The Wheel Strategy: How It Works, Example and Risks
The wheel sells cash-secured puts until assigned, then sells covered calls on the shares until they're called away, and repeats. Traders use it to collect premium on stocks they want to own. The main risk is holding shares through a large decline.
At a glance
| Outlook | neutral |
|---|---|
| Level | intermediate |
| Max profit | Premiums collected plus any gain to the call strike |
| Max loss | Stock-like loss on the shares, reduced by premiums |
| Breakeven | Assignment price − total premiums collected |
| Greeks exposure | Positive delta, positive theta |
| Ideal IV environment | Moderate IV on stable stocks |
Payoff diagram
Worked example
Sell a $48 put for $1.20. If assigned, your cost is $46.80. Then sell a $50 call for $1.00, lowering cost to $45.80. If called away at $50, total profit is ($50 − $45.80) × 100 = $420.
How to manage it
- Choose stocks you'd hold through a drawdown.
- Avoid selling calls below your cost basis unless you accept a loss.
- Track total premium to know your true breakeven.
Risks
- Large drops can leave you holding shares far below cost.
- Capped upside when shares are called away.
- Capital-intensive: one contract ties up strike × 100.
Questions
How does the wheel strategy work?
Sell puts → get assigned → sell calls → get called away → repeat.
Is the wheel guaranteed income?
No. Premiums are income only if the shares don't fall more than the premiums collected.
What stocks suit the wheel?
Liquid stocks with active options that you'd be comfortable owning long term.
Related
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