The wheel strategy

A cycle of selling cash-secured puts, taking assignment, then selling covered calls — a mechanical income routine on stocks you want to own.

The wheel is an income strategy that cycles between selling cash-secured puts and covered calls on a stock you would happily own. You start by selling a put at a strike where you'd be comfortable buying the shares, collecting premium up front. If the stock stays above that strike, the put expires worthless and you simply sell another one. If it drops below, you get assigned the shares at your chosen strike, and now you flip to the other half of the wheel.

Once you hold the stock, you sell covered calls against it, usually slightly out of the money, pocketing more premium each cycle. If the call gets assigned, your shares are called away at a profit and you go back to selling puts. Say you sell a $50 put on a stock trading at $53, collect $1.20, and get assigned. You then sell a $52 call, collect another $1.00, and if it's called away you keep the strike gain plus both premiums.

The common mistake is running the wheel on a volatile stock purely because the premiums look fat. If the shares crater to $35, you're stuck holding a loser and your covered calls barely cover the bleeding. Only wheel names you genuinely want to own at your put strike, and treat the premium as a bonus, not the reason.

← Back to the glossary · Guides · Strategies

All options terms

Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.