premium can drop 20% in a single headline.
The Wheel works best on:
Liquid names
Established companies
Businesses you would hold through turbulence
High premium does not equal high quality. In this strategy, durability matters more than excitement. I saw somewhere that basically said if you’re getting excited running the wheel, you may be doing it wrong. The more boring it is, the better it’s working.
Fifth: The “Low Risk” Myth
The Wheel is often marketed as safe because:
You’re selling options
You’re getting paid upfront
You’re willing to own the stock
You “just” sell covered calls at the same strike you’re assigned, so you can’t lose!
Owning stock is definitely preferred, but it is not risk-free. Even good names. Markets go through:
Bear cycles
Sector rotations
Multi-month consolidations
Earnings shocks
The drawdowns are real! If your stock drops 30–40%, even if you sell covered-calls on them, the premium collected will not fully offset that drawdown in the short term.
The Wheel reduces directional urgency but it does not eliminate market risk.
Risk Management and Durability of the Wheel
So how can we avoid all of this? What can we do when all of the above does happen (and trust me, it will happen some time or another)? We make it resilient and manage our risk appropriately:
Size positions properly (no more than 20-25% of your capital used if assignment were to occur)
Diversify across names or sectors
Avoid volatile or unstable companies
Accept assignment as part of the process
Prioritize consistency over peak premium
Every options strategy and trader has defined risk management rules in place so they look back for reminders or tell themselves what not to do, and the Wheel Strategy is no different. This will keep you from over trading, over leveraging, and avoid blowing up your accounts and preserving your hard earned capital. Risk management isn’t just one or two rules here and there, but its disciplined, unemotional choices.
Stick to them, and the profits will follow!
Personal Note
So I just preached about risk management, not over leveraging, and picking only stable companies. But admittedly, this is always easier said than done, and even I have to remind myself of these rules continuously! In today’s market, I’ve been caught myself with names such as NFLX and SHOP. I’m assigned these shares, selling covered calls, and am holding them while experiencing the big drawdowns, all while realizing minimal premiums and waiting for them to climb back.
So remember, assignments happen. Stocks pull back. Volatility spikes.
But the difference me now versus me 5 years ago in my trading journey is not the absence of risk, but comfort with it and this system. I trade names I truly believe in and don’t mind holding, and know that with patience and time, I will come back up on top. The structure holds because the rules hold.
What’s Next
For the the next post, we touched a bit on this, but we can get into the fun stuff: An example of position sizing and portfolio construction.
How many tickers can you realistically run?
How to diversify intelligently
How to think about allocation across tickers
And when to slow down
Today, we want to fully understand risk as step one. Designing around it is step two.
Thanks for reading folks! Until next time.
-HL Financial Strategies