How the wheel strategy works
- Sell a cash-secured put on a stock you would like to own. Collect the premium.
- If the put expires worthless, keep the premium and sell another put.
- If you are assigned, you now own 100 shares at the strike price, with a cost basis reduced by the put premium.
- Sell a covered call on those shares, ideally at a strike above your cost basis.
- If the shares are called away, the cycle is complete and you start again with a new put.
Reading the wheel calculator
- Cost basis if assigned = put strike − put premium.
- Basis after call premium subtracts the covered call premium as well, which is your real breakeven while you hold the shares.
- Full cycle profit = put premium + call premium + (call strike − put strike), per share.
The calculator warns you when the call strike is below your cost basis, because being called away there locks in a loss.
Visualize each leg
Use the options calculator above the article to see the payoff chart of the put leg, then switch the strategy to Covered Call to model the second leg. You can also use the dedicated cash-secured put calculator and covered call calculator.
Risks of the wheel
The wheel works best on stable stocks you are happy to own. Its main risk is a large drop after assignment: you hold shares worth less than your cost basis, and selling calls above that basis may pay very little premium.
Frequently asked questions
Is the wheel strategy profitable?
It earns premium in flat or rising markets. In a sharp decline it loses money like owning the stock, reduced by the premiums collected.
Which stocks are best for the wheel?
Liquid stocks or ETFs you would be comfortable holding long term, with active option markets and tight bid/ask spreads.
Should I sell the covered call below my cost basis?
Usually not, because assignment would lock in a loss. Many wheel traders only sell calls at or above their cost basis.
How often can I run the wheel?
As often as each leg expires. Weekly and monthly expirations are both common; compare them using the annualized return.
For educational purposes only. Not financial advice. Options involve risk and are not suitable for all investors.