Does the Options Wheel Strategy Work? My Experience

As someone that trades the wheel strategy for a living, I can offer insights into the effectiveness and nuances of this strategy.

After reading this article and you decide that selling options is for you, I created an entire soup-to-nuts course—The Options Selling Roadmap—that takes beginners to become confident options wheel investors. Plus you get 1-1 support so you can ask me anything.

does the wheel strategy work

Table of Contents

TLDR:

If you don’t have the time to read this right now, you can watch this short video I made so you can see how the wheel strategy works. I made this focussed for UK investors, but you can apply the same principles to any US-listed equity. 

The Wheel Options Strategy

The Wheel option strategy has gained popularity among traders seeking consistent returns in the options market. It is a strategy that is popular in the US, but not very well known amongst UK retail investors. 

However, as with any investment strategy, it is essential to evaluate its effectiveness before diving in.

In this article, I will explore the ins and outs of the Wheel option strategy as best as I can. After all, it’s a strategy that I use daily which provides me with enough income to live a comfortable life in East Yorkshire, England.

By the end, you will have a good understanding of whether the wheel strategy is worth incorporating into your investment approach. 

And if you have any questions, you can contact me here: 

Understanding the Wheel Options Trading Strategy: 4 Part Guide

The Wheel option strategy is a risk-mitigating strategy that involves selling cash secured puts and covered calls to generate income while potentially acquiring stocks at a favourable price. It consists of four primary steps:

Part 1: Selling Cash-Secured Puts

An investor sells a put option on a stock they are interested in owning, to receive the premium if the option expires worthless. If the option is exercised, the investor is obligated to purchase the underlying stock at the strike price. A great analogy is an insurance company. You are essentially insuring or underwriting a stock. 

Before getting into the weeds with an example, if you are in any doubt about which stocks to choose to sell options on, check out my 19 best stocks for wheel strategy article where I share some key metrics of what you can look for in a stock before initiating the options wheel approach. 

Here is an example of selling (or writing) a put option:

Let’s say ABC Nutrition is currently trading at $40 per share, and you have no existing shares but are interested in acquiring some at $35 per share.

You decide to write a put option with a $35 strike price that expires in two months. To insure or underwrite this trade, you will need to have $3,500 of capital in your brokerage account. 

In return for selling this put option, you receive a premium of $1.50 per share, totaling $150 for 100 shares.

If, at expiration, the stock hasn’t dropped below $35 per share, the put option expires without being exercised, and you keep the $150 premium as compensation for the trade. However, you miss the opportunity to purchase the shares at $35.

On the other hand, if the stock is trading below $35 per share at expiration, you become obligated to buy 100 shares at $35 each, costing you $3500.

This obligation holds whether the stock is at $34 or $2 per share.

The $150 premium you received when writing the put acts as a buffer, effectively reducing your cost basis on the stock from $35 per share to $33.50 per share.

So, What Returns Did You Make On This Trade?

You made a 26% annualised return on this trade. Meaning, that if you were able to do this trade every two months (remember it had a two-month expiration), then this is the sort of return you can make on your capital.

This is a 2.1% monthly return from running the first part of the options wheel strategy (selling put options).

I created a free easy to use online put calculator if you would like to learn how to calculate the annualised returns from selling put options. 

Part 2: Acquiring The Stock

If the put option is exercised, the investor acquires the stock at the agreed-upon strike price. This is the point at which the strategy becomes the stock wheel strategy.

Part 3: Selling Covered Calls

The covered call aspect of the wheel strategy is when you now own the shares. The analogy for covered calls is much like that of owning a rental property. You can collect monthly “rent” in the form of options premiums from agreeing to sell your shares at a predetermined price in the future.

This is an example of selling (or writing) a covered call: 

Suppose you own 100 shares of ABC Nutrition, currently trading at $35 per share. While you’re not keen on selling the shares at the current price and don’t anticipate a substantial upward movement in the stock in the near future, you’re interested in maximizing your profit from the position.

To achieve this, you decide to sell a call option with a $40 strike price that expires in two months, fetching a premium of $1.50 per share, totaling $150 (excluding commissions). By selling the call, or writing it, you grant someone else the right to buy your stock at any time over the next two months for $40 per share. In return, you receive $150 in cash.

If, at the expiration of the call option, the stock is trading below $40 per share, the call option becomes worthless, and you pocket the $150 profit. You are then free to write another covered call if you wish.

However, if the stock has surged significantly, reaching, for instance, $50 per share, you were obligated to sell at $40 per share, missing out on $10 per share in potential capital gains. Nevertheless, you still gain $5 per share (selling the $35 stock for $40 per share), and the original $150 premium you collected remains yours to keep.

Part 4: Rinse and Repeat

Part 4 is that when your shares get called away from you, you can begin to start all over again selling puts on the same stock (or one with a better opportunity). If you are assigned shares after selling the next put option, you move to covered calls, and you just keep performing the wheel strategy over and over again.

Here is a snapshot of my options wheel tracker spreadsheet for PayPal, ticker symbol PYPL.

wheel strategy returns

I have been wheeling PayPal for over 200 days. The stock has stayed in the 57-68 dollar per share range for this entire time.

This is why I love the options wheel investment strategy. 

It allows you to make money when a stock is going up, down, or trading sideways. The longer PYPL trades sideways the more premium I can accumulate ($1,911.17 at the time of this screenshot). giving me an annualised return on this stock of 26.91%. 

