Strategy Guide

The Wheel Strategy

A systematic approach to generating consistent income through options trading while potentially acquiring stocks at a discount.

What is the Wheel Strategy?

The Wheel Strategy is a methodical options trading approach that combines selling cash-secured puts and covered calls in a continuous cycle. It's designed for investors who are comfortable owning specific stocks long-term while generating premium income regardless of short-term market direction.

How the Wheel Works

The strategy operates in two phases that cycle continuously, generating income at each step.

Phase 1

Sell Cash-Secured Puts

Begin by selling put options on stocks you would be comfortable owning at a lower price. This requires having enough cash in your account to purchase 100 shares at the strike price (hence "cash-secured").

1

Select Your Stock

Choose a quality stock you're bullish on long-term and would be comfortable holding through market volatility.

2

Choose Strike Price

Select a strike price below the current market price where you'd be happy to buy. Consider the 0.30 delta as a starting point.

3

Select Expiration

Choose an expiration date, typically 30-45 days out, to optimize premium collection while managing assignment risk.

4

Collect Premium

Receive the option premium immediately upon selling. This is yours to keep regardless of the outcome.

Possible Outcomes

Option Expires Worthless

If the stock stays above your strike price, the put expires worthless. You keep the full premium and your cash is released. Return to Phase 1 and sell another put.

Result:+Premium Collected
Assigned Shares

If the stock falls below your strike, you purchase 100 shares at the strike price. Your effective cost basis is reduced by the premium received. Proceed to Phase 2.

Cost Basis:Strike - Premium
Phase 2

Sell Covered Calls

Once you own shares, sell call options against your position. This generates additional income while you wait for the stock to reach your target exit price.

1

Calculate Cost Basis

Know your adjusted cost basis (purchase price minus all premiums received) to ensure you sell calls above this level.

2

Choose Strike Price

Select a strike above your cost basis. This ensures profit if shares are called away. Consider using the 0.30 delta.

3

Select Expiration

Choose a 30-45 day expiration to balance premium income with flexibility. Avoid earnings dates when possible.

4

Collect Premium

Receive additional premium that further reduces your cost basis, increasing your profit margin on the position.

Possible Outcomes

Option Expires Worthless

If the stock stays below your strike, the call expires worthless. You keep your shares, keep the premium, and your cost basis decreases. Sell another covered call.

Result:+Premium, Keep Shares
Shares Called Away

If the stock rises above your strike, your shares are sold at the strike price. You realize your profit and the premium. Return to Phase 1 to start a new wheel.

Profit:Strike - Cost Basis + Premium

Best Practices for Success

Choose Quality Stocks

Only wheel stocks you would genuinely want to own long-term. Focus on established companies with solid fundamentals.

Mind Key Dates

Be aware of earnings announcements, ex-dividend dates, and major events that could cause significant price swings.

Track Your Cost Basis

Maintain accurate records of your adjusted cost basis. This is critical for selecting profitable strike prices.

Be Patient

The wheel strategy is designed for consistent, modest returns over time. Avoid chasing high premiums on volatile stocks.

Size Positions Properly

Never commit more than 10-15% of your portfolio to a single wheel position to manage concentration risk.

Consider Market Conditions

Higher volatility means higher premiums but also more risk. Adjust your strike selection based on market conditions.

Start Tracking Your Wheel Trades

Stocksicle makes it easy to track your positions, calculate your adjusted cost basis, and monitor your premium income across all your wheel campaigns.

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Disclaimer: This content is for educational purposes only and does not constitute financial advice. Options trading involves significant risk and is not suitable for all investors. You could lose more than your initial investment. Always conduct your own research and consider consulting with a qualified financial advisor before implementing any trading strategy.