The Wheel Strategy: Cash-Secured Puts, Covered Calls & Position Sizing Explained
Education only. Options involve risk. Not investment advice.
TL;DR
The wheel strategy is a three-phase income loop. First, you sell cash-secured puts until you get assigned. Then you own the stock and sell covered calls until it gets called away. Then you start over. It works best on stocks you’d be happy to own at a discount, in neutral-to-bullish markets. The appeal is steady premium collection with defined risk. The danger is getting stuck in a falling stock while the premiums barely offset the losses.
What Is the Wheel Strategy?
The wheel has three phases that cycle continuously.
In Phase 1, you sell a cash-secured put on a stock you want to own. You collect premium and agree to buy 100 shares at the strike price if the stock falls below it by expiration. If the stock stays above the strike, the put expires worthless, you keep the premium, and you sell another put.
In Phase 2, the stock drops and you get assigned. You now own 100 shares at the strike price, minus the premium you collected. This is where the “cash-secured” part matters — you had the cash to buy the shares, so there’s no margin call.
In Phase 3, you sell a covered call against your shares. You collect more premium and agree to sell the shares at the call strike if the stock rises above it by expiration. If the stock stays below, the call expires worthless, you keep the premium, and you sell another call.
Eventually the stock rises, your shares get called away, and you return to Phase 1 to start the cycle again.
Wheel Strategy Structure
| Phase | Action | Outcome if Expires Worthless | Outcome if Assigned |
|---|---|---|---|
| 1 | Sell cash-secured put | Keep premium, repeat Phase 1 | Buy shares, move to Phase 2 |
| 2 | Hold shares | N/A | N/A |
| 3 | Sell covered call | Keep premium, repeat Phase 3 | Sell shares, return to Phase 1 |
Why Traders Use the Wheel
The wheel appeals to income-oriented traders who want to generate premium consistently without taking unlimited risk.
Selling puts lets you buy a stock at a discount. If you’re willing to own Apple at $170 anyway, selling the $170 put gets you paid to wait. If the stock never drops, you keep the premium. If it does drop, you get assigned at a price you were already comfortable with.
Selling covered calls generates income on shares you own. If you bought Apple at $170 and it rises to $180, selling the $185 call gets you paid again. If the stock keeps rising, you sell at $185 — a nice profit plus premiums. If it stays flat, the call expires worthless and you sell another one.
The strategy also benefits from time decay. You’re always selling options, which means theta works in your favor. Every day that passes without a major move chips away at the options you sold, reducing what you’d have to pay to close them.
Capital Requirements and Position Sizing
The wheel requires enough cash to buy 100 shares if assigned. This makes it a capital-intensive strategy.
Capital Requirements by Stock Price
| Stock Price | Cash Required | Typical Monthly Premium (2-3%) | Annual Yield Target |
|---|---|---|---|
| $25 | $2,500 | $50-$75 | 24-36% |
| $50 | $5,000 | $100-$150 | 24-36% |
| $100 | $10,000 | $200-$300 | 24-36% |
| $150 | $15,000 | $300-$450 | 24-36% |
| $200 | $20,000 | $400-$600 | 24-36% |
Position sizing rule: Risk no more than 20-25% of your account on a single wheel position. This allows for 4-5 positions across different sectors.
For a $50,000 account:
- Max single position: $10,000-$12,500
- Suitable wheel stocks: $100-$125 range
- Number of positions: 4-5 different underlyings
Selecting Stocks for the Wheel
The wheel works best on stocks you’d actually want to own long-term.
This means fundamentally sound companies with stable or growing businesses. Large-cap tech, blue chips, and broad market ETFs like SPY are common choices. You want liquid options with tight bid-ask spreads and enough open interest to get filled at fair prices.
Avoid speculative stocks, meme stocks, and anything with binary catalysts like FDA approvals. The premiums will be tempting, but the risk of permanent capital loss is too high. If you get assigned on a stock that drops 50%, no amount of covered call premium is going to dig you out.
