Stock Selection Criteria: Scoring System for Wheel Trading

The Wheel Strategy Stock Scoring System

Use this systematic approach to evaluate and rank stocks objectively. Score each stock 0-100 to find the best opportunities.

The 5 Scoring Categories

Category	Weight	Max Points	Focus
Fundamentals	30%	30	Financial health
Options Metrics	30%	30	Liquidity & premiums
Technical Setup	20%	20	Price action
Volatility Profile	15%	15	IV characteristics
Risk Factors	5%	5	Red flags

Total possible score: 100 points

Scoring guide:

80-100: Excellent (trade aggressively)
65-79: Good (standard allocation)
50-64: Acceptable (smaller position)
Below 50: Avoid

Category 1: Fundamentals (30 points)

Market Cap (5 points)

5 pts: > $50B (mega cap)
4 pts: $20B - $50B (large cap)
3 pts: $10B - $20B (large cap)
2 pts: $5B - $10B (mid cap)
0 pts: < $5B (too small)

Why: Larger companies = more stability, less manipulation

Revenue Growth (5 points)

5 pts: > 20% YoY growth
4 pts: 10-20% growth
3 pts: 5-10% growth
2 pts: 0-5% growth
1 pt: Flat or declining
0 pts: Declining > 10%

Why: Growth = long-term price appreciation

Profit Margin (5 points)

5 pts: > 20% net margin
4 pts: 15-20%
3 pts: 10-15%
2 pts: 5-10%
1 pt: 0-5%
0 pts: Unprofitable

Why: Profitability = sustainable business

Debt-to-Equity (5 points)

5 pts: < 0.3 (minimal debt)
4 pts: 0.3 - 0.6
3 pts: 0.6 - 1.0
2 pts: 1.0 - 1.5
1 pt: 1.5 - 2.0
0 pts: > 2.0 (over-leveraged)

Why: Less debt = lower bankruptcy risk

Earnings Consistency (5 points)

5 pts: Beat estimates 8/8 last quarters
4 pts: Beat 6-7/8
3 pts: Beat 4-5/8
2 pts: Beat 2-3/8
0 pts: Beat < 2/8

Why: Consistent earnings = predictable

Dividend (5 points)

5 pts: Pays dividend, 10+ year history, growing
3 pts: Pays dividend, stable
2 pts: New dividend
0 pts: No dividend

Why: Dividends = income + downside cushion

Example - AAPL Score:

Market Cap ($3T): 5/5
Revenue Growth (8%): 3/5
Net Margin (25%): 5/5
Debt-to-Equity (1.8): 1/5
Earnings Consistency (7/8 beats): 4/5
Dividend (paying, growing): 5/5 Fundamental Score: 23/30

Category 2: Options Metrics (30 points)

Average Daily Volume (10 points)

10 pts: > 5,000 contracts/day
8 pts: 2,000-5,000
6 pts: 1,000-2,000
4 pts: 500-1,000
0 pts: < 500

Why: Volume = tight spreads, easy fills

Bid-Ask Spread (10 points)

Measure on typical 30-45 DTE, 0.25 delta put:

10 pts: < 2% of mid price
8 pts: 2-4%
6 pts: 4-6%
3 pts: 6-10%
0 pts: > 10%

Why: Tight spreads = less slippage

Weekly Options Available (5 points)

5 pts: Yes
0 pts: No

Why: More trading opportunities

Open Interest (5 points)

5 pts: > 10,000 OI on typical strikes
4 pts: 5,000-10,000
3 pts: 2,000-5,000
2 pts: 1,000-2,000
0 pts: < 1,000

Why: High OI = established market

Example - NVDA Score:

Volume (15,000+): 10/10
Spread (1.5%): 10/10
Weekly options: 5/5
Open Interest (50,000+): 5/5 Options Score: 30/30 ✓

Category 3: Technical Setup (20 points)

Price Trend (5 points)

Look at 6-month chart:

5 pts: Clear uptrend, above 200-MA
4 pts: Uptrend, choppy
3 pts: Sideways range
2 pts: Downtrend but stabilizing
0 pts: Steep downtrend

Why: Sell puts on uptrends (probability on your side)

Support Level (5 points)

5 pts: Strong support within 10-15% below current
4 pts: Support 15-20% below
3 pts: Support 20-25% below
2 pts: Weak support
0 pts: No clear support

Why: Support = put strike selection confidence

RSI (Relative Strength) (5 points)

5 pts: RSI 45-65 (neutral, healthy)
4 pts: RSI 35-45 (slightly oversold - good entry)
3 pts: RSI 65-75 (elevated)
2 pts: RSI 75+ (overbought)
1 pt: RSI < 35 (very oversold)

Why: Avoid extremes

Recent Volatility (5 points)

