The wheel strategy is one of the most popular options income strategies, and for good reason. It combines two proven strategies - cash-secured puts and covered calls - into a systematic approach for generating income on stocks you would be happy to own. This guide will teach you everything you need to know to run the wheel effectively.
What is the Wheel Strategy?
The wheel strategy is a three-phase approach to options income:
- Phase 1: Sell cash-secured puts on a stock you want to own
- Phase 2: If assigned, own the stock and sell covered calls
- Phase 3: If called away, return to Phase 1 and repeat
The wheel concept: You continuously rotate between selling puts and selling calls, collecting premium at every stage. It is called "the wheel" because you keep going around in circles, generating income along the way.
Phase 1: Selling Cash-Secured Puts
The wheel begins with selling puts on a stock you would like to own at a lower price.
What is a Cash-Secured Put?
A cash-secured put means you have enough cash in your account to buy 100 shares if you get assigned. For example, if you sell a $50 put, you need $5,000 in cash set aside.
Example: Starting the Wheel on AMD
AMD is trading at $165. You would be happy to own it at $150.
- Sell the $150 put (30 DTE) for $2.50
- Cash required: $15,000
- Premium collected: $250
- Return on capital: 1.67% in 30 days
Outcome A: AMD stays above $150 - you keep the $250 and sell another put.
Outcome B: AMD drops below $150 - you buy 100 shares at $150 (effectively $147.50 after premium).
Selecting Strikes for Puts
- Choose a price you would genuinely want to own the stock at
- Target 20-30 delta puts for good premium with reasonable probability
- Look for strikes at or below technical support levels
- Consider selling at round numbers where there may be buyer interest
Phase 2: Selling Covered Calls
If your put gets assigned, you now own 100 shares. Immediately begin selling covered calls.
What is a Covered Call?
A covered call means you own 100 shares and sell a call option against them. You collect premium, but agree to sell your shares at the strike price if the stock rises.
Example: Continuing the Wheel
You were assigned AMD at $150. The stock is now at $148.
- You own 100 shares at $150 (cost basis $147.50 after put premium)
- Sell the $155 call (30 DTE) for $3.00
- Premium collected: $300
Outcome A: AMD stays below $155 - you keep shares and the $300 premium.
Outcome B: AMD rises above $155 - shares called away at $155 for a profit.
Selecting Strikes for Calls
- Sell above your cost basis to ensure profit if called away
- Target 25-35 delta calls for good premium
- Consider selling at or above resistance levels
- If you want to keep the shares, sell further OTM
Phase 3: Getting Called Away
When your covered call gets assigned, you sell your shares at the strike price. Now you have cash again and return to Phase 1 - selling puts.
Complete Wheel Cycle Example
Let us trace a complete wheel cycle on AMD:
- Week 1: Sell $150 put for $2.50 credit
- Week 4: Put expires worthless. Sell $150 put again for $2.00
- Week 8: AMD drops to $145. Assigned at $150. Cost basis: $145.50
- Week 8: Sell $155 call for $2.50
- Week 12: AMD at $152. Call expires. Sell $155 call for $3.00
- Week 16: AMD at $158. Shares called away at $155
Total profit: $2.50 + $2.00 + $2.50 + $3.00 + ($155 - $150) = $15.00 per share ($1,500)
Best Stocks for the Wheel Strategy
Not all stocks are suitable for the wheel. Look for these characteristics:
Ideal Wheel Candidates
- Stable, quality companies: Blue chips with solid fundamentals
- Moderate volatility: Enough IV for good premium but not too wild
- Good options liquidity: Tight bid-ask spreads
- Stocks you want to own: Never wheel something you would not hold
- Affordable stocks: Remember you need cash for 100 shares
Popular Wheel Stocks
- Large-cap tech: AAPL, MSFT, GOOGL, AMD, NVDA
- Financial: JPM, BAC, GS
- Consumer: DIS, NKE, SBUX
- ETFs: SPY, QQQ, IWM
Wheel Strategy Variations
The Aggressive Wheel
- Use weekly options instead of monthly
- Sell closer to the money (higher delta)
- More premium but more assignments
The Conservative Wheel
- Use 45-60 DTE options
- Sell further out of the money (lower delta)
- Less premium but higher win rate
The Dividend Wheel
- Focus on dividend-paying stocks
- Collect dividends while holding shares
- Triple income: put premium + dividends + call premium
Managing Risk in the Wheel
The Biggest Risk: Stock Declines
If the stock drops significantly after you are assigned, you may be stuck holding shares at a loss. This is why stock selection is critical.
Risk Management Strategies
- Only wheel stocks you believe in: Willing to hold through downturns
- Diversify across sectors: Do not wheel only tech stocks
- Position size appropriately: No more than 10-15% of portfolio in one wheel
- Have an exit plan: Know when you will cut losses
Wheel Strategy Performance
What can you realistically expect from the wheel?
Realistic returns: Most wheel traders target 1-3% monthly return on capital deployed. This translates to 12-36% annually, though actual results vary based on market conditions and stock selection.
Tracking Your Wheel Trades
Keep detailed records of every wheel trade:
- Put premium collected
- Assignment price and date
- Call premium collected
- Call-away price and date
- Total profit per cycle
- Days in each phase
Track Your Wheel Strategy Automatically
Pro Trader Dashboard imports your trades and automatically tracks wheel cycles. See your put win rate, covered call performance, and total income generated per stock.
Common Wheel Mistakes
- Wheeling bad stocks: Never wheel a stock just because the premium is high
- Selling calls below cost basis: This locks in a loss if assigned
- Over-concentrating: Running the wheel on one stock with all capital
- Ignoring the underlying: The wheel does not eliminate stock risk
- Chasing premium: Higher IV often signals higher risk
Getting Started with the Wheel
- Choose 2-3 stocks: Start with quality companies you know well
- Calculate capital needed: Strike price x 100 shares per wheel
- Start small: Run one wheel at a time while learning
- Track everything: Journal every trade and outcome
- Be patient: The wheel works best over time with compounding
Summary
The wheel strategy is a powerful, systematic approach to options income. By alternating between selling puts and covered calls on quality stocks, you can generate consistent returns while limiting risk. The key is stock selection - only wheel stocks you would be happy to own long-term. Start small, track your results, and let the wheel spin.
Ready to explore more income strategies? Learn about selling puts for income or discover covered call strategies.