Also avoid stocks in clear downtrends. The wheel is a neutral-to-bullish strategy. If you sell puts on a falling stock, you’ll get assigned at the worst possible time and spend months selling calls below your cost basis trying to recover.
Strike Selection and Timing
For cash-secured puts, the goal is to find a strike price where you’d be genuinely happy to own the stock.
Most traders target around 30 delta, which gives roughly a 70% chance of the put expiring worthless. That’s a good balance between premium collected and probability of assignment. Going lower delta — say 20 or 15 — improves your odds but reduces premium. Going higher delta collects more but gets you assigned more often at worse prices.
Delta Selection Guide
| Delta | Probability of Profit | Premium Level | Best For |
|---|---|---|---|
| 15-20 | ~80-85% | Low | Conservative traders, volatile markets |
| 25-30 | ~70-75% | Moderate | Balanced approach (most common) |
| 35-40 | ~60-65% | High | Aggressive income, willing to own shares |
| 45-50 | ~50-55% | Very High | Want to get assigned quickly |
For covered calls, you want to balance income against upside capture. A 30-delta call gives you a roughly 70% chance of keeping your shares, which means you’ll stay in Phase 3 longer and collect more premium over time. Selling a higher-delta call generates more premium per trade but caps your gains earlier.
Expiration Selection
| Timeframe | Theta Decay | Gamma Risk | Best For |
|---|---|---|---|
| 7-14 DTE | Very fast | High | Aggressive income, active management |
| 30-45 DTE | Accelerating | Moderate | Optimal balance (most common) |
| 60-90 DTE | Slow | Low | Less frequent trades, lower maintenance |
For expiration, 30 to 45 days is the sweet spot. Theta decay accelerates in this window, and you have enough time for the trade to work without tying up capital for months.
Managing Assignments
Assignment isn’t a problem — it’s part of the strategy.
When you sell a put and get assigned, you now own shares at a known price. Your actual cost basis is the strike minus all the put premium you collected. If you sold the $50 put for $1.50 and got assigned, your effective cost is $48.50.
When you sell a covered call and get called away, you sell your shares at the strike price plus whatever call premium you collected. If you sold the $55 call for $1.00, you effectively sold at $56.
The wheel math usually works out. Even if you get assigned below the current market price, you’re getting paid to hold a stock you wanted anyway. Even if your shares get called away below a peak, you’ve collected premium on both sides of the trade.
The problem comes when the stock falls and keeps falling. If you get assigned at $50 and the stock drops to $35, you’re underwater by $15 per share. Selling $40 calls brings in a little premium, but not nearly enough to offset the loss. This is where the wheel breaks down.
Complete Wheel Example: AAPL at $175
Here’s a full wheel cycle with cost basis tracking:
Phase 1: Selling Cash-Secured Puts
| Trade | Action | Premium | Running Total |
|---|---|---|---|
| Week 1 | Sell $170 put (30 DTE) | +$2.50 | +$250 |
| Week 5 | Put expires worthless | $0 | +$250 |
| Week 5 | Sell $172.50 put (30 DTE) | +$2.80 | +$530 |
| Week 9 | Assigned at $172.50 | Cost: $17,250 | +$530 |
Effective cost basis: $172.50 - $5.30 = $167.20 per share
Phase 3: Selling Covered Calls
| Trade | Action | Premium | Stock Price | Running Total |
|---|---|---|---|---|
| Week 9 | Sell $175 call (30 DTE) | +$2.20 | $171 | +$750 |
| Week 13 | Call expires worthless | $0 | $173 | +$750 |
| Week 13 | Sell $177.50 call (30 DTE) | +$1.80 | $173 | +$930 |
| Week 17 | Called away at $177.50 | Sell: $17,750 | $179 | +$930 |
Final Results:
- Total premium collected: $930
- Stock gain: $17,750 - $17,250 = $500
- Total profit: $1,430
- Return on capital: $1,430 / $17,250 = 8.3% in 17 weeks
- Annualized: ~25%
Rolling and Adjustments
Rolling means closing your current option and opening a new one at a different strike or expiration.