5 pts: No gaps > 5% in last 3 months
4 pts: 1-2 gaps 5-10%
3 pts: Multiple gaps but recovering
2 pts: Recent gap > 15%
0 pts: Frequent violent gaps

Why: Predictable price action = safer puts

Example - MSFT Score:

Trend (steady up, above 200-MA): 5/5
Support (strong at $385): 5/5
RSI (58): 5/5
Volatility (stable): 5/5 Technical Score: 20/20 ✓

Category 4: Volatility Profile (15 points)

Average IV Percentile (10 points)

Look at 6-month average:

10 pts: Average IVP 50-70%
8 pts: Average IVP 40-50%
6 pts: Average IVP 30-40%
3 pts: Average IVP 20-30%
0 pts: Average IVP < 20%

Why: Higher IV = better premiums

IV Stability (5 points)

5 pts: IV percentile range 30-70 (stable)
4 pts: Range 20-75
3 pts: Range 15-80
1 pt: Range 10-90 (wild swings)

Why: Predictable IV = easier planning

Example - JPM Score:

Average IVP (45%): 8/10
IV Stability (range 30-65): 5/5 Volatility Score: 13/15

Category 5: Risk Factors (5 points)

Deduct points for red flags:

Deduct 1 point each:

Pending major lawsuit
Recent accounting issues
Regulatory investigation
Management turnover (CEO change within 6 months)
Major customer loss
Declining sector

Start at 5, subtract for each flag

Example - TSLA Score:

Elon Musk controversy (ongoing): -1
Regulatory scrutiny (FSD): -1
High debt levels: -1 Risk Score: 2/5

Complete Scoring Examples

Example 1: AAPL (March 2026)

Category	Score	Notes
Fundamentals	23/30	Strong but debt concerns
Options Metrics	28/30	Excellent liquidity
Technical Setup	18/20	Clean uptrend
Volatility Profile	12/15	Moderate premiums
Risk Factors	5/5	No major concerns
TOTAL	86/100	Excellent

Verdict: Top-tier wheel candidate. Trade aggressively.

Example 2: TSLA (March 2026)

Category	Score	Notes
Fundamentals	18/30	Growth but unprofitable, high debt
Options Metrics	30/30	Amazing liquidity
Technical Setup	12/20	Volatile, gaps frequently
Volatility Profile	15/15	High IV, great premiums
Risk Factors	2/5	Multiple concerns
TOTAL	77/100	Good

Verdict: Trade with caution, smaller position size. Great premiums but risk is real.

Example 3: Small Cap XYZ (Fictional)

Category	Score	Notes
Fundamentals	15/30	Mid cap, inconsistent earnings
Options Metrics	8/30	Poor liquidity, wide spreads
Technical Setup	10/20	Downtrend, weak support
Volatility Profile	6/15	Low IV
Risk Factors	3/5	Some concerns
TOTAL	42/100	Avoid

Verdict: Pass. Not suitable for wheel strategy.

Using the Scoring System

Step-by-step workflow:

Build your watchlist (20-30 stocks)
Score each stock monthly
Rank by total score
Allocate capital based on scores:
- Score 80+: 10-15% of portfolio per stock
- Score 65-79: 5-10% per stock
- Score 50-64: 2-5% per stock
- Below 50: Avoid
Re-score quarterly or after major events

Automating the Scoring

Use our platform to track:

Fundamental metrics (auto-updated)
Options volume and spreads (real-time)
IV percentile history (charts)
Technical indicators (RSI, MA)

Set up alerts for:

Score drops below 65 (consider closing)
Score jumps above 80 (increase allocation)
Red flags appear (news, earnings miss)

Portfolio Construction with Scores

Example $200K portfolio:

Stock	Score	Allocation	Capital	Positions
AAPL	86	12%	$24,000	2 puts
MSFT	84	12%	$24,000	2 puts
NVDA	82	10%	$20,000	1 put
META	79	10%	$20,000	1 put
JPM	76	8%	$16,000	2 puts
DIS	74	8%	$16,000	2 puts
TSLA	77	6%	$12,000	1 put (smaller)
Others	-	34%	$68,000	Various

Key principles:

Higher scores = larger allocations
Never exceed 15% in single stock
Keep 10-15% cash for opportunities

When to Re-Score

Monthly: Standard review

Immediately after:

Earnings announcement
Major news event
Significant price move (> 15%)
Sector rotation
Change in Fed policy

Common Scoring Mistakes

❌ Ignoring fundamentals - Chasing high IV only

❌ Not updating scores - Stale data = poor decisions

❌ Score inflation - Being too generous in scoring

❌ Single-factor focus - Only looking at premium yield

✅ Balanced approach - Weight all categories fairly

Next lesson: Deep dive into liquidity analysis and bid-ask spread optimization.