How Does The WHEEL Strategy Works?

I have mentioned the Wheel Strategy a few times in my previous articles and together with the LEAPS strategy, it is one of the two favourite strategies in options trading. In this article, I will share with you how this strategy works.

The Wheel Strategy is very easy to understand, it is basically made up of a series of selling PUT and CALL options. When you sell a PUT option contract, you basically agree to buy 100 units of the shares of Company ABC if the market share price is below the strike price (agreed contract price) on the date of expiration. In return, you collect a premium for selling a PUT option contract.

If you are confused about how a PUT options contract works, this simple analogy may just be able to help you:
How PUT Option Works

Assuming your PUT option contract is being exercised and you have to buy 100 shares of Company ABC at the agreed (strike) price and you are a proud owner of 100 shares of Company ABC. What you can do now is to sell covered call on the 100 shares that you have. Selling a CALL option means you agree to sell 100 shares of Company ABC if the market share price rises above agreed (strike) price on expiration date. In return, you will get a premium for selling a CALL option contract.

This below analogy should help you understand CALL options better:
How Call Option Works

Assuming your CALL option contract is exercised when the market share price rises above strike price on expiration date, you now sell away 100 shares of Company and get back the money from selling 100 shares of Company ABC. With that amount, you can sell another PUT contract and collect a premium. If the PUT option contract is not exercised this time round, you collect the premium without having to buy the shares of Company ABC. Thus, you can sell another PUT contract.

In essence, the Wheel Strategy starts when you sell a PUT contract for a period, say a month.

If exercised, you sell a CALL contract with the shares you own. If not exercised on expiry date, you continue to sell another PUT contract.

If you sell a CALL option contract and it gets exercised, then you can sell a PUT contract with the sales proceeds of selling your 100 shares. If your CALL option contract is not exercised, you continue to sell another CALL contract for another period, say a month.

The Wheel Strategy is a series of selling PUT and CALL option contract, depending on when the respective contract gets exercised or not.

Let’s use Apple stock as an example.

January 2022 (Sell PUT)

On 1st Jan 2022, the market price of Apple share is $160.

You start the Wheel Strategy by selling a PUT option contract, with details as follow:

Type of Option: PUT
Strike price $165
Expiration Date: 31 Jan 2022
Premium Collected $16.50

On 31st Jan 2022, Apple stock closes at $166. You gain $1650 premium ($16.50 x 100) without requiring to buy 100 Apple Shares.

Feburary 2022 (Sell PUT)

On 1st Feb 2022, Apple share price is $166, you sell another PUT contract, with details as follow:

Type of Option: PUT
Strike price $170
Expiration Date: 28 Feb 2022
Premium Collected $10

On 28 Feb 2022, Apple stock closes at $169. Thus, your PUT options contract is exercised and you will buy 100 shares of Apple at $170. The amount you need to pay is $17,000 ($170 x 100). But you will still get to keep the premium of $1000 ($10 x 100).

March 2022 (Sell CALL)

On 1 March 22, the share price of Apple stock is $169. As you now own 100 shares of Apple, you can sell covered call for your Apple shares, with details as follow:

Type of Option: CALL
Strike price $168
Expiration Date: 30 March 2022
Premium Collected $8

On 30th March 2022, Apple stock closes at $166, which is below your strike price. You gain $800 ($8 x 100) premium without having to sell away your 100 Apple shares.

April 2022 (Sell CALL)

On 1 April 22, the share price of Apple stock is $166. As you still own 100 shares of Apple, you can sell covered CALL for your Apple shares, with details as follow:

Type of Option: CALL
Strike price $160
Expiration Date: 30 April 2022
Premium Collected $12

On 30th April 2022, Apple stock closes at $163. You gain $1200 ($12 x 100) premium from selling a CALL option contract on Apple. However, as market close price is higher than your strike price for your CALL option contract, you will have to sell away your 100 shares at $16,000 ($160 x 100).

May 2022 (Sell PUT)

On 1st May 2022, the market price of Apple share is $163. With the $16,000 that you collected from selling your 100 shares previously, you can now sell another PUT option contract and collect another month of premium

Type of Option: PUT
Strike price $160
Expiration Date: 31 May 2022
Premium Collected $14

If by month end, the option contract is exercised, you will sell CALL option in the following month. Else, you will continue to sell a PUT option contract. You take turn to spin the wheel and alternate between selling CALL and PUT option contracts.

I hope this explaination helps you understand this powerful strategy bettter. It can bring you consistent sideline income if you sell options on a stock with strong fundamentals, e.g. Apple. The price flucutation will not be drastic and you can earn good premium every month by either selling CALL or PUT options.

***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
The Ultimate LEAPS Options Thread

Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:
MY TRADES

Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)

I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day

I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021

This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months

12 thoughts on “How Does The WHEEL Strategy Works?

  1. Hi Jason, what are the criteria for u to enter a cash secured puts? Or u just enter based on implied volatility or pre-earnings ?

    For both leaps and CSP , i found that u also enter OTM trades, can u explain why use OTM on CSP ? Cheers.

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    1. Hi Tony, great question! I sell cash-secured PUT with the intention to own them for the long run, either for capital appreciation or to sell covered calls and get monthly income. I sold OTM PUT because I am bullish on the stock price and I am in a way locking in future gains. As you know, the maximum return of selling PUT is capped by the total premium. It does not matter if the share price exceed by $1 or $100 of the strike price upon expiry, the premium is still the same. I sold an OTM so if stock rise and hit SP, I get to keep the higher premium without having to buy anything. If not, I will be happy to own these stocks as they are my high conviction stocks 🙂

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  2. Hi Jason, what are some of the stocks you think I should consider for WHEEL Strategy, assuming I’ve USD20k left to deploy?

    Thanks

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    1. oh I just sold a 21.5k PUT contract on Nvidia. It is an OTM PUT contract and the return is about 1.6% for a 35 days contract. If Nvidia drops to USD215, which I think is unlikely, I think it is a very good price to own Nvidia and sell covered calls henceforth. If it does not drop to that level, the contract expires worthless and I get to sell another PUT contract next month. In fact, I do not need to wait till the expiration date. If the current rally continues, I will roll over the PUT contract and collect more premiums. You can read further about this strategy:

      https://learninginvestmentwithjasoncai.com/2022/01/18/why-i-choose-to-roll-my-put-option-contract-when-share-price-rises/

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  3. Hi Jason, in your example of SELL PUT, I realised all are ITM, is it your wanted to have higher premiums? If Sell Put what would a good percentage return? Thanks

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    1. Hi David, thanks for your question. The examples are using ITM are just to act as an illustration as ITM stands a higher chance of getting exercised, which would mean that the options seller will now sell a covered call contract instead of another new PUT contract. Every time a contract gets exercised, it will change from selling PUT to CALL to PUT and so on. Thus, the examples are to demonstrate how one can do the wheel strategy every month and still get a good return.

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      1. Oh it depends, and it is always a trade off. If you sell OTM options, the premium will be lower. I usually sell ITM or ATM if I am bullish and OTM if I am bearish. The whole intent is to not get assigned so you still have your cash to keep selling cash-secured PUT contracts, while earning the premium from each contract.

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  4. Hi Jason, in your example. The Sell PUT are all ITM. Is it you want to get high premium ? What is a good percentage of premium for WHEEL strategy? Thanks

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