The Wheel Options Strategy: Profitability and How To Use It

Filip Dimkovski
By Filip Dimkovski
Edited by Taj Schlebusch

Published October 11, 2021.

The Wheel Options Strategy: Profitability and How To Use It main image

The Wheel Strategy is a systematic means of selling cash-safe calls as part of an ongoing options trading strategy. Putting it simply for our less educated readers, you continue to sell stock options to create monthly revenue.

Generally, this works by selling CSPs (cash-secured put) for the collection of the option premium repeatedly. Once your stock has ultimately been called off, you must sell your shares and start selling additional cash-secured items on the same, or possibly other stock.

Is the Wheel Strategy Profitable?

When it comes to the stock wheel strategy approach, there are several conceivable results. While the wheel approach might be beneficial, the dangers of selling OTM (out of the money) products and buying/selling these stocks must be recognized.

The Different Outcomes Option Wheel Strategy

Undetected Loss

One possible result is that your stock is purchased and the stock is still falling, and you will have an undetected loss if this happens. In addition, ownership utilizes far more influence than sales choices. When you’ve purchased a stock for the long-term, you will effectively collect the benefits from selling the OTM-based invitations on shares and generate extra revenue. However, when the stock's call options are exhausted, you will keep selling further calls to maintain the “wheel” rotation. It's best recommended to sell OTM calls with an expiration of two weeks.

Stocks Trade Above Strike Price

When Selling an OTM

A further conceivable result is that the stock starts trading above the strike prices of your puts when you sell an OTM. This way, you will keep the premium you earned when you sell the put option, then wait until the option expires, and finally restart the “wheel” by selling a set OTM.

Once Equity Has Been Allocated

Another possible outcome is that the stock starts trading above the strike price of your call option, once you have been allocated equity. If this happens, you will keep the premium from the calling options you sell and take advantage of the increase in the base stock, until the call option’s price strikes and sell the shares at the call option’s price strike.

In such a case, you will profit from the sale of the original stack, the sale of calls, and also the appreciation of the capital and price increases of your underlying stock and sell the shares at a price of the call options.

Is It Profitable?

When you're done with purchasing stocks, you can start the wheel again by selling options for OTM placing. The wheel trading strategy approach may generally be successful, however, many experts think that it is not the most effective trading technique. Still, the average return wheel strategy is somewhere around 28%.

How to Trade the Wheel Strategy

The wheel options trading strategy is used to collect premiums and it uses a combination of trades. For best results, you should have around $10,000 in cash, and you'll get more with a margin. Some of the best stocks for the wheel strategy include SPY, QQQ, TNA, MSFT, and AMZN.

Keep in mind that the following three main trades are crucial if you want to make the most of the stock wheel strategy:

  • Sell an out of the money put
  • Get the shares assigned
  • Sell a covered call on those shares

In the beginning, start with the sale of money to apply the wheel trading strategy. Keep in mind that the option owner has the right, but not the legal obligation, to own the underlying security at the strike price on or before the expiration date. Then, you'll collect the premium when you sell a placement option, which you may keep independent of the result of your purchase.

Should You Trade the Wheel Strategy?

It's no secret that transacting with stocks has its own risks. The stock price might drop significantly overnight, leaving your shares with very little value, or you can keep the shares longer than expected. If the wheel strategy sounds too risky for you, consider selling your premium options so that you may profit more consistently.