Strategies

Wheel Strategy

The wheel combines two familiar income components: first an OTM short put to potentially acquire stock at a lower basis, then an OTM covered call to continue collecting premium on the assigned shares.

Description

What the strategy is doing

The wheel usually starts with a cash-secured or otherwise backed OTM short put. The core idea is simple: only sell puts on stocks you would genuinely be willing to own. If the option expires worthless, you keep the premium and restart the cycle.

If the stock drops below the strike and you are assigned, you take delivery of 100 shares per contract. From there the strategy moves into phase two: OTM covered calls against the newly acquired stock.

What makes the wheel attractive is that premium is collected on both sides. The short put reduces the potential entry basis, and the covered call lowers the stock basis even further or leads to the shares being called away at a profit.

Delta is often used as a practical strike-selection tool. A short put around 30 to 35 delta is often a useful balance between credit and probability. For the covered call, many traders also lean on an OTM call around 30 delta to leave some upside while still collecting meaningful premium.

Example: Coca-Cola from short put to assignment to covered call

As an illustrative example, assume KO trades at 64.00 USD. You would be happy to own the stock, but preferably at a lower effective price.

  • Step 1 Sell the 62 put and collect 0.85 USD in premium.
  • Step 2 KO falls below 62 and you are assigned 100 shares at 62.00 USD.
  • Effective basis After the put premium, your cost basis is now 61.15 USD.
  • Step 3 On the assigned shares, sell a 64 covered call for another 0.70 USD.
  • New basis After both premiums, the effective basis is 60.45 USD.
  • Step 4 If KO later rallies above 64.00 USD, the shares are called away and the cycle ends.
  • Total cycle 2.00 USD stock gain plus 1.55 USD in total premium = 3.55 USD per share, or 355 USD per 100 shares.
  • Restart After the shares are called away, you begin again with a fresh OTM short put in KO.

If KO stays below the covered-call strike, you keep the shares and can sell the next covered call again. That repetition is exactly what gives the wheel its name.