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Here’s a detailed analysis of Monthly Returns of SPY from Jan 2008 till Dec 2023. This unique period covers varied market dynamics, which is essential for our strategy.

Imagine you had 100 shares of SPY at $140 on Jan 2008 for the wheel strategy, and were selling covered calls at our recommended strike price, and the 2008 financial crisis strikes, where the S&P 500 plunged from 1404 in February to 797 in November, marking a 43% decline. In such times, investing more can be a wise decision, especially in an index like the S&P 500, which historically has shown resilience and recovery potential. This is in contrast to individual companies, many of which may not recover from such drastic falls. For example, the S&P 500 eventually returned to the 1400s, whereas numerous individual companies did not.

By adopting the DCA (Dollar Cost Averaging) approach and investing $500 monthly in SPY, the investor could resume selling covered calls after two and a half years, now with the ability to sell two contracts. This would bring their average cost per share down to $119, effectively avoiding a situation where they are left with a devalued asset.

Alternatively, if the investor chose to invest $1000 monthly, they could start selling covered calls after about 18 months, again with two contracts, reducing their average cost to $113.

Dollar-cost averaging (DCA) works better on an index fund like SPY, because it is inherently diversified, spreading investment across many companies. This diversification reduces the risk associated with the volatility of individual stocks. When investing in single companies, the success of DCA can be heavily influenced by the specific performance and risks related to that company. SPY’s broad exposure mitigates these risks, making DCA more effective by smoothing out the impact of market fluctuations across a wider range of assets, leading to potentially steadier returns over time.

Let the numbers speak more than the fancy words.

For each type of investment, “Added Shares” represent additional shares that you bought every month until your average cost was below the recommended strike price, “Incremental Cost” is a cumulative additional investment every month, “New Number of Shares” is the total number of shares you would have after investment each month, and “Average Cost” is your new Average cost after each investment.

Be greedy when others are fearful

If someone in 2008 had followed the approach described in the book and simply held on SPY, their investments would have returned mouth-watering returns. See details below.

Their returns would be better than the above if they also sold covered calls following the formula described in the book.