In the wheel strategy, premium is your primary source of income. It is the cash deposited immediately into your brokerage account when you sell a cash-secured put or a covered call. Premium consists of two parts: Intrinsic Value (if the option is in the money) and Extrinsic Value (time value and volatility).
Since wheel traders generally sell out-of-the-money options, the premium they collect is 100% Extrinsic Value, which decays to zero via Theta if the stock does not breach the strike price.
How Much Premium Is Enough? A common benchmark is targeting at least 1-2% of the secured capital per month. For example, on $10,000 of collateral, you should aim to collect at least $100-$200 per month in premium to justify the opportunity cost.
Net Premium refers to the total premium collected across an entire campaign, after subtracting any premiums paid to close or roll positions.
Examples of Premium in Action
- 1Selling an option priced at $1.50 yields a $150 total premium ($1.50 × 100 shares).
- 2Collecting $2.00 in CSP premium and $1.50 in two CC premiums = $3.50 net premium total, or $350 cash deposited.
- 3A $50,000 portfolio targeting 1.5% monthly premium = $750/month goal across all open positions.