The Wheel Strategy
Combine covered calls and cash-secured puts into a systematic income machine
What Is the Wheel Strategy?
The wheel is a systematic income strategy that combines two options strategies you may already know: cash-secured puts and covered calls. You rotate between these two strategies in a continuous cycle, collecting premium at every step.
The Cycle
Step 1 — Sell a cash-secured put. Choose a stock you would be happy to own. Sell a put at a strike price where you would be comfortable buying. Collect the premium.
Step 2 — If assigned, sell covered calls. If the stock drops below your strike and you are assigned shares, you now own the stock at a discount (strike price minus premium received). Start selling covered calls above your cost basis to generate more income.
Step 3 — If called away, start over. When the stock rises above your call strike and shares are called away, you have locked in a profit. Return to Step 1 and sell another put.
Why It Works
The wheel works because you collect premium at every stage. When selling puts, you get paid to wait for a stock you want to buy. When selling calls, you get paid while holding shares. Time decay (theta) is always working in your favor.
Key Terms
Cash-Secured Put — Selling a put while holding enough cash to buy the shares if assigned
Covered Call — Selling a call while holding the underlying shares
Assignment — Being obligated to buy or sell shares when an option is exercised
Cost Basis — Your effective purchase price after accounting for premiums collected