If you've spent any time on options trading forums, you've seen the term "the wheel" come up constantly. ThetaGang traders love it. Income investors swear by it. And if you've only been buying calls and puts, the wheel strategy represents the natural next step into the world of selling premium — where time works for you instead of against you.
Here's everything you need to understand what the wheel strategy is, how each phase works, and why it generates income in a way that simple stock ownership never can.
What Is the Options Wheel Strategy?
The wheel strategy is a systematic, three-phase options income approach. It cycles between selling cash-secured puts, owning shares, and selling covered calls — over and over — collecting premium at each step. The name comes from this repeating cycle: you "wheel" through the three phases continuously on the same underlying stock.
Phase 1: Selling Cash-Secured Puts
You sell a put option on a stock you'd be willing to own at a price below the current market. In exchange, you collect premium immediately. Two outcomes are possible: the stock stays above your strike and the put expires worthless (you keep the premium and start over), or the stock drops below your strike and you're assigned 100 shares. Either outcome is manageable when you've chosen the right stock.
Phase 2: Owning the Shares After Assignment
Getting assigned isn't a failure — it's a planned step in the strategy. Your actual cost of those shares isn't the assignment strike. It's the strike price minus all the premiums you collected before assignment. This is your Adjusted Cost Basis (ACB) — typically 3-8% lower than your assignment price from the start, with more reduction coming from every covered call you sell afterward. See the exact ACB calculation in our step-by-step ACB guide.
Phase 3: Selling Covered Calls
Now that you own the shares, you sell call options above your ACB. Each premium further reduces your cost basis. When the stock rises above your call strike, your shares are called away at a profit — and you return to Phase 1 with fresh capital. If the stock doesn't rise that high, the call expires worthless, you keep the premium, and you sell another call next week.
Why Does the Wheel Strategy Actually Work?
The mechanical edge comes from three sources: theta decay (options lose value as time passes, and you're the seller), the volatility risk premium (implied volatility consistently overstates actual future volatility, meaning options are structurally overpriced), and the directional buffer built into every strike you choose. Learn the full explanation in our deep dive on where wheel strategy income actually comes from.
How Do You Get Started?
You need the right stock (see our current stock picks), the right broker (see our broker comparison), enough capital (see our capital calculator), and a way to track your campaigns accurately from day one. Create a free OptionWheelTracker account before your first trade — your ACB, premium income, and campaign P&L will all be calculated automatically as you go.
For fundamental research on the stocks you're considering, use MoneySense.ai to read AI-summarized SEC filings and earnings analysis before you sell your first put.