The Wheel Strategy in Option Trading: A Step-by-Step Guide

Generating consistent income from the stock market can be challenging, especially if you’re only relying on buying shares and hoping they go up. Fortunately, options trading opens up new paths to steady returns, and one strategy stands out for its simplicity, flexibility, and income potential: the Option Wheel Strategy.

At Maverick Trading, we often highlight the wheel strategy to our students and members because it aligns well with a disciplined, long-term approach. By rotating between cash-secured puts and covered calls, the wheel strategy can help reduce your cost basis on stocks you want to own while generating regular option premiums. The current stock price plays a crucial role in this decision-making process, as it affects the profitability and timing of selling put options and writing covered calls. This systematic approach can be especially appealing for traders seeking to blend consistent income with the possibility of purchasing quality stocks at discounted prices.

In this guide, we’ll explore each step of the wheel strategy—from selling puts to potentially owning shares, to selling covered calls, and back again. We’ll also discuss stock and ETF selection, risk management, rolling techniques, and more, helping you decide whether the wheel strategy deserves a spot in your trading arsenal.

What Is the Option Wheel Strategy?

The Option Wheel Strategy is a systematic method of trading options designed to generate income and potentially acquire stocks at attractive prices. It involves two main steps:

Selling a Cash-Secured Put:

1. You pick a stock (or ETF) that you wouldn’t mind owning.
2. You sell (write) a put option on that stock at a chosen strike price. The trade is “cash-secured” because you have enough capital set aside to purchase the shares if assigned. Selecting a higher strike price can balance income potential against risk, as it allows for higher premiums but comes with increased risk of assignment.
3. If the stock remains above the put’s strike price at expiration, the option will expire worthless, allowing the trader to keep the premium.

Selling a Covered Call (Once Assigned):

1. If the stock drops below your put’s strike price at expiration, you get assigned the shares. Now you own the stock.
2. Next, you sell a covered call on those shares to collect premium and potentially sell the stock at a profit if it rises above the call strike.

This process can repeat in a wheel-like fashion—after your covered call expires or is assigned, you can start again by selling cash-secured puts. The beauty of the strategy is that you’re collecting premium at each step, which can reduce your cost basis and enhance overall returns.

Key Benefits:

• Ongoing income from two sources: put premiums and call premiums.
• Potential to buy stocks at a discount (when assigned from puts).
• Systematic approach with clear steps.

What Is an Example of a Wheel Strategy?

Let’s consider a hypothetical scenario using a fictional stock, XYZ, which is currently trading at $50 per share.

1. Sell a Cash-Secured Put:

• You sell one put contract with a $48 strike, collecting a premium of $1.50 per share. The $48 strike price is slightly out of the money, which increases the likelihood of the option expiring worthless.
• Your premium income: $150 (because each contract covers 100 shares).
• You must keep $4,800 in your account to cover the potential stock purchase ($48 strike x 100 shares).

1. Assigned Shares:

• Suppose XYZ falls to $47 at expiration, so you’re assigned 100 shares at $48.
• Your net cost basis: $48 – $1.50 (premium) = $46.50.

1. Sell a Covered Call:

• Now you own 100 shares of XYZ. You sell a covered call with a $50 strike, collecting $1.25 per share (another $125 premium).

1. Stock Called Away:

• If the stock trades at or above $50 at call expiration, your shares get called away (sold) at $50 each.
• Total profit calculation:
  • $150 from the put premium
  • $125 from the call premium
  • $3.50 per share gain on the stock (bought effectively at $46.50, sold at $50), which is $350 for 100 shares
  • Overall profit: $150 + $125 + $350 = $625

This transaction forms a full “wheel.” If the call is exercised and the shares are called away, you can start again by selling another put.

Is the Wheel a Good Option Strategy?

For many traders—especially those comfortable owning shares—the wheel strategy checks several boxes:

• Steady Premium Income: You collect income both when selling puts and calls.
• Clear Rules: The steps (sell put → acquire shares → sell call → potentially sell shares) are straightforward.
• Flexibility: You decide which stocks to target, what strike prices to use, and the expirations you prefer.
• Versatility in Various Markets: Works in bullish, sideways, and mildly bearish conditions—though steep sell-offs remain a risk.

On the other hand, the wheel strategy isn’t foolproof. Potential drawbacks include:

• Assignment Risk: If the stock drops significantly below your put strike, you’re obligated to buy shares.
• Capital Requirement: You need sufficient cash to secure the put contract. For high-priced stocks, this can be substantial.
• Opportunity Cost: Capital might be tied up for extended periods, especially if the market moves sideways or shares linger below your strike price.

Overall, the wheel is a conservative-to-moderate strategy. It’s a step above simply buying stocks or index funds for long-term growth, but it doesn’t carry the high risk of more speculative leveraged option strategies.

Can You Make Money with the Wheel Strategy?

