The Wheel Strategy | The Wheel Options Strategy Guide
The wheel options strategy is an excellent way to learn how to trade options due to its simplicity.
Key Takeaways
The Wheel Strategy is an options trading strategy that involves selling put options on a stock and then potentially buying the stock if the put option is exercised.
Once assigned shares, you sell covered calls until you are exercised and sell the shares, completing the wheel.
What is The Wheel Options Strategy?
The wheel options strategy combines the cash secured put and covered call strategy to create a consistent investment-like options strategy.
When appropriately used, the wheel is an excellent alternative to a buy-and-hold strategy that will produce higher returns with lower volatility.
Cash Secured Puts
A cash secured put is when you write a put and get paid to promise to buy 100 shares of a stock at a specific strike price.
Covered Calls
The covered call strategy is when you own 100 shares of a stock and get paid a premium to promise to sell them at the strike price.
The Wheel Strategy | Step-by-Step Guide
The wheel strategy follows a simple set of rules, combining the cash secured put and covered call strategy.
The following are the exact steps you must take to run the wheel options strategy effectively:
1- Sell a cash secured put
The first step of the wheel options strategy is to sell cash secured puts on a company you do not mind owning.
Ideally, you sell the cash secured put when the stock is trading at a price you don’t mind owning it at.
Additionally, the strike price you sell should be at or lower than the price you wouldn’t mind owning the shares.
2- Get assigned 100 shares
You will continue to sell cash secured puts until you accept assignment of 100 shares.
If the stock continues increasing, you will keep selling puts until you take assignment.
You will only be assigned shares if the stock falls below your strike price.
3- Sell a covered call
Once you own 100 shares from selling cash secured puts, you can sell covered calls on the shares for additional income.
It is ideal to sell covered calls when the stock is trading at a price you wouldn’t mind selling the shares.
When selecting a strike price for the covered call, you want to pick one where you wouldn’t mind selling the shares for a profit.
4- Get 100 shares called away
You will continue selling covered calls until you are eventually called away and forced to sell your shares.
You will only be called away if the stock exceeds your strike price. However, it can remain ITM and not be called away early, so you may have to wait until expiration.
5- Repeat from step 1
Once your shares are called away, you will have nothing left in your account.
Once this happens, you will have completed the wheel, and you can repeat step 1 by selling more cash secured puts.
Advantages of The Wheel Strategy
The advantages of the wheel strategy include less volatility than buy and hold and receiving income when the stock doesn’t move up or down.
Reduced volatility than buy-and-hold
Since you will be selling OTM contracts, you will incur less volatility than buying and holding 100 shares of stock. Additionally, the premium collected provides a buffer.
Income when stocks are flat
When the stock you are running the wheel options strategy on doesn’t move up or down, you will still generate income due to theta decaying the option contracts.
Disadvantages of The Wheel Strategy
The disadvantages of the wheel strategy include reduced returns in bull markets and the inability to sell covered calls at a reasonable price.
Reduced returns in bull markets
When stocks are in a bull run, you will likely not get assigned shares and will just collect premium from the cash secured puts. The premium collected will be good profits, but 100 shares will perform better when stocks rise quickly.
Unable to collect premium selling covered calls
If you are assigned shares and the stock drops hard, the covered call premium will be negligible at the strike price you want to sell.
FAQ
Is the wheel a good option strategy?
The wheel is a good option strategy for investors who want to generate consistent income from selling options and potentially owning stocks at a discount. The wheel involves selling cash-secured puts on stocks that you are bullish on or willing to own, and then selling covered calls on the same stocks if you get assigned.
What is the risk of the wheel options strategy?
The risk of the wheel options strategy is that you may end up buying stocks at a higher price than the current market value if the stock price drops significantly below your put strike price. You may also miss out on some upside potential if the stock price rises above your call strike price and your shares get called away.
Is the wheel strategy bullish?
The wheel strategy is generally bullish because it involves selling put options on stocks that you expect to rise or stay above a certain level. However, the wheel strategy can also be neutral or slightly bearish in the short term, as you can benefit from selling options with high implied volatility and collecting premiums while waiting for the stock price to recover or rally.
How much capital is needed for the wheel strategy?
The amount of capital needed for the wheel strategy depends on the price of the stock and the strike price of the options that you sell. You need to have enough capital to buy 100 shares of the stock at the put strike price in case of assignment. For example, if you sell a $50 put option on a $60 stock, you need to have at least $5,000 in your account to buy 100 shares at $50.
Is the wheel strategy risk free?
No, the wheel strategy is not risk free. There is no such thing as a risk free strategy in investing or trading. The wheel strategy has risks such as stock price risk, opportunity cost risk, assignment risk, and liquidity risk. You should always be aware of these risks and manage them accordingly.
Can you do the wheel strategy on SPY?
Yes, you can do the wheel strategy on SPY, which is an ETF that tracks the S&P 500 index. Spy is a popular choice for the wheel strategy because it has high liquidity, low bid-ask spread, and diversified exposure to the US stock market.
How to Learn More About The Wheel Strategy
If you are interested in learning more about the wheel options strategy, you should join a community of traders with experience in the stock and options market.
The free HaiKhuu Discord Community is the best resource for retail traders to accelerate their learning curve for stocks and options trading.
HaiKhuu provides a live voice call from market open to market close, plus a daily live report 15 minutes before the market opens.
If you are an options trading beginner, consider reading our article about the basics of call options.
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