Abstract wheel strategy illustration

Options Income Playbook

What Is the Wheel Strategy?

A systematic options approach that cycles between cash-secured puts and covered calls, capturing premium while managing stock ownership risk. Explore the full workflow, risks, and best practices below.

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Definition and Overview

The wheel strategy is a repeatable sequence of option trades designed to harvest premium while maintaining disciplined stock ownership. It pairs cash-secured puts with covered calls to cycle through income opportunities.

Sell a put to enter a stock at a discount, buy shares if assigned, then sell covered calls against those shares. Repeat the sequence to keep generating premium.

Keep in mind: the wheel is still an equity strategy. Premium income offsets losses but does not eliminate them. Stock selection and risk controls matter as much as option execution.

Wheel strategy cycle illustration

Workflow

Mechanics - How the Wheel Spins

Break the strategy into four repeatable steps. Expand each accordion to reveal deeper notes on strikes, expirations, and the Greeks that matter.

Wheel Strategy Mechanics DiagramSell PutAssignedSell CallCalled AwayPremium InShares OwnedPremium AgainMaintain discipline: redeploy capital only when criteria stay intact.

Step 1 - Sell a Cash-Secured Put

Collect premium for agreeing to buy 100 shares at your chosen strike price. Keep cash on hand to cover the potential assignment.

Choose a strike price slightly below current market value to balance probability of assignment and premium received. Traders often target a delta between 0.20 and 0.35.

Step 2 - Assignment & Stock Ownership

If the stock trades below your strike at expiration, you are assigned and purchase 100 shares. Premium collected reduces your cost basis.

Cost basis equals strike price minus collected premium. Tracking the adjusted basis is essential for future profit calculations.

Step 3 - Sell a Covered Call

Once shares are in your account, sell a covered call above your cost basis to generate additional premium.

Select an out-of-the-money strike that aligns with your desired exit price. Wheel traders often target a delta between 0.15 and 0.30.

Step 4 - Called Away or Rinse & Repeat

If the stock rallies through your call strike, shares are called away at expiration and you keep the premium. If not, sell another call.

Continue cycling between puts and calls as long as the underlying meets your criteria. Record premiums to gauge cumulative return.

Perspective

Benefits and Risks

Every edge comes with trade-offs. Use these accordions to weigh the appeal of steady premium against the reality of market volatility.

Benefits

Risks

Example

Wheel Example - ACME Corp

Follow a fictional trade on ACME Corp (ACME) currently trading at $50. We target a $45 put and $50 covered call to illustrate cash flow, cost basis management, and outcome.

Scenario Overview

  • Sell one cash-secured put: Strike $45 expiring in 30 days, premium $2.20 ($220).
  • Assignment happens: Buy 100 shares at $45 > $4,500 outlay, effective basis $42.80 after premium.
  • Sell one covered call: Strike $50 expiring in 30 days, premium $2.05 ($205).
  • Shares called away: Stock rallies above $50, contract assigned, shares sold at $50.
StageActionCash FlowCumulative P&L
1Sell $45 put (30 DTE)+$220+$220
2Assigned: buy 100 shares @ $45-$4,500-$4,280
3Sell $50 covered call (30 DTE)+$205-$4,075
4Called away @ $50+$5,000+$925

Cash Flow Timeline

Positive bars indicate premium collected or sale proceeds. The lone negative bar is the capital outlay to acquire the shares. Net outcome: +$925, or about 21.6 percent return on $4,280 capital at risk over roughly 60 days.

Cash flow chart illustrating the ACME Corp example+$220Sell Put-$4,500Assignment+$205Sell Call+$5,000Called Away

Payoff Snapshot

The green curve shows the downside buffer granted by put premium. The purple curve caps upside at the call strike but locks in gains if shares are called away.

Combined payoff diagram for the wheel cycle on ACME Corp$45 put strikeBreak-even$50 call strikePut leg (premium buffer)Covered call capUnderlying Price ---Profit / Loss

Context

When the Wheel Shines

Set yourself up for success by aligning the strategy with market regime, volatility, and stock quality.

Market Environment

Neutral to mildly bullish trends favor the wheel. Sideways price action lets you harvest premium without getting called away immediately.

  • - Avoid early stage bear markets.
  • - Respect macro catalysts and earnings seasons.
  • - Watch sector momentum to align with relative strength.

Volatility Sweet Spot

Implied volatility should be elevated enough to boost premiums but not so extreme that assignment risk becomes unmanageable.

  • - Seek implied volatility rank between 25 and 50.
  • - Lower IV reduces premium, so shorten duration if needed.
  • - Hedge or lighten exposure in volatility spikes.

Stock Selection

Choose optionable stocks you would be willing to own through turbulence. Liquidity and fundamentals protect the wheel.

  • - Average daily volume above one million shares.
  • - Tight option bid and ask spreads.
  • - Steady earnings and manageable debt levels.

Play Defense

Risk Management and Adjustments

Build a playbook for exits, rolls, and position sizing so risk is calculated, not reactive.

Rolling and Exiting Early

  • - Roll puts down or out when price drifts below strike.
  • - Buy back options at 50 to 70 percent max profit to redeploy.
  • - Close before earnings to sidestep gap risk.

Position Sizing Discipline

  • - Limit any single ticker to under ten percent of account value.
  • - Allocate so two assignments will not freeze your account.
  • - Track buying power buffer for margin calls.

Protective Hedges

  • - Purchase long puts to create a collar when needed.
  • - Use debit spreads to offset directional exposure during events.
  • - Deploy trailing stops on underlying shares after selling calls.

Scenario Planning

  • - Define exit triggers for one, two, and three standard deviation moves.
  • - Pre-plan responses to dividend announcements or splits.
  • - Log outcomes to refine your playbook for future cycles.

Execution

Tips and Best Practices

Refine your edge with battle-tested guidelines that experienced wheel traders rely on.

Strike and Expiration

  • - Target 20 to 30 delta puts and 15 to 25 delta calls.
  • - Favor liquid weeklys; extend duration if implied volatility is muted.
  • - Avoid strikes around major support or resistance breaks.

Capital Allocation

  • - Maintain a cash buffer for surprise assignments.
  • - Diversify across sectors to reduce correlated drawdowns.
  • - Keep notes on return on capital to allocate to top performers.

What to Avoid

  • - Illiquid options with wide bid and ask spreads.
  • - Binary events such as earnings or FDA decisions without hedges.
  • - Averaging down indefinitely without redefining the thesis.

Beginner Pitfalls

  • - Selling puts on stocks you would never hold.
  • - Ignoring assignment logistics and capital requirements.
  • - Letting losing trades linger without an adjustment plan.

Questions

Frequently Asked Questions

Expand the answers to clarify common points of confusion before running your own wheel.

Yes. Highly liquid ETFs such as SPY, QQQ, or DIA are common wheel candidates thanks to tight spreads and abundant option volume. Capital requirements can be higher, so monitor your buying power.
You need enough to buy 100 shares per put contract. For a $45 strike, reserve $4,500. Many traders start with mid-priced equities between $20 and $60 to balance affordability and option liquidity.

Further Reading

References and Next Steps

Dive deeper into authoritative resources to sharpen your edge.

Disclaimers

This material is for educational purposes only. It does not constitute financial, investment, or tax advice. Options involve risk and are not suitable for all investors. Review the Characteristics and Risks of Standardized Options (OCC) before trading.

Past performance does not guarantee future outcomes. Evaluate trades in the context of your objectives, risk tolerance, and timeframe.

Copyright 2025 Wheel Strategy Logger. Crafted for disciplined income traders.