The Wheel Strategy – Options Trading Explained

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May 11, 2021

Video Summary

The wheel strategy, also known as the triple income strategy, is a popular options trading strategy that combines the principles of covered calls and cash-secured puts. The strategy involves selling cash-secured puts and covered calls in a continuous loop, allowing traders to generate a steady stream of income.

To implement the wheel strategy, traders need to secure a substantial amount of cash in their brokerage account, typically equivalent to the strike price of the stock they want to trade. They then sell cash-secured puts, receiving a premium for taking on the risk of potentially being assigned the stock. If they are not assigned, they sell another put option, and if they are assigned, they use the stock as collateral to sell a covered call.

The strategy is ideal for large cap, stable stocks with a high degree of volatility. Traders should aim to sell options with a delta value of around 0.3, which corresponds to a 30% chance of being assigned. They should also aim to sell options that are three to six weeks out, as this allows them to capture the majority of the premium.

A key tip is to play the game of being assigned right before the ex-dividend date or selling a covered call after the ex-dividend date to capture the dividend payout. The strategy can generate a significant amount of income, equivalent to an annualized percentage yield (APY) of up to 20% on one’s money.

For example, if a trader sells a cash-secured put with a premium of 74, they would be earning 1.9% on their money in 33 days. If they are assigned, they can sell a covered call and earn an additional 1.8% on their money. This can result in a total APY of 20.3% if they hold the stock for the entire 33-day period.

The wheel strategy is a versatile and profitable options trading strategy, but it requires discipline, patience, and a solid understanding of options trading. Traders who are new to options trading may want to start with basic covered calls and cash-secured put strategies to develop their skills before moving on to the wheel strategy.