Using Expected Move to Optimize Strike Prices in the Wheel Strategy: A Masterclass in Options Trading

The options market is a battlefield where precision and strategy reign supreme. For investors employing the wheel strategy, a systematic approach to generating income through cash-secured puts and covered calls, choosing the right strike prices is the linchpin of success. Enter the expected move, a powerful tool that blends market probabilities with disciplined execution to tilt the odds in your favor. In this article, I’ll show you how to harness the expected move to select strike prices that maximize returns while managing risk.

What Is the Wheel Strategy?

Before diving into the expected move, let’s ground ourselves in the wheel strategy. This income-generating powerhouse involves two phases:

1. Selling Cash-Secured Puts: You sell put options on a stock you’re willing to own, collecting premiums while committing to buy the stock at the strike price if assigned.

2. Selling Covered Calls: If assigned the stock, you sell call options against those shares, pocketing more premiums until the stock is called away or you choose to sell.

The cycle repeats, “spinning the wheel” to generate consistent income. The key to success? Selecting strike prices that balance profitability and probability. That’s where the expected move comes in.

Understanding the Expected Move

The expected move is a market-derived estimate of how much a stock is likely to move, up or down, by a specific expiration date. It’s rooted in the options market’s implied volatility (IV), which reflects the collective wisdom of traders about future price swings. Think of it as the market’s best guess, distilled into a range.

How to Calculate the Expected Move

The expected move is typically calculated using the prices of at-the-money (ATM) call and put options for a given expiration. Here’s the formula:

Expected Move ≈ (Price of ATM Call + Price of ATM Put) × 0.85

Alternatively, many platforms provide an implied move based on the stock’s IV. For a quick approximation:

Expected Move = Stock Price × (Implied Volatility ÷ √Time to Expiration)

For example, if a stock trades at $100 with an IV of 30% and 30 days until expiration, the expected move is roughly:

$100 × (0.30 ÷ √(365/30)) ≈ $8.60

This means the stock is expected to stay within ±$8.60 of its current price (i.e., $91.40-$108.60) with about 68% probability, assuming a normal distribution.

Why Expected Move Matters

The expected move acts as a guardrail, helping you choose strike prices that align with market probabilities. By selling options outside this range, you increase the likelihood that your options expire worthless, allowing you to keep the premium without being assigned (for puts) or losing shares (for calls).

Applying Expected Move to the Wheel Strategy

Let’s break down how to use the expected move to select strike prices for cash-secured puts and covered calls, optimizing your wheel strategy for income and risk management.

Step 1: Selling Cash-Secured Puts

When selling cash-secured puts, your goal is to collect premiums while minimizing the chance of assignment (unless you’re eager to own the stock). The expected move helps you pick a strike price that’s likely to stay out-of-the-money (OTM).

• Identify the Expected Move: Calculate or pull the expected move for your chosen expiration (e.g., 30-45 days out, a common timeframe for wheel traders).

• Choose a Strike Below the Expected Move: Select a put strike price below the lower bound of the expected move range. For our $100 stock with a ±$8.60 expected move, consider a strike at $90 or $85.

• Check the Delta: Aim for a delta of 0.20-0.30 (20%-30% probability of being in-the-money). This keeps the strike far enough OTM to reduce assignment risk while offering a decent premium.

• Example: If the $90 put has a delta of 0.25 and pays a $1.50 premium, you’d collect $150 per contract with a 75% chance of keeping the premium without buying the stock.

Pro Tip: Stocks with high IV (e.g., tech or growth stocks) offer juicier premiums but wider expected moves, so adjust your risk tolerance accordingly.

Step 2: Selling Covered Calls

If assigned shares from your put, you pivot to selling covered calls. Here, the expected move helps you select a strike price that maximizes premium income while reducing the chance of your shares being called away (unless you’re ready to let them go).

• Recalculate the Expected Move: Use the same formula for the new expiration cycle, based on the stock’s current price.

• Choose a Strike Above the Expected Move: Pick a call strike price above the upper bound of the expected move. For our $100 stock, a $110 or $115 strike might work.

• Check the Delta: Again, aim for a delta of 0.20-0.30 to balance premium and probability. A $110 call with a 0.25 delta might yield $1.20 per contract ($120 total).

• Example: Selling the $110 call means you keep the premium if the stock stays below $110, and you retain your shares to continue the wheel.

Pro Tip: If the stock surges past your call strike, consider rolling the option (buying it back and selling a higher strike) to avoid losing shares prematurely.

Why This Approach Works

The expected move is your edge because it’s grounded in market data, not guesswork. By selling options outside the expected range, you’re betting on probabilities, not predictions. This aligns with the wheel strategy’s core philosophy: stack the odds in your favor and let time decay work its magic.

• High Probability of Success: Options outside the expected move have a 68%-80% chance of expiring worthless, depending on your strike choice.

• Risk Management: Choosing OTM strikes reduces assignment risk for puts and call-aways for calls.

• Consistent Income: The wheel thrives on premium collection, and the expected move ensures you’re not chasing risky, low-probability trades.

Real-World Example: Apple (AAPL)

Let’s apply this to Apple (AAPL), trading at $230 with an IV of 25% and 45 days until expiration.

1. Calculate Expected Move:

   • Expected Move = $230 × (0.25 ÷ √(365/45)) ≈ $20

   • Range: $210–$250 (68% probability).

2. Cash-Secured Put:

   • Sell the $205 put (below $210) with a 0.25 delta, collecting $2.50 ($250 per contract).

   • If AAPL stays above $205, you keep the premium. If assigned, you buy AAPL at an effective cost of $202.50 ($205 - $2.50).

3. Covered Call (if assigned):

   • Sell the $260 call (above $250) with a 0.20 delta, collecting $2.00 ($200 per contract).

   • If AAPL stays below $260, you keep the premium and shares. If called away, you sell at $260, locking in gains.

Pitfalls to Avoid

Even with the expected move, the wheel strategy isn’t foolproof. Watch out for:

• Overly Aggressive Strikes: Selling puts or calls too close to the current price increases assignment risk. Stick to the expected move range.

• Ignoring Volatility Shifts: A sudden IV spike (e.g., before earnings) can widen the expected move, so monitor catalysts.

• Neglecting Liquidity: Choose strikes with tight bid-ask spreads to avoid slippage.

• Tax Implications: Assignment or call-aways can trigger taxable events. Consult a tax advisor.

Spin the Wheel with Confidence

The wheel strategy is a disciplined, income-focused approach to options trading, but its success hinges on smart strike selection. By leveraging the expected move, you align your trades with market probabilities, boosting your chances of keeping premiums while managing risk. Whether you’re a seasoned trader or a curious newcomer, this method—rooted in data, tempered by discipline, can elevate your options game. So, calculate that expected move, pick your strikes, and spin the wheel with confidence. The market’s probabilities are on your side.

Probabilities over predictions,

Andy Crowder

🔗 Related Reading

• 📘 The Mathematics Behind Poor Man’s Covered Calls: Delta, Theta, and Probability

• ⏳ When to Sell Puts - Using Breadth, RSI, and Volatility as Your Guide

• 🎯 How to Sell Cash-Secured Puts and Covered Calls for Steady Returns in Bull, Bear, and Sideways Markets

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