Wheel Options Trading Strategy Explained

The wheel is the most beginner-friendly multi-stage options strategy. It's not fancy. It's not complicated. But it works.

Here's what you need to know before you start.

What Is The Wheel?

The wheel is three separate actions that repeat:

1. Sell cash-secured puts — collect premium, wait to be assigned
2. Get assigned — now you own 100 shares
3. Sell covered calls — collect more premium, eventually get called away
4. Repeat — go back to step 1 with new capital

It's called the "wheel" because you're cycling through the same stocks over and over: sell puts → own shares → sell calls → shaken out → sell puts again.

That's it. It's not complicated.

Why People Love The Wheel (And Why You Might Too)

Reason 1: You Know Exactly What You're Getting

Unlike buying options (where price moves are unpredictable), the wheel is mechanical. You:

• Know the strike you're buying at (if assigned)
• Know the strike you're selling at (on the covered call)
• Know your profit target in advance

Example: You sell a $50 put and collect $1.00 premium. You get assigned and own shares at $50. You sell a $52 call and collect $1.00 more premium. Your maximum profit = $1.00 + $1.00 + ($52 - $50) = $3.00 profit on $50 capital = 6% for ~90 days = 24% annualized.

Before you start, you know what you'll make (if it works as planned).

Reason 2: It Works In Any Market

• Market rallies? Your calls get called away at profit. You restart with fresh capital.
• Market drops after assignment? You own shares at a price you chose. The covered call sale caps your loss. You hold and restart the cycle after assignment.
• Market trades sideways? Perfect. Theta decay works for you. Premium expires, you keep it, repeat.

There's no scenario where the wheel is "wrong." It adapts.

Reason 3: It Simplifies Your Stocks

Instead of trying to pick winners and losers, the wheel picks for you. You run it on 2–4 stocks (same ones every month). You stop overthinking and start repeating.

This removes the psychological burden of stock picking.

How The Wheel Works: Step By Step

Step 1: Sell Cash-Secured Puts

You decide: "I'd buy XYZ at $50 if I had to."

You go to your broker and sell 1 put option at the $50 strike, collecting $1.00 premium (example).

What you're doing: You're getting paid $100 now ($1.00 × 100 shares) to promise to buy 100 shares at $50 anytime before expiration (typically 30–45 days from now).

Risk: If the stock drops below $50, you might be assigned. You'll own 100 shares at $50 (roughly $5,000 capital).

Best case: Stock stays above $50. Your option expires worthless. You keep the $100 and do it again next month.

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Step 2: Get Assigned (Or Expire Worthless)

If stock stays above $50: Expiration day arrives, your option expires worthless, you keep the $100. Go back to step 1.

If stock drops below $50: Expiration arrives, you're assigned. Your broker forces you to buy 100 shares at $50. Your cash account is debited $5,000. Your stock account credits 100 shares.

Your effective cost basis: $50 - $1.00 (premium) = $49.00 per share. You now own 100 XYZ at an effective price of $49/share.

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Step 3: Sell Covered Calls

You now own 100 shares. Immediately (or when you're ready), you sell a call option against them.

You decide: "I'd be happy to sell these shares at $52."

You sell 1 call option at the $52 strike, collecting $1.00 premium.

What you're doing: You're getting paid $100 now to promise to sell your 100 shares at $52 anytime before expiration (typically 30–45 days).

Risk: If the stock rallies above $52, you'll be called away. You'll have to sell your shares at $52.

Best case: Stock stays below $52. Your call expires worthless. You keep the $100 premium and the shares.

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Step 4: Repeat (Or Adjust)

If shares get called away: You sold them successfully. You now have $5,200 in cash (100 × $52). Go back to step 1 with fresh capital.

Total profit this cycle: $100 (put premium) + $100 (call premium) + $200 (stock appreciation from $50 → $52) = $400 profit on $5,000 capital = 8% for ~90 days = 32% annualized.

If shares don't get called away: Stock stayed below $52. You keep the call premium ($100) and the shares. You can:

1. Sell new calls at a higher strike ($54?) and cycle again
2. Hold the shares for dividend income (if paid)
3. Exit the position entirely

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Visual: The Wheel Cycle

Month 1:
  Sell $50 Put → Collect $1.00
  ↓
  [Stock hovers $48-$52 for 45 days]
  ↓
  Assigned at $50 → Own 100 shares (effective cost: $49.00)

Month 2:
  Sell $52 Call against shares → Collect $1.00
  ↓
  [Stock hovers $50-$54 for 45 days]
  ↓
  Called away at $52 → Sold 100 shares

Total: $2.00 premium + $2.00 appreciation = $4.00 profit on $50 strike

Repeat next month with new capital / new stock

Who Should Run The Wheel?

