Wheel Strategy
A sequence commonly described as selling cash-secured puts, accepting assignment, then selling covered calls.
What is a Wheel Strategy?
A sequence commonly described as selling cash-secured puts, accepting assignment, then selling covered calls.
Construction
Sell a cash-secured put; if assigned shares, sell covered calls; if shares are called away, optionally restart.
When it may be studied
To study systematic premium selling only when comfortable owning the underlying and accepting capped upside.
Expiration profile
Maximum risk: Substantial equity downside
Maximum reward: Premium plus limited stock appreciation depending on stage
Break-even: Changes with accumulated premiums and share basis
Worked example
A put sold at strike 50 may lead to assignment. Covered calls may then be sold against the shares. Each premium changes the accounting basis, but not the underlying business risk.
Key risks and limitations
The wheel does not manufacture safe income. A severe stock decline can overwhelm years of premium, and covered calls can cap recovery.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.