The Options Wheel Strategy Explained

"The Wheel is Turning and You Can't Slow Down..."

https://steadyoptions.com/articles/the-options-wheel-strategy-wheel-trade-explained-r632/

The options wheel strategy, also known as the “triple income strategy” is a method where a trader continuously sells cash-secured puts until assignment, at which point they start selling covered calls against the assigned shares. Once the covered calls are assigned, they start the process over again by selling more cash-secured puts.

This strategy is named “the wheel trade” as it cycles between selling puts and calls, much like a wheel’s rotation. Because a trader utilizing the wheel is constantly selling options, they’re always generating income from several sources: calls, puts, and potentially even long stock.

How the Options Wheel Strategy Works

Step One: Sell a Cash-Secured Put

The first part of the options wheel strategy involves selling a cash-secured put. By selling the put option, you receive the price of the option as a credit, which you get to keep should the option expire worthless. For this reason, traders tend to choose out-of-the-money put options, as they’re highly likely to expire worthless allowing you to pocket the entire premium.

Step Two: Sell Covered Calls

If the underlying stock price drops below the strike price of the put option at expiration, the put will be assigned, and you’ll be obligated to buy 100 shares per contract at the strike price. At this point, you’re holding shares of the stock, which transitions us to the second step of the options wheel strategy: selling covered calls.

A covered call involves selling a call option for every 100 shares of the underlying stock you own. If I own 300 shares of Apple stock and I want to sell covered calls against them, I will sell three calls.

The covered call strategy aims to generate income by selling calls against a long stock position, with the hopes that the calls expire worthless, allowing you to keep the entire premium collected. Your position in the shares hedges out the upside risk should the stock price significantly increase.

The goal is to sell covered calls, have them expire worthless and then sell additional covered calls. You repeat this process until you get assigned on your calls.

Step Three: Repeat the Process

If the stock price surges above the strike price of the covered call by expiration, the call option will be exercised. This means that you’ll be forced to sell your 100 shares at the strike price of the call option, finalizing the options wheel cycle as your position in the stock is now flat.

Using the proceeds collected from selling the stock, you’re now ready to begin the process all over again by selling another cash-secured put, thereby setting the options wheel into motion once more. The continuous cycle of selling put options until assignment, then selling call options until assignment, forms the basis of the wheel strategy, offering multiple opportunities to earn income using different instruments: puts, calls, and long stock.

The Options Wheel Trade Benefits from Time Decay (Long Theta)

One of the most compelling benefits of the options wheel strategy is its inherent ability to exploit and benefit from time decay, making it a long theta trading approach.

Theta is the rate at which the price of an option will decay with each passing day. When you buy a put or a call, you’re working against the clock because the market has to move enough to counteract this factor. However, when you’re selling options as you do when trading the wheel, you’re constantly short options, meaning you benefit from the passage of time.

Market Outlook: Neutral to Slightly Bullish

Another benefit to the options wheel strategy is it makes a profit even if the market doesn’t move. As a matter of fact, it works optimally in a market that’s relatively neutral or in a slow upwards trend. In other words, the strategy is profitable in neutral to slightly bullish markets and loses money in fast-moving bear markets.

Selling put options is making a bet that the underlying price won’t decline significantly. Later, if the put option is assigned, selling covered calls is making the bet that the price won’t surge significantly. Therefore, the best market conditions for this strategy are those that see slow, gradual price changes, rather than volatile shifts.

Couldn't you try just a little bit more?

The wheel is turning and you can't slow down,
You can't let go and you can't hold on,
You can't go back and you can't stand still,
If the thunder don't get you then the lightning will.

Won't you try just a little bit harder,
Couldn't you try just a little bit more?
Won't you try just a little bit harder,
Couldn't you try just a little bit more?

Round, round robin run round, got to get back to where you belong,
Little bit harder, just a little bit more,
A little bit further than you gone before.
The wheel is turning and you can't slow down,

You can't let go and you can't hold on,
You can't go back and you can't stand still,
If the thunder don't get you then the lightning will.
Small wheel turn by the fire and rod,

Big wheel turn by the grace of God,
Every time that wheel turn 'round,
Bound to cover just a little more ground.
The wheel is turning and you can't slow down,

You can't let go and you can't hold on,
You can't go back and you can't stand still,
If the thunder don't get you then the lightning will.
Won't you try just a little bit harder,

Couldn't you try just a little bit more?
Won't you try just a little bit harder,
Couldn't you try just a little bit more?