The Wheel Strategy: Earn Consistent Income with Options

97% of day traders lose money over the long term. You read that right - and that was the stat that was told to me back when I first started trading options. As a data-driven introvert, I always thought that I could make money by studying charts and patterns, that is until I came across the Wheel Strategy in options trading which is a pretty structured and methodical approach that lets you make money on your already existing positions and doesn’t keep you up at night.

The thing I hated most about options trading was all the jargon and technical language that “experts” use (always promising that you’ll make money if you buy their course - yeah right). But once I came across the Wheel Strategy I was pretty curious since it was a systematic way to add to your portfolio (make your money work for you). If you’re all about making money by following strict rules like I am, this guide breaks down how you can do so by using the Wheel Strategy. 

What is the Wheel Strategy? Simple Steps to Get Started

The best way to understand the Wheel Strategy is to think of a circle that makes money at different points. The points at which you make money are always the same - it's a never-ending cycle of option premiums, then capital gains, then options premiums, then capital gains, and so on. 

How the Wheel Strategy Works Step by Step

The most important part of the Wheel Strategy is that you must do it on a stock you wouldn’t mind holding (or already holding in your portfolio). If you don’t, you might as well skip the rest of this guide since it will be pointless.

1. Assuming you have no positions, you start by selling cash-secured puts. This means you are getting paid to buy the stock at a guaranteed price (strike price). 

2. You can keep doing step 1 over and over again until the stock comes down to your strike price at which point you’ll get assigned the shares (100 shares per contract).
   

3. At this point, you can start to sell covered calls on your position. Your second stream of income is paying you to hold the shares with the condition that you have to sell them once it hits your strike price.
   

4. You can keep doing step 3 until the stock rises and hits your strike price. The third stream of income here is the capital gains (provided your strike price is above the price you got assigned). Your shares will be “called away” and you’ll receive your money back.
   

5. You’re at no positions now so you can go back to step 1 and start the process all over again.

That’s it! If there is anything you need to learn about the Wheel Strategy the above 5 steps of the cycle is about 80% of the work done!

Why the Wheel Strategy is Great for Passive Income

Like I mentioned before, day trading kind of sucks because you always have to be on the ball with regards to predicting the market, and as Buffet says “no one knows what the market is going to do long term”. The Wheel Strategy lets you take a much more long-term approach (by sticking with a position you don’t mind owning long-term) and make some income on it. 

Top Benefits of Using the Wheel Strategy for Income

The best part about this strategy is that it lets you make multiple income streams while holding a stock you have a long-term view on:

✅ You get regular income coming in every month as opposed to just buying and holding a position (and waiting for dividends depending on the stock). A lot of the profiles I’ve been following on X have started to implement this in their portfolios!

✅ You’re only trading stocks you are familiar with and (hopefully) have done some sort of research. As mentioned, you should only be doing this on stocks you don’t mind owning.

✅ Selling puts gives you a discount on your purchase price vs. just straight-up buying. For example, if you sell a put with a strike of $30 and receive $0.75, your actual purchase price is $29.25 (assigned price minus credit received).

✅ It doesn’t matter what the market is doing. It could be going up, down or sideways - the Wheel Strategy lets you make money regardless. That’s personally what I love about options!

How to Choose the Best Stocks for the Wheel Strategy

So what is a good stock for options trading in general? This might sound like repetition, but it should be a stock you don’t mind owning long-term (and I am going to drill this into you until you get it!). That aside, there are some key factors to consider:

✅ Fundamentally strong stocks (good balance sheets, consistent growth, etc) are important. You don’t want to do this on some random hype stock you see on Reddit.

✅ Lower volatility stocks are the way to go. This might sound counterintuitive since volatile stocks usually have higher premiums, but unusual movements in price can be bad for you (imagine getting your stock called at $30 and by the time you go to purchase it spikes to $40 then comes back down to $30 after you get assigned - lol).

✅ Liquidity is king. You wanna be able to get in and out within a tight bid-ask spread otherwise you might lose money on the initial trade.

✅ Not required but dividend stocks or REITs are a good idea too. They give you another income on top of the premiums made through the Wheel Strategy.

Below is a screenshot from my interactive brokers' account of Apple (AAPL). Notice that the put I am looking at has lots of volume, a tight bid-ask spread, and generally Apple is well-traded with strong earnings. 

How To Get Better Results with the Wheel Strategy

While we have the “right” steps to execute this strategy, there are still a couple of things you can do to make sure this is a repeatable and consistent source of additional income for your portfolio.

Pick the Best Strike Prices

Choosing strike prices is pretty important because this drives your entire strategy. Here are two things to remember when picking strike prices:

• The closer your strike price is to the current price, the more premiums you receive but

• The closer your strike price is to the current price, the more likely you are to get assigned on your options.