If you sold a put and the stock is approaching your strike near expiration, you can roll by buying back the put and selling a new one at a later date, often at a lower strike. This collects additional premium and delays assignment. It’s a reasonable tactic if you still believe in the stock but aren’t ready to own it yet.
If you sold a covered call and the stock is ripping through your strike, you can roll up and out — close the call and sell a new one at a higher strike with more time. This usually costs money because you’re buying back an option that’s now in the money. It preserves your upside but reduces your net return.
Rolling isn’t free. It extends your exposure and often narrows your profit margin. Use it sparingly, not as a crutch to avoid every assignment.
The Wheel on Robinhood
Robinhood supports the wheel strategy through its Level 2 options approval.
To sell a cash-secured put, select your stock, tap Trade Options, and choose your expiration. Select Sell and pick a put strike. Robinhood will calculate your max profit (the premium) and the collateral required (the cash needed to buy 100 shares). Submit your order and wait.
If you get assigned, Robinhood will automatically buy the shares and deduct the cash overnight. You’ll see the shares in your portfolio the next morning. From there, you can immediately sell a covered call.
To sell a covered call, navigate to your stock position, tap Trade Options, and select Sell. Choose a call strike above your cost basis (or wherever you’re comfortable selling). Robinhood recognizes you own the shares and treats it as a covered call.
If your call gets assigned, Robinhood sells your shares automatically at the strike price. The cash appears in your account and you can start Phase 1 again.
Robinhood doesn’t support one-click rolling, so you’ll need to close and reopen positions manually. The commission-free structure is helpful since you’re trading multiple contracts per cycle.
The Wheel on Tradier
Tradier supports the wheel through Level 1 options approval for covered calls and cash-secured puts in cash accounts.
The TradePro interface displays the full options chain with Greeks, making it easier to find 30-delta strikes. You can compare premium across multiple expirations without clicking into each one.
Tradier also integrates with CoveredWheel.com, a free journal built specifically for tracking wheel trades. It auto-imports your positions and tracks cost basis through assignment cycles, which saves time on record-keeping.
For automation, Tradier’s API allows programmatic wheel execution. You can build a script that scans for high-IV stocks, checks for earnings, and sells puts automatically when conditions are met. After assignment, you can auto-sell covered calls at target delta. This is advanced territory, but powerful for scaling the strategy.
Commissions are $0.35 per contract on the standard plan, or $0 with the $10/month Pro subscription. For active wheel traders, the subscription pays for itself.
Common Mistakes
The biggest mistake is wheeling bad stocks because the premiums look good. High IV usually means high risk. If a stock is paying 5% monthly premium, there’s a reason — the market expects it to move, and probably not in your favor.
Another mistake is getting emotionally attached to losing positions. If you got assigned at $50 and the stock dropped to $35, the rational move might be to close the position and take the loss, not to spend six months selling calls below your cost basis hoping to break even.
Over-concentrating is dangerous too. If you run five wheels on five different tech stocks, you’re not diversified — you’re correlated. A tech selloff hits all of them at once, and you’re stuck with losses across the board.
Finally, ignoring earnings and dividends causes problems. Selling calls over ex-dividend dates invites early assignment. Selling puts into earnings invites gaps that blow through your strikes.
Final Thought
The wheel is simple but not easy. It rewards patience, discipline, and stock selection more than clever trading. It generates steady income in calm markets and creates problems in volatile ones.
If you pick quality stocks, size conservatively, and accept that some trades will go against you, the wheel can be a reliable income strategy. If you chase premium on garbage stocks and refuse to cut losses, it will grind you down slowly.
Related Guides
- Vertical Spreads: Credit vs Debit
- Long Calls and Puts: A Beginner’s Guide
- Naked Options: Risk, Margin, and When to Avoid
Disclaimer: This is education only. Options trading involves significant risk and is not suitable for all investors. Consult a financial advisor before trading.