Yes, you absolutely can—provided you follow a disciplined approach:

1. Choose Quality Stocks: You want companies (or ETFs) that you’d be comfortable owning if assigned.
2. Set Conservative Strikes: Selling puts well below the current market price lowers the chance of assignment (though it also reduces the premium). If the stock price rises, the trader can benefit from both the premium collected and potential capital gains.
3. Manage Volatility: Avoid extremely volatile or “meme” stocks that can tank quickly.
4. Stick to the Process: Don’t deviate because of short-term market fear or greed.

Ultimately, your long-term success hinges on consistent execution, proper risk management, and a thoughtful selection of underlyings. Many professionals at Maverick Trading integrate the wheel into broader income-oriented portfolios, precisely because it marries well with a systematic, rules-based approach.

For more on professional tactics, see our in-depth guide: Options Trading Tactics Used by Wall Street Pros.

Why Is the Options Wheel Strategy Profitable?

When implemented correctly, the wheel strategy can be quite profitable, often beating a simple buy-and-hold strategy on stable, high-quality stocks. Here’s why:

• Two Streams of Premium: Unlike just purchasing a stock, the wheel generates premium at both the entry (put) and exit (call). Stock prices play a crucial role here, as fluctuations in stock prices affect the premiums collected and the overall profitability of the strategy.
• Cost-Basis Reduction: Every put and call premium you collect lowers your net cost if you’re eventually assigned the shares.
• Participation in Stock Upside: If assigned, you still own the shares and can benefit from future price appreciation until (and unless) you sell them via a covered call.

Example: Even if a stock’s price remains flat, you’re still collecting premium. If the price spikes above your covered call strike, you lock in a profit. If it goes down, your premium partially offsets those losses.

Profitability, however, is never guaranteed. A sharp market downturn could leave you holding shares with unrealized losses, and you might need to continue selling calls at lower strikes or holding for the long term.

Does Warren Buffett Use the Wheel Strategy?

Warren Buffett famously sells cash-secured puts on stocks he’d love to own at a discount. While he doesn’t call it a “wheel strategy,” his approach aligns with the first step of the wheel—selling puts with the intention of acquiring quality companies at fair prices.

Buffett’s Keys to Success:

• He focuses on fundamentally solid businesses.
• He sets strike prices that represent good value for the stock. Understanding the stock’s price movements is crucial for setting strike prices that represent good value.
• He’s prepared to hold the shares if assigned.

This philosophy matches neatly with the wheel strategy, which hinges on comfort with stock ownership and disciplined risk management.

How to Select Stocks for the Wheel Strategy

Stock selection is paramount. Selling puts on the wrong stock can leave you holding shares of a company in freefall. Consider the following:

1. Market Capitalization and Stability
   • Large-cap, well-established companies (e.g., Apple, Microsoft) typically have steadier price action and robust options volume. It is crucial to select suitable underlying stocks that you are willing to own and have the capital to purchase.
2. Dividend Stocks
   • If assigned, you may collect dividends while selling covered calls. Blue-chip dividend payers can add an extra layer of return.
3. Options Liquidity
   • Look for underlyings with high options volume and tight bid-ask spreads. This ensures you can enter and exit quickly without large slippage.
4. Sector Strength
   • Defensive sectors (consumer staples, healthcare, utilities) often have lower volatility.
5. Technical and Fundamental Analysis
   • Evaluate a company’s balance sheet, earnings, and price trends. The best wheel candidates often exhibit stable or moderately growing price trends with minimal “gaps” or erratic moves.

For more strategic angles on option selection, visit our post: 5 Options Strategies Inspired by Game Theory.

Which Stock Is Best for Wheel Strategy?

There’s no universal “best” stock because each trader has unique goals, risk tolerance, and capital. However, here are some perennial favorites:

• Apple (AAPL): Mega-cap tech with high liquidity and consistent demand.
• Microsoft (MSFT): Similar reasons—strong fundamentals, robust option chains.
• Coca-Cola (KO): Defensive, dividend-paying consumer staple with a global footprint.
• Procter & Gamble (PG): Another stable, dividend-paying conglomerate in consumer staples.
• SPDR S&P 500 ETF (SPY): An ETF, but widely used for the wheel thanks to extremely high liquidity.

Each of these underlyings tends to have tight bid-ask spreads and liquid options, making them ideal for quick fills.

Best Low-Priced Stock for Wheel Strategy

Many traders specifically seek low-priced stocks for the wheel to reduce capital requirements and diversify across multiple positions. While there’s no “one-size-fits-all” choice, here are some pointers:

• Look for Stocks Under $25: This ensures a single options contract (100 shares) costs $2,500 or less if assigned, making the position more accessible.
• Prioritize Liquidity: Even if the stock is trading at, say, $15, you still need enough daily volume and tight option spreads for efficient trading.
• Fundamental Stability: Cheaper doesn’t always mean better. You want companies that are financially sound, not just “cheap” because of poor performance or negative news.