✓ Perfect For:

• Disciplined savers — You have capital to deploy monthly
• Boring traders — You like the same stocks every month
• Tax-efficient traders — You want predictable capital gains (long-term)
• Income seekers — You want steady cash flow, not home runs
• Hands-off investors — You want rules, not guesswork

✗ Not For:

• Day traders — Wheel is too slow (30–45 day cycles)
• Lottery players — Wheel returns are modest (2–4% per wheel = 24–48% annualized, not 100%+)
• Stock pickers — Wheel ties up capital in 2–4 repeating names; you can't rotate freely
• Margin cowboys — Wheel requires discipline. Margin creates temptation to over-leverage

The Math: How Much Money Will You Make?

Given:

• 1 wheel = 90 days (put + call combined)
• Premium collected per wheel = 2–4% of the stock price
• Stock appreciation within your strikes = 0–4% (if you pick right)
• Total return per cycle = 2–8% per wheel

Annualized:

• Conservative: 2% per wheel × 4 wheels/year = 8% annual
• Moderate: 4% per wheel × 4 wheels/year = 16% annual
• Bullish: 6% per wheel × 4 wheels/year = 24% annual

On reality:

• Not all wheels finish in 90 days (you might roll, adjust, or miss expirations)
• Not all positions yield the target return (some assignments happen early, some calls expire worthless requiring you to restart)
• Tax drag and commissions reduce returns by 1–2%

Expected actual return: 8–18% annual over a full year of consistency.

This isn't exciting. But it's repeatable. And it compounds.

Example: Running The Wheel (Real Numbers)

Starting capital: $10,000

Cycle 1 (Jan–Mar):

• Sell AAPL $220 put, collect $1.50 → now you have $10,150
• Assigned at $220, own 100 AAPL (required capital: $22,000, but let's assume you have $25,000 total)
• Sell $225 call against them, collect $1.25 → now you have $10,275
• Called away at $225, sold shares

Profit: ($1.50 + $1.25 + $5.00 appreciation) × 100 = $750 profit on $25,000 capital = 3% for 90 days = 12% annualized

Cycle 2 (April–June):

• With $10,750, buy another wheel on JPM puts ($205 strike, collect $1.20)
• Same pattern repeats

After 1 year (4 wheels):

• If each wheel yields 3% = total 12% annual return
• $10,000 grows to $11,200

After 5 years (20 wheels):

• $10,000 grows to $17,600 (compound)

Not a homerun. But boring, repeatable, tax-efficient wealth building.

Common Beginner Mistakes

Mistake 1: Selling Puts On Stocks You Wouldn't Own

The wheel assumes: if assigned, you're happy to own the stock.

One trader sold puts on Tesla just to collect premium. Stock crashed 30%. He was assigned. Now he owns Tesla at $80 in a stock he doesn't believe in. He's stuck.

Fix: Only sell puts on stocks you'd genuinely buy at that price.

Mistake 2: Selling Covered Calls Too High

You want to get called away (full profit realization). But you sell calls SO high that they never get in the money.

Example: You own IBM at $180. You sell a $200 call. IBMnever reaches $200, call expires worthless. You own it forever, earning just the put premium.

Fix: Sell calls 3–5% above entry price. You'll get called away. The wheel cycles.

Mistake 3: Over-Leveraging

You have $50,000 capital. You run 5 wheels on $50,000 ~= 250,000 in capital requirements (5 × 100 × $50 average strike).

Markets drop 10% → $250,000 of position swings $25,000. Margin call stresses your account. You panic sell. Wheel breaks.

Fix: Start with 1 wheel. Add a 2nd after 6 months of success. Never run more wheels than your capital can comfortably handle (rule of thumb: each wheel should be < 30% of total account).

Mistake 4: Selling Puts Right Before Earnings

You sell puts on a stock that reports earnings in 2 weeks. You get assigned the day of earnings. Stock gaps down 15%. Ouch.

Fix: Check earnings dates. Don't sell puts if earnings are within your 30–45 day window. Or, sell far OTM and know you're taking gamma risk.

The Boring Truth About The Wheel

The wheel makes you 8–18% annual. That's not flashy. That's not LinkedIn-worthy.

But in 10 years:

• $50,000 grows to $110,000 (8% compound)
• $50,000 grows to $200,000 (12% compound)

That's life-changing for boring, mechanical discipline.

The traders who get rich don't do it with one big home run. They do it with years of boring, consistent 10–15% annual returns.

The wheel is that strategy.

Getting Started

1. Pick 1 stock you'd genuinely own long-term (mega-cap, dividend, or wide-moat company)
2. Sell 1 cash-secured put at a strike 5–10% below current price
3. Collect premium and wait 30–45 days
4. If assigned, immediately sell a covered call at 3–5% above your assignment price
5. If called away, celebrate the win and restart
6. Repeat until it becomes boring (which is the point)

You've just run your first wheel.

After 4 successful cycles, add a 2nd stock. Then a 3rd.

That's how most wheel traders start. That's how you should too.

It's not sexy. But it works.