Wheel Strategy Options are a systematic, income-generating options strategy that involves selling cash-secured puts and then covered calls in a repeating cycle. It’s popular with investors who want to accumulate income while potentially acquiring quality stocks at a discount.
Step-by-Step Breakdown of the Wheel Strategy Options
Step 1: Sell Cash Secured Puts
- You sell a put option on a stock you wouldn’t mind owning.
- You receive a premium upfront.
- You must keep enough cash on hand to buy 100 shares if assigned.
Outcomes:
- If the stock stays above the strike price (OTM), the put expires worthless — you keep the premium and repeat.
- If the stock drops below the strike price (ITM), you’re assigned — now you own 100 shares at the strike price.
Step 2: Sell a Covered Call
- Now that you own the shares, you sell a call option (usually out-of-the-money).
- Again, you collect a premium upfront.
Outcomes:
- If the stock stays below the call strike (OTM), the option expires worthless — keep the shares and repeat.
- If the stock rises above the call strike (ITM), the shares are called away — you sell at the strike price, locking in profit, and start the cycle over.
EXAMPLE:
Let’s say you like ABC stock at $50.
Step 1: Sell a cash secured put
- You sell (STO) 1 put with a $48 strike, expiring in 1 week, and collect $1.00 premium or $100 (100 shares at $1.00 each)
- If ABC stays above $48, you keep the $100 premium and repeat.
- If it drops below $48, you get assigned the 100 shares at $48. That’s $4800 Cash tied up in your account but not lost.
Step 2: Selling covered calls
- Now you own 100 shares at $48.
- You Sell 1 call with a $50 strike, collect $1.00 premium.
- If ABC goes above $50, sell your shares at $50 (gain of $200 + premium $100).
- If not, keep the shares and rinse and repeat until either shares are exercised or you no longer want to do covered calls on the stocks that you own.
Pro’s & Con’s of the Wheel Strategy
PRO’s:
- Generates consistent income via premiums you receive, possibly every week.
- Can lead to buying stocks at a discount and selling them for a higher price high.
- Good for neutral to moderately bullish markets.
CON’s:
- Downside risk: You can still lose money if the stock tanks.
- Cap on upside: If the stock skyrockets, your gains are limited to the strike price + premium.
- Requires 100-share lots, so can be capital intensive.
Choosing the Right Stocks for Wheel Strategy Options
Choosing the right stocks is critical to successfully running the Wheel Strategy. You’re aiming to generate consistent income from options while minimizing risk and managing potential assignments. Here’s a breakdown of the best criteria to look for:
1. High Liquidity (Tight Bid/Ask Spreads)
Why it matters: You want to sell options with tight bid/ask spreads to:
- Maximize the premium you collect.
- Enter and exit trades efficiently.
Look for:
- High daily volume in the stock.
- High open interest in near-term options.
- Narrow spreads (a few cents wide).
🧠 Tip: ETFs like SPY, QQQ, IWM, or stocks like AAPL, AMD, MSFT are great for this. Just be aware that these underlying’s are most likely well above $300 a share, which if assigned will result in a $30,000 or more hold on the cash available in your account for future option plays.
2. Solid Option Premiums
Why it matters: The Wheel profits from selling options. You want:
- Attractive premiums relative to stock price.
- Annualized return on collected premium of >10% is a good target.
Look for:
- Slightly OTM puts (Delta ~0.20–0.30) that yield decent cash premiums.
- Covered calls with solid income potential if assigned.
3. Strong Fundamentals or Stable Trend
You may end up owning the stock if your put is assigned — so pick companies you’re okay holding.
Look for:
- Profitable companies with strong balance sheets.
- Consistent cash flow and moderate growth.
- Stocks with steady price behavior (not meme stocks or biotech lotteries).
💡 Tip: Some investors use dividend stocks to earn yield while running the wheel.
4. Manageable Volatility
You want some volatility to earn decent premiums — but not so much that it becomes risky.
Ideal range:
- Implied Volatility (IV): 20%–50% is a sweet spot.
- Avoid earnings dates and news events that spike volatility unpredictably.
Use IV rank or percentile to compare current vs. historical volatility.
5. Affordable Share Price
Since you may need to buy 100 shares if assigned, choose stocks that fit your capital.
Look for:
- Share price under $100 is often ideal for small investors.
- ETF examples: TLT, XLF, SOXL, ARKK
- Stocks: F, SOFI, CHPT, PLTR, PYPL
💡 Tip: The Wheel requires capital — either cash-secured puts or owning 100 shares per trade.
6. Avoid Stocks with Upcoming Earnings (for Puts)
Earnings can cause wild price swings. Selling puts just before earnings increases the risk of assignment.
Best practice:
- Sell puts after earnings or well before the report.
- Covered calls are sometimes OK through earnings if you’re fine losing them if the stock prices rises past the strike price and they get exercised or called away.
Summary Checklist
✅ Criteria
📌 What to Look For
Liquidity
- Tight bid/ask spreads, high open interest
Good Premiums
- Decent returns on OTM puts and calls
Fundamentals or Trend
- Stocks you’d be comfortable owning
Moderate Volatility
- IV 20–50%, avoid binary news events
Affordable Share Price
- Stock fits your budget to own 100 shares
Avoid Earnings Risk
- Skip puts near earnings; calls OK if intentional