How Does the Wheel Strategy Work?

The wheel strategy is a continuous cycle of selling options to generate income.

The 4 Steps of the Wheel

Step 1: Sell Cash-Secured Put

  • Choose a stock you want to own
  • Sell a put below current price
  • Collect premium immediately
  • Wait for expiration

    • Step 2: If Put Expires Worthless

  • Keep premium (profit!)
  • Go back to Step 1
  • Sell another put

    • Step 3: If Put Gets Assigned

  • You buy 100 shares at strike
  • Your cost basis = Strike - Premium
  • Move to Step 4

    • Step 4: Sell Covered Calls

  • Sell calls above your cost basis
  • Collect more premium
  • If called away → back to Step 1
  • If not called → repeat Step 4

    • Visual Example

    Starting with $5,000 on a $50 stock:

    Month 1: Sell $48 put for $1 → $100 income Month 2: Put expires worthless → Keep $100, sell new put Month 3: Sell $47 put for $1.20 → $120 income Month 4: Assigned at $47, own 100 shares Month 5: Sell $50 call for $1 → $100 income Month 6: Stock at $51, called away at $50 Result: $300 gain on stock + $320 premium = $620 profit

    Why It's Called "The Wheel"

    It's a continuous cycle:

    Sell Puts → Get Assigned → Sell Calls → Get Called → Sell Puts...

    The wheel keeps spinning, generating income at every step.

    Key Benefits

  • Income at every stage - Always selling premium
  • Defined risk - You know max loss
  • Built-in discipline - Clear rules
  • Works in any market - Flat markets ideal