In all of this, you collect a premium at every step plus any capital gain on the stock that you get when your stocks are called away.
You can read complete detail on how to run a successful wheel here.
How the Wheel Strategy Works #
graph TD
A[Start: Sell Cash Secured Put] -->|Not Assigned| A
A -->|Assigned - Own 100 Shares| B[Sell Covered Call]
B -->|Not Called Away| B
B -->|Called Away - Shares Sold| C[Collect Capital Gain]
C --> A
- Premium from selling puts - Collected while waiting to buy
- Premium from selling calls - Collected while holding shares
- Capital gains - When shares are called away above your cost basis
In this article, I will be going through five of the best stocks and funds to run a profitable wheel.
Best Underlying for Wheel Strategy #
SPY #
The SPDR S&P 500 trust is an exchange-traded fund that trades on the NY stock exchange under the symbol (SPY). SPDR is an acronym for the Standard & Poor’s Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest and oldest ETF in the world.
- High Liquidity: SPY is probably the most traded ETF on the NY stock exchange, making it a perfect candidate for the wheel
- Low Volatility: SPY has lower volatility so it doesn’t make wild swings unless there’s a major economic event
- Multiple Expirations: SPY has multiple expiration dates in a single week, unlike other stocks/funds which typically have weekly/monthly options only
- Low Premiums: This is an inverse effect of having low volatility. SPY does not fall into the high-swing ETFs, so it tends to provide lower premiums
QQQ #
Invesco QQQ is an exchange-traded fund (ETF) that tracks the Nasdaq-100 Index™. The Index includes the 100 largest non-financial companies listed on the Nasdaq based on market cap. Based on daily traded volume, QQQ is the second-largest fund in the United States.
- High Liquidity: Similar to SPY, QQQ is also one of the most traded funds on the NY stock exchange, making it a perfect candidate for the wheel
- Growth Potential: QQQ tracks the top 100 tech companies that primarily operate out of the US, making it attractive for growth while leveraging the wheel strategy
- Tech Heavy: QQQ comprises all companies in the tech sector and that makes it slightly speculative with higher swings
- Medium Volatility: QQQ is of medium volatility so you can expect some swings, but compared to individual stocks this is still a better choice for running the wheel
TNA #
TNA falls into the high-risk and high-reward categories. This index fund measures the performance of approximately 2,000 small-capitalization companies in the Russell 3000® Index, based on a combination of their market capitalization. The fund invests at least 80% of its net assets in financial instruments, such as swap agreements, securities of the index, and ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.
This is a 3X leveraged index so there is an inherent risk of owning this fund and it is only meant to hold for a small period of time. Do not plan to hold this in your portfolio as a long-term fund. Do your research about 3X leveraged risk before planning on investing in any of the leveraged funds.
- Huge Premiums: TNA gives one of the best bucks for your money in terms of premiums. This is a good instrument to leverage yourself rather safely by keeping a small percentage allocated to this
- High Volume: TNA is also one of the most traded funds in the stock market so you will not have issues closing or rolling off your options if they don’t go in your favor
- 3X Leverage/High Risk: As mentioned earlier this is a leveraged ETF and can go down significantly in fund value during market drops. It magnifies your losses so wheel this weekly with a small % of your overall portfolio
TQQQ #
TQQQ also falls into the high-risk and high-reward categories. This leveraged ProShares ETF seeks a return that is 3x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. The underlying benchmark target here is the Nasdaq 100 which primarily is made of the top 100 companies listed in NASDAQ by their market capitalization.
This is a 3X leveraged index so there is an inherent risk of owning this fund and it is only meant to hold for a small period of time. Do not plan to hold this in your portfolio as a long-term fund. Do your research about 3X leveraged risk before planning on investing in any of the leveraged funds.
- Huge Premiums: TQQQ again will give you one of the best bucks for your money in terms of premiums. This is a good instrument to leverage yourself rather safely by keeping a small percentage allocated to this
- High Volume: TQQQ is also one of the most traded funds in the stock market so you will not have issues closing or rolling off your options if they don’t go in your favor
- 3X Leverage/High Risk: As mentioned earlier this is a leveraged ETF and can go down significantly in fund value during market drops. It magnifies your losses so wheel this weekly with a small % of your overall portfolio
GOOG #
Image Credit: Google
Google is one of the top 5 companies that probably every fund worldwide has exposure to. It has a robust pipeline of revenue and is well diversified. Google has shown the best track record in terms of being a stable stock throughout recent market corrections. The medium volatility and strong fundamentals make it one of the best stocks for wheel strategies that you can play for the long term.
- Strong Fundamentals: Google is a great combination of having growth and strong fundamentals. It gives you a solid amount of growth without putting your money into a speculative stock
- Medium Volatility: Google has medium volatility and in most market conditions it will go in a range-bound fashion which makes it a great fit for wheel strategy
- High Liquidity: Google is traded widely in major exchanges and that makes it very liquid in nature. You will not find any issues closing or rolling off the options
- Medium Premiums: You cannot expect very high premiums however it would be better than some of the other stable stocks in the market
FAQ #
What stocks are good for wheel strategy? #
Best stocks for wheel strategy include index funds with good volume like SPY, QQQ, TNA, and TQQQ. Some other recommended stocks for wheel strategy are Amazon (AMZN) and Google (GOOGL).
Is the wheel strategy profitable? #
Yes, the wheel strategy is profitable. It is considered one of the safest strategies in the stock market that are bound to give consistent weekly/monthly income provided the right underlying are chosen.
Is the wheel option strategy good? #
Yes, the wheel option strategy is considered one of the safe option strategies.
How much money do you need to use the wheel strategy? #
You can start the wheel strategy with as low as $2000. You can always increase the amount as you start to generate weekly profit.