TRADING

The Options “Wheel” Strategy: Is It A Good Idea?

A popular plan, but is it really so smart?

Erik Bassett
9 min readAug 24, 2021

--

Photo by camilo jimenez on Unsplash

“…and there is no new thing under the sun.”

I don’t believe the author of Ecclesiastes had a Robinhood account, but he unwittingly described the options “wheel” strategy anyhow.

I found online references to the wheel strategy go back to 2015-ish, but at its core are two rudimentary trades that date to the beginning of the options market. (That would be some time between antiquity and 1973, depending on how precise we are.)

But as a strategy per se, it only entered common trading parlance over the last couple years, and proliferated because of (and as a prudent alternative to) the Great Get-Rich-Quick Retail Trading Bonanza of 2021.

So, what does this mean for you as a trader or investor? Is it a bandwagon worth jumping on, or just a margin call waiting to happen?

(Spoiler: quite possibly, and generally not.)

I’m not a financial professional. This is purely opinion and entertainment, not advice. Do what’s right for you, and if in doubt about what that is, then it’s important to find someone who’s legally able to tell you.

Here’s exactly what the options wheel strategy is

The wheel strategy involves repeatedly selling put and call options against a single underlying for several weeks or months. The goal is to collect premium for reinvestment or income. Margin is not required, nor generally recommended for new traders.

The idea is not to hold shares often, nor for a long period. To that end, most wheel traders begin by writing a cash-secured put with low likelihood of assignment.

If assigned, they write a covered call (perhaps with higher likelihood of assignment) at a strike price above the cost basis of their shares.

Once assigned, they’ll write another cash-secured put against the same underlying, to keep the “wheel” rolling.

It tends to outperform in flat and slowly moving markets, but underperform in rapidly moving ones.

An example of the wheel strategy in…

--

--