autorenewThe Options Wheel Strategy

A systematic approach to generating income from options while potentially acquiring shares at a discount

infoStrategy Overview

The Options Wheel Strategy is a systematic approach to generating income from options while potentially acquiring shares of stock at a discount. It involves a combination of selling cash-secured puts and selling covered calls in a repeating cycle.

listStep-by-Step Process

1
Sell Cash-Secured Put

You start by selling a cash-secured put option on a stock you wouldn't mind owning. The premium you receive from selling the put is your initial income. The "cash-secured" part means you need to have enough cash in your account to purchase the stock if you get assigned.

2
Assignment (if stock drops)

If the stock price falls below the strike price of the put option by expiration, you will be assigned the shares. This means you must buy the stock at the strike price and your total cost basis is the strike price minus the premium you received.

3
Sell Covered Calls

Once you've acquired the stock, you can sell covered calls against the shares you own. This generates additional income through the call premiums. The goal is to collect premiums while possibly selling the stock if it rises above the strike price.

4
Stock Sale (if stock rises)

If the stock price rises above the strike price of the call, your stock will be called away (sold at the strike price). You keep the premium from the sold call, and the cycle begins again.

calculateExample Walkthrough

trending_downStep 1: Sell Cash-Secured Put

Suppose you're interested in stock XYZ, currently trading at $50. You sell a cash-secured put option with a strike price of $45 for a premium of $2.

  • If XYZ stays above $45 by expiration, you keep the $2 premium and can sell another put option.
  • If XYZ falls below $45, you are assigned 100 shares at $45 per share, effectively buying the stock for $43 per share (after factoring in the $2 premium).
trending_upStep 2: Sell Covered Call

After being assigned the stock, you now own XYZ at an effective cost basis of $43. You sell a covered call with a strike price of $50, receiving a premium of $3.

  • If XYZ rises above $50, your shares will be called away, and you sell the stock for $50 (keeping the $3 premium).
  • If XYZ stays below $50, you keep the stock and the premium, and the cycle continues.

analyticsIndicators & Market Conditions

sellSell Cash-Secured Puts When:
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Volatility is high: Higher implied volatility means higher premiums for the options, making it a good time to sell puts for a larger premium.
target
Stock is trading near strike price: This allows for a high likelihood of getting assigned at a discount.
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Bullish or Neutral outlook: You sell puts when you think the stock won't fall significantly below the strike price.
call_madeSell Covered Calls When:
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Neutral to slightly bullish outlook: You believe the stock will not rise far above the strike price of the call.
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Volatility is relatively low: This reduces the likelihood of sharp price movements above the call strike.
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Stock has already appreciated: After a significant move up, you can sell calls for extra income.

visibilityKey Market Conditions to Watch

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Increased Volatility

Good time to sell puts for higher premiums

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Sideways/Modest Bullish

Ideal for covered calls and cash-secured puts

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Strong Uptrend/Breakout

Riskier for selling puts and covered calls

Ready to Start Wheeling?

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