I will take those sorts of wheel options returns all day long.

options wheel tracker spreadsheet

Options Wheel Tracker Sheet

What gets measured gets managed. Learn to track all your trades like a pro.

Advantages and Disadvantages of the Wheel Option Strategy

Advantages:

>> Income Generation: The primary benefit of the options wheel strategy is the potential to generate consistent income from selling put and call options.

>> Risk Mitigation: By selling cash-secured puts, the investor has a predetermined entry price for the stock they desire, reducing the risk of buying at unfavorable prices. Additionally, selling covered calls limits potential gains but offers downside protection by collecting premiums.

>> Opportunity for Stock Acquisition: The strategy provides an opportunity to acquire stocks at potentially lower prices when the put options are exercised, allowing investors to accumulate positions in world-class companies they believe in.

Disadvantages:

>> Limited Profit Potential: Selling covered calls restricts the potential upside of the underlying stock. If the stock price rises significantly, the investor’s gains are limited to the strike price of the call option sold.

>> Risk of Assignment: If the put option is exercised, the investor is obligated to buy the stock at the agreed-upon strike price. This may result in acquiring stocks that experience further declines or volatility, leading to potential losses.

>> Market Conditions: In a raging bull market, this strategy just might not keep pace. You may be just better off not messing with options at all and just buy and hold.

>> Small account sizes might be limiting: I certainly recommend having at least $10,000 to $30,000 in your account before attempting the strategy. With a smaller account size, you are limited to certain stocks and it hampers your ability to diversify fully and keep position sizes under a certain threshold. I try to keep my position sizes to 2.5-5% maximum if I can.

What Returns Can You Expect To Make From The Options Wheel Strategy?

I delved into this topic more extensively in a separate article, but to give you a concise estimate, you can aim for a monthly return of approximately 1.25-2%. This translates to an annualised return of about 15-25% from employing the wheel options strategy.

I had the opportunity to interview several highly successful options traders who employ options wheel strategies. While many achieve commendable returns, some even surpass expectations, targeting weekly returns of up to 1%

The outcomes of your wheel strategy hinge on the specific stocks you select. Some stocks offer substantially higher premiums than others.

Regardless, once you become adept at employing the options strategies outlined in the wheel – selling puts and covered calls – you could soon find yourself achieving similar results.

In the beginning, I’ll confess, it can feel a bit daunting. The terminology used to explain some of these strategies might seem overwhelming at first. However, not knowing how something works initially doesn’t imply that it’s beyond comprehension.

Consider this: None of us were born with an innate knowledge of driving a car, yet we all managed to learn. So, don’t let unfamiliar terms or concepts intimidate you. Embrace the opportunity to learn and grow.

If any of this resonates with you I created the Options Selling Roadmap course designed to teach you everything you need to know to learn how to trade the wheel options strategy with confidence.

option selling roadmap

Options Selling Roadmap Course $97

Learn to sell options the right way with my flagship course.

FAQs about the Options Wheel

The wheel option strategy requires a good understanding of options trading and risk management. However, in my opinion, anyone can learn the skills to sell options and perform the wheel strategy. If you have bought and sold stocks before it’s only an extra layer of complexity above this.

The capital requirement will vary depending on the stocks and options chosen. Traders typically need enough capital to purchase the underlying stock if a put option is exercised. You could learn to wheel with a minimum of $10,000 / £10,000.

What factors should you consider when selecting stocks for the Wheel strategy?

It is essential to choose stocks that you are comfortable owning if the put option is exercised (part 1 of the wheel). Consider factors such as fundamental analysis, volatility, and liquidity when selecting stocks for the strategy. 

The effectiveness of the Wheel strategy can vary depending on market conditions. It tends to perform better in stable or slightly bullish markets. In highly volatile or bearish markets, the strategy may face challenges. I cover this in more detail in the Options Selling Roadmap course. 

The risks include the possibility of the stock price declining below the put option strike price, resulting in potential losses. I must stress that the risk is not in selling options, it is in the underlying securities that you choose to sell options on. Generally speaking, the more risky the stock, the higher premiums you can earn. This is a trade-off you need to think about when choosing stocks to sell options on.

The frequency of repeating the strategy depends on individual preferences and market conditions. Some traders may choose to repeat the cycle monthly or quarterly, while others only trade weekly options so they can be wheeling stocks all the time.

The Wheel strategy primarily focuses on selling cash-secured puts and covered calls. I like to keep things very simple and just focus on these two strategies. To take things to the next level you should also look at how to roll positions as well. This is a fundamental part of the wheel strategy that isn’t discussed enough however we cover this more inside the Options Selling Roadmap course

When considering the best stocks for the wheel strategy, it’s crucial to focus on high-quality companies with strong fundamentals. Identifying the best stocks to wheel involves evaluating factors such as a company’s balance sheet, competitive advantages, and dividend history. In my experience as a stock and options trader, I often look for reliable candidates like Google (GOOG), a company I deem suitable for the wheel strategy. Google’s sound financials, durable competitive advantages, and consistent dividend payments make it a top choice. Analyzing potential wheel strategy stocks involves not only the current market conditions but also a long-term perspective on acquiring shares and optimizing returns over time.

Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

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Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

About DividendOnFire.com

Welcome to Dividend On Fire, we are a site dedicated to options trading! We specialize in helping investors generate passive weekly or monthly income through selling cash secured puts and covered calls.

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