The Options Wheel Strategy: A Popular Approach That Doesn't Work for Everyone

What is the Options Wheel Strategy?

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The Wheel combines two strategies you may already know:

1. Sell cash secured puts until you get assigned shares
2. Sell covered calls on those shares until they get called away
3. Repeat - back to selling puts

Sounds elegant, right? In theory, you’re collecting premium at every stage. In practice… it’s more complicated.

How the Wheel Works

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graph TD
    A[Start with Cash] -->|Sell Cash Secured Put| B{At Expiration}
    B -->|Stock > Strike| C[Keep Premium
No Assignment]
    C --> A
    B -->|Stock < Strike| D[Assigned: Buy 100 Shares]
    D -->|Sell Covered Call| E{At Expiration}
    E -->|Stock < Strike| F[Keep Premium
Keep Shares]
    F --> D
    E -->|Stock > Strike| G[Called Away: Sell Shares]
    G --> A

    classDef primary fill:#2a9d8f,stroke:#1f7a6a,stroke-width:2px,color:#fff
    classDef success fill:#22c55e,stroke:#16a34a,color:#fff
    classDef warning fill:#f59e0b,stroke:#d97706,color:#fff

    class A primary
    class C,F success
    class G warning

The Four Stages

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Why the Wheel is Popular

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The Problem: When the Wheel Breaks Down

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Here’s what the YouTube videos and blog posts don’t always tell you:

graph TD
    A[Sell Put at $100 Strike
Collect $2 Premium] --> B[Stock Drops to $85
You're Assigned]
    B --> C[Sell Covered Call
$90 Strike for $1 Premium]
    C --> D{Stock Keeps Dropping}
    D -->|Stock at $75| E[Call Expires Worthless
You Keep $1 Premium]
    E --> F[Sell Another Call
$80 Strike for $0.50]
    F --> G[Stock Drops to $70]
    G --> H[Trapped: Can't Sell Calls
Above Your Cost Basis]

    classDef danger fill:#ef4444,stroke:#dc2626,color:#fff
    classDef critical fill:#b91c1c,stroke:#991b1b,color:#fff

    class B,G danger
    class H critical

This is exactly what happened to me. Multiple times.

My Honest Experience with the Wheel

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What Kept Going Wrong

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Here’s my typical wheel experience:

1. Sell a cash secured put on a quality stock I want to own
2. Get assigned - stock drops below strike
3. Sell a covered call trying to generate income while holding
4. Stock keeps dropping - my covered call expires worthless
5. Sell another call at an even lower strike
6. Stock drops more - now I can’t sell calls above my cost basis without locking in losses

At this point, I’m trapped. The “wheel” has become a one-way trip to bagholding.

The Numbers Don’t Lie

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Initial CSP: $8 strike, collected $0.40
Assigned at: $7.50 (cost basis: $7.60)

Covered Call #1: $8 strike, collected $0.25
Stock dropped to: $6.80 (call expired worthless)

Covered Call #2: $7.50 strike, collected $0.20
Stock dropped to: $6.20 (call expired worthless)

Covered Call #3: $7 strike, collected $0.15
Stock dropped to: $5.50 (call expired worthless)

Result after 4 months:
- Total premium collected: $1.00
- Stock loss: $2.10 per share
- Net loss: -$1.10 per share (-$110 per contract)

Cash Secured Puts:
- Only sell on stocks I genuinely want to own
- If assigned, I'm happy to hold - no pressure to sell calls
- If stock drops further, I might sell MORE puts at lower strikes

Covered Calls:
- Only sell on stocks I WANT to exit
- If I'm assigned, great - I wanted out anyway
- Never sell calls on stocks I want to keep long-term

Why I Trade CSPs and Covered Calls Separately

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Cash Secured Puts: My Main Income Strategy

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I sell cash secured puts on quality stocks I want to own. Period.

• If not assigned: Great, I keep the premium and sell another put
• If assigned: Great, I now own a stock I wanted at a discount
• If stock keeps dropping: I hold because I believe in the company. I might even sell more puts at lower strikes to average down.

I don’t immediately try to wheel out of the position. That’s where I used to go wrong.

Covered Calls: Only When I Want Out

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I only sell covered calls in one specific situation:

This completely changes the psychology:

• I’m not chasing premium while hoping the stock recovers
• I’m actively trying to exit a position while collecting some income on the way out
• If the stock rallies and gets called away - perfect, that’s what I wanted

The Key Difference

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graph LR
    subgraph "Wheel Strategy"
    A1[Forced to Sell CC] --> B1[Hope Stock Recovers]
    B1 --> C1[Chase Premium]
    C1 --> D1[Often Trapped]
    end

    subgraph "My Approach"
    A2[Choose to Sell CC] --> B2[Want to Exit Position]
    B2 --> C2[Premium is Bonus]
    C2 --> D2[Win Either Way]
    end

    classDef bad fill:#ef4444,stroke:#dc2626,color:#fff
    classDef good fill:#22c55e,stroke:#16a34a,color:#fff

    class D1 bad
    class D2 good

When the Wheel Might Work

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I’m not saying the wheel never works. It can work well when:

Risk Comparison

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Best Practices If You Still Want to Wheel

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If you’re set on trying the wheel, here are some guidelines:

Strike Selection

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DTE (Days to Expiration)

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Aim for 30-45 DTE for optimal theta decay. This gives you:

• Enough time for the stock to move
• Maximum time decay in your favor
• Room to roll if needed

Interactive Calculator

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Use this calculator to estimate potential wheel returns - but remember, these are best-case scenarios:

Key Takeaways

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1. The wheel is popular but not perfect - It works in specific conditions
2. Stocks don’t always cooperate - Dropping stocks break the cycle
3. Forcing trades is costly - Don’t sell covered calls just to “stay in the wheel”
4. Separate strategies offer flexibility - You don’t have to combine CSPs and CCs
5. Personal experience matters - What works for others may not work for you

My Recommendation

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The best strategy is one that matches your goals, risk tolerance, and market conditions - not just the one with the catchiest name.

Disclaimer: This is educational content based on personal experience. Options trading involves risk and is not suitable for all investors. What doesn’t work for me might work for you - do your own research!