Example Candidates (as of various market conditions; always do your own due diligence):

• Ford (F): A household name, generally in the $10–$20 range, decent dividend (when paid), and active options.
• AT&T (T): Historically offered a higher yield, though it’s had mixed performance. Still, it’s often under $25 with active options chains.
• Bank of America (BAC) (sometimes trades under $25, depending on market conditions): A large-cap financial institution with substantial daily liquidity.

Important: Even with a “low” price, the stock can still be volatile. Apply the same level of scrutiny you would for any higher-priced stock.

Graphic illustrating price volatility

What Is the Best ETF for Wheel Strategy?

Many traders turn to ETFs for the wheel strategy because they offer:

• Diversification: Owning an ETF gives exposure to multiple companies, reducing single-stock risk.
• High Liquidity: Popular ETFs often see large trading volumes and tight spreads.
• Consistent Premiums: The broad market or sector can yield stable option premiums.

Some top ETF picks:

1. SPY (S&P 500 ETF)
   • Tracks the S&P 500 index. Extremely high liquidity and multiple expiration dates per week.
2. QQQ (Nasdaq 100 ETF)
   • Focused on tech, which can offer higher premiums due to slightly increased volatility.
3. XLP (Consumer Staples Select Sector SPDR)
   • A defensive sector ETF, often stable in volatile markets. Options liquidity is reasonable.
4. DIA (Dow Jones Industrial Average ETF)
   • Composed of 30 blue-chip companies. Steady but less volatile than QQQ.

Choosing an ETF for the wheel can be a great way to simplify your selection process—rather than picking individual stocks, you gain broad exposure while still collecting option premiums.

Is the Options Wheel Strategy Safe for Risk Management?

“Safe” is relative in any market context. The wheel strategy is often seen as moderately conservative because:

• You’re aiming to buy fundamentally sound stocks.
• You collect premium that cushions potential downside.
• You can continually reduce your cost basis with repeated option sales.

However, market risk remains. If a stock plummets, you still own the shares (if assigned) and face potential paper losses. The obligation to buy 100 shares per contract can be significant for higher-priced stocks. Moreover, the wheel strategy ties up capital (cash-secured puts and owned shares), so you must be comfortable with that liquidity constraint.

Risk Management Tips:

• Diversify across multiple stocks/sectors.
• Use conservative strike prices well below the current market to reduce assignment risk.
• Keep a sufficient cash buffer for potential margin needs or to roll positions when necessary.
• Develop a clear exit strategy—if a stock’s fundamentals deteriorate, don’t hesitate to adjust or close out the position.

 

Is Rolling Options a Good Strategy?

Rolling an option means closing your current position (buying back the short put or call) and simultaneously opening a new position at a different strike or expiration. Within the wheel strategy, rolling can be used to:

• Avoid Assignment: If your short put is about to finish in the money, rolling it forward to a later expiration can buy you time (at the cost of receiving or paying additional premium, depending on the situation).
• Capture More Premium on Covered Calls: If your covered call is on track to expire worthless, you might roll it out (and potentially up in strike) to collect extra premium.

Rolling adds flexibility but must be done carefully. You could end up repeatedly rolling losing positions, increasing your cost basis. Always consider whether rolling improves your overall risk/reward or just delays an inevitable assignment or stock sale.

Pro Tip from Maverick Trading: Rolling can be a powerful tool if it aligns with your broader thesis on the underlying stock and your willingness to hold shares longer. It’s not about “kicking the can down the road” indefinitely; it’s about strategically adjusting your position.

Concluding Thoughts on the Option Wheel Strategy

The Option Wheel Strategy offers a systematic, income-generating approach to trading options. By selling cash-secured puts on quality stocks, you position yourself to acquire shares at potentially discounted prices. 

 

If and when shares are assigned, you then sell covered calls—collecting even more premium and possibly selling your stock for a profit if called away. This wheel-like cycle can repeat indefinitely, providing consistent cash flow and disciplined stock ownership.

That said, no strategy is perfect. The wheel demands capital, discipline, and prudent selection of underlyings. If you pick risky or volatile names, the downside can be significant. Success hinges on understanding your risk tolerance, choosing stable or moderately priced stocks/ETFs, and staying consistent with your plan—especially during market turbulence.

Ready to learn how to implement the wheel strategy effectively and tailor it to your financial goals? Maverick Trading offers professional coaching, market insights, and structured programs to help you trade with confidence.

Take the Next Step
Book a call with Maverick Trading today to discuss your trading goals, explore how the wheel strategy fits your investment style, and discover the power of a disciplined, rules-based approach.

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And if you’re curious how seasonal factors might affect option trading, don’t miss our article: How Does Christmas Affect Option Trading?.