Wheel Trading Strategy

The wheel trading strategy is a popular options trading strategy that involves generating income from options by buying and selling puts and covered calls.

It is a systematic approach to trading options, allowing investors to potentially generate income while acquiring or disposing of stock. However, as you’ll learn in this article, you should be careful in calling capital from financial instruments “income”.

Let’s look at the wheel trading strategy:

Table of contents:

What is the wheel trading strategy?

First, let’s look at the concept:

Understanding the concept of the wheel strategy

The wheel strategy involves a combination of two basic options trading strategies: selling put options and selling call options. It aims to generate income from the premiums collected while also potentially acquiring or selling the underlying stock.

We have previously covered this in separate articles:

How does the wheel strategy work?

When implementing the wheel strategy, an investor starts by selling a put option on a stock they wouldn’t mind owning. This is what happens:

If the option expires worthless, they keep the premium as income.

If the option is assigned, they buy 100 shares of the stock at the strike price. Because the investor issued puts, he or she doesn’t mind owning the stock at that price level. We repeat: you should only issue puts in stocks you like and at price levels you deem acceptable.

Once owning the stock, they can then sell a cover