Options – What is the Wheel Strategy

The options wheel strategy is a income generating strategy primarily composed of two very simple options strategies. The cash secured put and the covered call.

Cash Secured Puts

The first part of the strategy involves selling a cash secured put. At this point in time, you have no position in the stock. Here’s a completely fictional example of how this would work.

Assume stock ABC is currently trading for $10 / share. You would go into the option chain and sell a put lower than the current price. In this example, selling a $9 put option may be appropriate. You could sell an $8 put or a $7 put, but the premium you receive for that put will be much lower.

In order for the put to be cash secured, you must have enough money in your account to purchase 100 shares of stock at the put price. In this example, we were discussing selling the $9 put as a CSP. Therefore, in order to qualify as a cash secured put, you must have $900 ($9 x 100 shares) available in your account to cover the cost of the stock if it expires in the money.

Cash Secured Put expiration

At option expiration, there are two possible outcomes:

  1. Stock ABC will be selling above or below your CSP price ($9). If stock ABC is trading above $9, the put option expires worthless and the premium you received for selling the option is yours to keep. At this point, you could open a new CSP at a price lower than the current stock price and start the cycle again.
  2. If stock ABC is trading below $9, the option has expired in the money and you will be required to purchase 100 shares at $9 ($900 worth of stock). Once you have the shares in your account, we move to the next step in the wheel strategy.

Covered Calls

At this point, we have been put shares of stock ABC at $9 / share and own 100 shares. The actual price may be $8.50 or $8.00 and we are currently losing money. However, in the wheel strategy, we will now be selling call options and generating premium using the 100 shares as collateral. This strategy is a covered call strategy.

Assume that stock ABC is currently trading for $8 and you were put the 100 shares at $9. The idea is to sell to open a call option that is trading higher than the current price, and ideally at the same price you were put the shares ($9). Selling this covered call will generate some income that will be paid to you immediately upon sale. This premium is yours to keep irregardless of what happens to the stock price.

Covered Call expiration

For this example, let’s assume that the current price of stock ABC is $8 and we sold a covered call at $9. At expiration of the covered call, there are two possible outcomes:

  1. Stock ABC will be selling at a price lower than our covered call $9. If the stock price of ABC closed less than our call option price of $9, we keep the entire premium and can sell another covered call for a future date using the 100 shares as collateral.
  2. Stock ABC will be selling at a price higher than our covered call $9. If the stock price of ABC closes higher than our call option price of $9, the 100 shares of ABC stock that we were holding will get called away. After the transaction is completed we will be left with 0 shares of ABC. At this point, we go back to the beginning and can start selling additional cash secured puts in the same stock if it still makes sense to do so.


In summary, the wheel strategy is basically a combination of two option strategies. You sell cash secured puts until assigned stock (stock closes below put option price at expiration). Once you are assigned stock, you sell covered calls until they are called away (stock closes above call option price at expiration).

To be clear, this is an option strategy designed to generate income. The premium received from selling the cash secured put and covered call will be the income received. This strategy will not be able to take advantage of large moves of the underlying stock to the upside or downside.