The wheel strategy is one of the most popular options income strategies among retail traders. It combines selling cash-secured puts with covered calls to generate consistent premium income while building stock positions. If you want a systematic approach to options income, the wheel might be your answer.
What is the Wheel Strategy?
The wheel is a three-part cycle that keeps repeating:
- Sell cash-secured puts on a stock you want to own at a lower price
- If assigned, you now own shares at a discount (strike price minus premium)
- Sell covered calls against those shares until they get called away
- Repeat by selling puts again
Why it works: You collect premium at every stage. When selling puts, you get paid to wait for a stock to drop. When selling calls, you get paid while holding shares. Either way, time decay works in your favor.
Step 1: Sell Cash-Secured Puts
Start by selling put options on a stock you would be happy to own. You collect premium upfront, and if the stock stays above your strike price, you keep the premium and repeat.
Example: Starting the Wheel
You want to buy stock XYZ, currently trading at $100. Instead of buying now, you sell a cash-secured put.
- Current price: $100
- Sell the $95 put expiring in 30 days for $2.00
- Cash required: $9,500 (to buy 100 shares if assigned)
- Premium collected: $200
Outcome 1: Stock stays above $95. Put expires worthless. You keep $200. Return: 2.1% in one month (25% annualized). Sell another put.
Outcome 2: Stock drops to $90. You get assigned at $95. Your effective cost basis: $93 ($95 - $2 premium). You now own shares at a discount.
Step 2: Sell Covered Calls
Once you own shares from assignment, switch to selling covered calls. This generates income while you wait for the stock to recover or get called away at a profit.
Example: Continuing the Wheel
You were assigned 100 shares at $95 (effective cost $93 after premium). Stock is now at $92.
- Current price: $92
- Sell the $97 call expiring in 30 days for $1.50
- Premium collected: $150
Outcome 1: Stock stays below $97. Call expires worthless. You keep shares and $150. New cost basis: $91.50. Sell another call.
Outcome 2: Stock rallies to $100. Shares called away at $97. Your profit: $97 - $93 cost basis + $1.50 premium = $5.50 per share ($550 total). Start selling puts again.
Income Calculations
Let us look at realistic annual returns from running the wheel on a $50 stock with $25,000 capital (500 shares worth).
Annual Income Projection
- Capital deployed: $25,000
- Average premium per month: $300-$500 (1.2%-2% of capital)
- Months collecting premium: 10-12 (accounting for assignment periods)
- Annual income: $3,000-$6,000
- Annual return: 12%-24%
Conservative estimate: 15% annual return from premium alone, not counting capital gains from stock appreciation.
Best Stocks for the Wheel
Not every stock works well for the wheel. Look for:
- Stocks you want to own long-term: You might hold shares for months
- Moderate volatility: Higher IV means better premiums, but not too volatile
- Liquid options: Tight bid-ask spreads save you money
- No upcoming earnings or major events: Avoid surprise moves
- Dividend-paying stocks: Extra income while holding shares
Popular wheel stocks include blue chips like AAPL, MSFT, and AMD, as well as ETFs like SPY and QQQ.
Managing Risk
The wheel has limited risk compared to naked options, but you still need to manage positions properly.
- Only wheel stocks you want to own: You will hold shares, so pick quality companies
- Size positions appropriately: Never use more than 20-25% of capital on one position
- Choose conservative strikes: Puts at 5-10% below current price, calls at 5-10% above
- Avoid earnings: Close or roll positions before earnings announcements
- Have a loss limit: If the stock drops 20%+, consider cutting losses instead of holding
Rolling Positions
Sometimes you need to roll options to avoid assignment or extend trades.
Rolling puts down and out: If the stock is approaching your strike, buy back your put and sell a new one at a lower strike and later expiration. Collect additional credit to lower your cost basis further.
Rolling calls up and out: If you do not want shares called away, buy back your call and sell one at a higher strike and later date. This can turn a loss into profit.
Rolling Example
You sold a $95 put for $2.00. Stock dropped to $94 with 5 days to expiration.
- Buy back $95 put for $1.50
- Sell new $92 put expiring in 35 days for $2.50
- Net credit: $1.00 more ($2.00 - $1.50 + $2.50 = $3.00 total)
- New breakeven: $89 instead of $93
Wheel Strategy Variations
- Aggressive wheel: Sell ATM options for higher premiums, more frequent assignments
- Conservative wheel: Sell far OTM options, lower premiums but fewer assignments
- Weekly wheel: Use weekly options for faster premium decay
- Dividend wheel: Time covered calls to capture dividends before assignment
Common Mistakes to Avoid
- Wheeling bad stocks: Picking high-premium junk stocks that keep falling
- Oversizing positions: Going all-in on one stock
- Chasing premium: Selling too close to the money for higher income
- Ignoring the underlying: Premium income does not matter if the stock crashes 50%
- Not tracking trades: You need to know your actual returns, not just premiums
Track Your Wheel Trades
Pro Trader Dashboard automatically tracks your wheel strategy performance. See premium collected, assignment rates, and true returns including stock gains and losses.
Summary
The wheel strategy is a systematic approach to generating options income. By selling cash-secured puts on stocks you want to own and covered calls on shares you hold, you collect premium throughout the entire cycle. With proper stock selection and position sizing, many traders earn 15-25% annually from the wheel.
Want to learn more about the components of the wheel? Check out our guides on cash-secured puts and covered call income.