Let’s say a stock is trading at $50 and you want to sell a put. You’ll notice that the $49 put pays you more than the $40 put. However, the $49 put is more likely to close “in the money” than the $40 put. Fast forward to you getting assigned at $49, when it comes to selling covered calls, the $50 call option will pay you more premium than the $55. You get the general concept here. 

I typically like to stick to the same “probability” to take any of the emotion away and I use the option Greek “delta” to determine this. A strike with a 25 (or 0.25) delta means the likelihood that it’ll expire in the money is roughly 25% (so its a 75% chance to expire out of the money).

Of course, this depends on how aggressive you want to get with the wheel strategy - so its best to determine your comfort level and stick to that if it works.

Pick the Right Expiration Date

The expiry that you pick can impact the success of the wheel strategy. There is no one size fits all, but its important to understand the differences between the time frames:

As you can see from the above table, the medium term happens to be the best option in my opinion. Without getting into the technical jargon, putting options trades on at around 45 days is the best because of how options behave between days 45 - 20 (which I’ll explain in another post - for now, “trust me, bro”).

Pay attention to Implied Volatility

Implied volatility (IV) shows what the market thinks the stock is going to do. The higher the IV, the more “uncertain” the market and the bigger the move they are expecting in either direction. The good thing is the higher the IV, the higher the premiums which is a win for us options sellers. However, this typically means that a big move is expected to come soon (like right before earnings) so you still need to be careful. 

Whenever you see high IV you probably should:

• Go further out on your strikes - you’ll still receive a similar premium on further out strike prices when IV is high vs in normal periods.
  

• Don’t go too hard on positions, maybe scale back a bit until the chaos has subsided.
  

• This is the one time you probably should take advantage of shorter-term options since premiums are higher than normal.

Diversify your positions

If you are still a small fish and are just testing this out with little money, you can go ahead and skip this part. For those of you who haven’t blown your accounts yet, its important to make sure you are diversified. Sure, you may love one stock to do this position on but I wouldn’t necessarily put all my eggs in one basket. While you can make some money selling calls when your position goes down, it still sucks when it keeps going down for a long period. 

One way to do this is instead of just focusing on individual stocks, you can do the wheel strategy on ETFs like the S&P500 or Nasdaq - that way you are not impacted when one company has an outlier move.

How to Adapt the Wheel Strategy to Market Changes

Heres is how you should be adapting your approach based on the type of market

What to Know About Taxes and the Wheel Strategy

Now that the good stuff is out of the way, it's time to talk about taxes. I’m no tax professional (doing my wife's taxes doesn’t count) but I am a bit of a finance nerd so here's what I know about taxes and options. 

How are Option Premiums and Stocks Are Taxed?

When you do cash-secured puts and covered calls, these are treated as short-term capital gains which means they will be taxed at the ordinary income tax rate. You’ll also most likely have stocks that you buy or sell in less than a year, which means you won’t qualify for that long-term capital gains tax rate. 

I’d still double-check with your tax professional but I have to say that this is one of the things to take into consideration before you implement this strategy - especially if you’ve already been holding a stock for a while now. 

FAQs About the Wheel Strategy

Lets go over some of the common questions people have about the Wheel Strategy

What is the Wheel Strategy?

The Wheel Strategy is an options trading method that makes you additional income by constantly selling puts and covered calls.

Can Beginners Use the Wheel Strategy?

Absolutely! All you need to know is how to sell puts and how to open a covered call and you are good to go.

How much money do I need to start using the Wheel Strategy?

You’ll need enough to buy 100 shares of a stock that has active options. The higher the stock price, the more expensive it’ll be.

What are the risks of the Wheel Strategy?

The main risk is that if the stock has a consistent movement to the upside, you may actually make less on the strategy than you would have by just buying and holding.

Can the Wheel Strategy generate passive income?

Yes. Selling options premiums on stocks you already own is a great way to create another income stream.

What stocks work best for the Wheel Strategy?

Look for stocks with good liquidity and strong fundamentals. Popular ETFs like SPY help you to diversify your risk.

Conclusion

The Wheel strategy is the best alternative to day trading. It’s a systematic approach that takes away all the guesswork and allows you to create an additional income stream on your long-term portfolio. 

Personally, I love that you can do this strategy on any stock in any condition, without looking at a chart or doing heavy analysis since you already own the stock for the long term. Perfect if you are an introverted income seeker like myself. As long as you stick to stocks you don’t mind owning and follow the rules, you should be able to boost your portfolio gains. 

One thing to remember is you aren’t trying to hit it out of the park with this strategy. Instead, you are trying to generate repeatable and predictable income, regardless of how small it is. The compounding effect will work well over the long term - consistency over everything!