The Wheel Strategy

The Wheel Strategy combines Cash Secured Puts and Covered Calls in a systematic approach to generate consistent income while potentially lowering your cost basis over time.

Strategy Components:

Strategy Overview

Prerequisites

  • Understanding of CSPs and CCs
  • Options-enabled margin account
  • Sufficient capital for 100 shares
  • Patience and discipline

Risk Level

Moderate

Combines two conservative strategies for enhanced returns

Time Commitment

  • Initial research: 1-2 hours
  • Monitoring: 30 minutes/week
  • Trade management: Monthly

The Three Phases of The Wheel

Phase 1: Cash Secured Puts

  • Sell puts on stocks you want to own
  • Collect premium while waiting to buy
  • If assigned, move to Phase 2
  • If not assigned, repeat Phase 1

Phase 2: Stock Ownership

  • Take ownership of 100 shares
  • Cost basis reduced by put premium
  • Prepare for covered calls
  • Consider dividend income

Phase 3: Covered Calls

  • Sell calls above your cost basis
  • Collect additional premium
  • If called away, return to Phase 1
  • If not called, repeat Phase 3

Complete Wheel Cycle Example

Apple (AAPL) Wheel Strategy Example

Let's walk through The Wheel Strategy with Apple trading at $175

Phase 1: Selling Puts

You want to buy Apple at $165 (a 5.7% discount)

  • Action: Sell one $165 Put option expiring in 30 days
  • Premium Received: $3.50 ($350 total)
  • Cash Required: $16,500 (100 shares × $165)
  • Scenario: Apple drops to $162
  • Result: You get assigned 100 shares at $165
  • True Cost Basis: $161.50 ($165 - $3.50 premium)
Think of it like: Getting paid $350 to promise buying Apple if it drops to your desired price of $165

Phase 2: Owning Shares

You now own 100 Apple shares at $161.50 per share

  • Position Cost: $16,150 ($161.50 × 100 shares)
  • Scenario: Apple recovers to $170
  • Current Value: $17,000 ($170 × 100 shares)
  • Paper Profit: $850 ($17,000 - $16,150)
Think of it like: Buying Apple at a discount and watching it recover

Phase 3: Selling Covered Calls

Time to generate income from your shares

  • Action: Sell one $175 Call option for $2.50 ($250)
  • Scenario: Apple rises to $178
  • Result: Shares called away at $175
Total Profit Breakdown:
  • Put Premium: +$3.50 per share ($350)
  • Call Premium: +$2.50 per share ($250)
  • Stock Gain: +$13.50 per share ($175 - $161.50)
  • Total Profit: $19.50 per share ($1,950 total)
Think of it like: Getting paid to set a sell order above your purchase price

Advanced Wheel Techniques

Strike Price Selection

  • CSP strikes: 5-15% below market
  • CC strikes: Above cost basis + desired profit
  • Consider support/resistance levels
  • Adjust based on market conditions

Rolling Strategies

  • Roll puts down and out in downtrends
  • Roll calls up and out in uptrends
  • Consider rolling for additional credit
  • Maintain mechanical approach

Position Sizing

  • Max 2-5% of portfolio per wheel
  • Run multiple wheels simultaneously
  • Diversify across sectors
  • Keep some cash in reserve

Essential Knowledge:

Stock Selection

  • Focus on quality stocks
  • Check option liquidity
  • Consider volatility levels
  • Watch earnings dates

Common Mistakes to Avoid

Chasing High Premiums

Focus on quality stocks first, premium second. High premiums often indicate higher risk.

Ignoring Market Conditions

Adjust strike prices and expiration dates based on market trends and volatility.

Overcommitting Capital

Keep cash available for adjustments and new opportunities.

Breaking the Rules

Stick to your predetermined rules for entries, exits, and position sizing.

Getting Started

  1. Start with one wheel on a stable, well-known stock
  2. Use our scanner to find suitable candidates
  3. Paper trade to practice the mechanics
  4. Start small and scale up gradually
  5. Keep detailed records of each cycle
← Cash Secured Puts Covered Calls →