The Greeks play a vital role in options trading and understanding them helps fine-tune the Wheel Strategy for consistent income and risk control. This guide focuses on the three most relevant Greeks for the Wheel Strategy: Delta, Gamma, and Theta.
Delta – Directional Risk & Probability of Assignment
Delta represents the approximate probability that the option will finish in-the-money (ITM). For put options, a higher delta such as -0.40 indicates a greater chance of assignment. Conversely, for call options, a higher delta like 0.40 suggests a greater likelihood that the stock will be called away.
In the context of the Wheel Strategy, when selling cash-secured puts, a Delta between -0.15 and -0.30 is often targeted. A lower delta means a lower assignment risk and a smaller premium, while a higher delta offers a higher premium but comes with a greater likelihood of assignment. When selling covered calls, a Delta between 0.20 and 0.40 is typical. A lower delta results in a lower premium and less chance of selling your stock, while a higher delta increases the premium and the likelihood of your stock being called away.
Delta helps balance income potential with the probability of assignment, making it a valuable tool for risk management.
Gamma – Stability of Delta
Gamma measures the rate at which Delta changes in response to price movement. A high Gamma indicates that Delta shifts quickly, leading to more volatile option behavior, while a low Gamma suggests more stable and predictable performance.
For the Wheel Strategy, lower Gamma options—typically those farther from expiration or further out-of-the-money—are preferable for more predictable trades. Higher Gamma, often seen near expiry or at-the-money, can cause Delta to shift rapidly. This makes the option more responsive but also riskier. It’s wise to be cautious with high Gamma near expiration, as the assignment risk can change rapidly.
Theta – Time Decay is your Friend
Theta quantifies how much value an option loses each day simply due to the passage of time. As an option seller, a positive Theta works in your favor, allowing you to profit as time decay reduces the option’s value.
Since the Wheel Strategy always involves selling options, Theta is consistently beneficial. Theta increases as expiration approaches, particularly in the last 7 to 14 days. High Theta allows you to maximize premium decay while minimizing the time you hold the position. Time becomes an ally, driving consistent income through option decay.
Summary Table
- Delta measures direction and assignment probability, guiding strike price choices to manage risk and reward.
- Gamma tracks how rapidly Delta changes, highlighting potential volatility and signaling caution near expiration.
- Theta represents time decay, which fuels your income as an option seller.
Example
Suppose you sell a 30-day cash-secured put on XYZ stock with a $45 strike price. If the Delta is -0.25, there’s roughly a 25% chance of assignment. A Theta of 0.03 means you earn $3 per day from time decay. If Gamma is 0.02, then a $1 drop in XYZ’s price would change Delta to -0.27, reflecting increased assignment risk.