Starting the wheel strategy from scratch involves five key steps:
- Fund your account: You need enough capital to secure 100 shares of the stock you want to trade. For a $100 stock, that means at least $10,000 in cash collateral per contract.
- Choose an underlying: Pick a stock or ETF with moderate-to-high IV, liquid options, and a business you are comfortable holding long-term.
- Sell a cash-secured put: Select a strike at a delta of 0.20-0.30 (roughly 20-30% probability of assignment) and an expiration 21-45 DTE. Collect the premium.
- Manage the position: If the stock stays above your strike, the put expires worthless. Sell another CSP. If the stock falls below the strike, you are assigned 100 shares and transition to Phase 3.
- Sell covered calls: After assignment, sell a covered call at a strike above your Adjusted Cost Basis. Repeat until called away, then restart from Step 3.
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