The wheel is a repeating options strategy: sell cash-secured puts on a stock you are willing to own and, if the shares are assigned, sell covered calls on them until they are called away, then start again. It turns option premium into a gradual way to buy and sell a stock, but it carries close to the full downside of owning the shares.
How it works
Phase 1: the cash-secured put. Sell one put at strike K and set aside K × 100 in cash to buy the shares if assigned. If the stock finishes above K, the put expires, you keep the premium and sell another. If it finishes below K, you buy 100 shares at K.
Phase 2: the covered call. After assignment, your cost basis is the strike minus the put premium received. Sell a call at or above that basis. If the stock finishes above the call strike, the shares are sold there and the cycle returns to phase 1. If not, you keep the shares and the premium and sell another call.
Per share, with put premium P, call strike C and call premium Q (one contract covers 100 shares):
| Phase | Measure | Formula |
|---|---|---|
| Cash-secured put | Max profit | P |
| Cash-secured put | Breakeven | K − P |
| Cash-secured put | Max loss | K − P (if the stock goes to zero) |
| Covered call | Cost basis | K − P (lower again after each call premium) |
| Covered call | Profit if called away | C − cost basis + Q |
| Covered call | Breakeven | Cost basis − Q |
How to read it
- Stock first, premium second. The wheel suits a stock you would hold through a decline. A high premium on a stock you would not otherwise own is compensation for risk, not extra income.
- Volatility. Premiums are larger when implied volatility is high, but high IV usually reflects a real chance of a large move.
- Events. An earnings report inside the put's life raises both the premium and the chance of assignment at a much lower price. See IV crush.
- Strike choice. A put strike near 30 delta balances premium against the chance of assignment; a lower delta collects less and is assigned less often.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $50.
- Phase 1: sell the $45 put, about 35 days out, for $1.00 and reserve $4,500. If the stock ends at $48, the put expires and you keep $100, about 2.2% of the cash reserved, before costs.
- Assignment: if the stock ends at $43 instead, you buy 100 shares at $45. Your cost basis is 45 − 1.00 = $44.
- Phase 2: sell the $46 call for $0.80. If the stock rises to $47 and the shares are called away at $46, the cycle earns (46 − 44 + 0.80) × 100 = $280.
- Adverse case: if the stock falls to $35 after assignment, the shares show a loss of (44 − 35) × 100 = $900, and calls at or above $44 now pay very little.
Assignment and early exercise
- US stock options are American-style. A deep in-the-money short put can be assigned before expiry; in the wheel this only brings forward a purchase you were prepared to make.
- A short call in the money can be assigned just before the ex-dividend date, in which case you do not receive the dividend.
- Selling a call below your cost basis can lock in a loss if the shares are called away.
Limitations and common mistakes
- The downside is the stock's. Premiums only soften a decline. A stock that keeps falling leaves you holding shares well below your basis.
- The upside is capped. In a sharp rally the shares are called away at the strike and you miss the rest.
- Cash is tied up. Each put reserves the full purchase amount, which concentrates capital in a few names. Size positions with position sizing in mind.
- Taxes and costs vary. Frequent short-dated trades generate commissions and, depending on your country, taxable events.
In Clear Tape
Pro members can build the wheel on any stock in the Options strategies section of the Options page. Phase 1 is the cash-secured put, near 30 delta and the expiry closest to 35 days, with its premium, breakeven, capital at risk, chance of profit and checks such as earnings before expiry. Phase 2 shows the covered call you would sell if assigned: near 30 delta at or above your effective cost, priced on today's chain as an illustration, since the real call would be sold after assignment at that day's prices. Cash-secured put and covered call can also be built separately. No orders are placed, and data reflects the previous session's close. See pricing.
For educational purposes only. Not investment advice.