Featured Report: How to Profit with The Wheel Strategy: A Step-by-Step Guide to Consistent Income Using a Conservative Options Strategy

Featured Report: How to Profit with The Wheel Strategy: A Step-by-Step Guide to Consistent Income Using a Conservative Options Strategy

If you’re like most investors, you know the appeal of steady, reliable income is hard to come by. Dividend stocks, bonds, and even traditional covered calls can provide some relief, but there’s a disciplined, slightly contrarian strategy that may be one of the market’s best-kept secrets: the options wheel strategy. At its core, the wheel strategy is deceptively simple yet surprisingly powerful—offering a way to create income, lower your entry price on stocks, and systematically manage risk.

Here’s how it works: Rather than buy a stock outright, you start by selling a put option, which lets you set your own price for owning shares if the stock moves lower. If the market delivers those shares into your hands, you then switch gears and begin selling calls against your new stock position, reaping income until the stock moves above your strike price and gets called away. Then you repeat the process, moving back to selling puts, cycling in and out with each turn of the wheel.

In today’s markets, with volatility swinging prices and an endless barrage of economic uncertainties, the wheel strategy offers something many approaches lack: patience. Instead of reacting to the latest headline, you’re setting up trades on your terms, creating income at every turn, and setting a price to own stocks you already believe in. If you’re ready for a method that can build a foundation of income and manage the risks along the way, the wheel strategy may be exactly the disciplined approach you’ve been waiting for.

What are the Goals of “The Wheel Strategy”?

The Wheel Options Strategy is designed to generate consistent income, lower the risk of owning stocks, and provide a disciplined, systematic approach to options trading. Here are the primary goals of the wheel strategy:

1. Generate Steady Income: By repeatedly selling options, the wheel strategy creates a regular income stream. Selling cash-secured puts first and then covered calls, traders earn premium payments from each option sale, making it an attractive choice for income-focused investors.

2. Lower the Cost Basis: With each premium collected, investors effectively lower the cost basis of their position, reducing their overall risk. This means even if the stock doesn’t move much, the income collected can help offset any dips in price or stabilize returns.

3. Mitigate Downside Risk: By setting a specific buy price when selling cash-secured puts, investors can choose a level where they’re comfortable owning the stock. This reduces the risk compared to outright stock purchases at market price.

4. Take Advantage of Market Fluctuations: The wheel strategy capitalizes on the natural ups and downs in a stock’s price. By holding a stock and selling covered calls when assigned, and then switching to selling puts once called away, the strategy leverages each side of the market movement for potential gains.

5. Build Portfolio Flexibility: This approach allows investors to manage and rotate holdings across various stocks while generating income. If a stock reaches the desired price and is called away, investors can move on to other opportunities, creating flexibility in their portfolio.

6. Systematic, Low-Maintenance Approach: The wheel strategy provides a straightforward, mechanical approach to options trading, making it an accessible choice for investors who prefer a consistent, rules-based strategy that requires relatively low active management.

7. Reduce Overall Portfolio Volatility: By generating income and holding stocks at predetermined price points, the wheel strategy can offer a smoother, more predictable return profile compared to more speculative options strategies.

Overall, the wheel options strategy is aimed at building a steady income stream with a structured plan, providing a less risky way to benefit from the stock market’s natural movements while offering opportunities to buy stocks at a discount and sell them at a profit.

The Wheel Strategy - An Example

Also known as the covered call wheel or the income cycle, the wheel strategy is a systematic, income-focused approach that has gained popularity for its potential to outpace the classic buy-and-hold approach. Here’s the breakdown:

1. Sell Cash-Secured Puts until you’re assigned shares.

2. Sell Covered Calls on the shares until they’re called away.

3. Repeat the process.

In other words, find a liquid, solid stock you’re comfortable holding. Sell puts until you own the stock, then switch gears to covered calls until the shares are called away. This cycle lets you collect premium consistently, whether through the puts or the calls. Let's walk through it with Intel.

Simple Example using INTC (INTC)

Step One
With Intel (INTC) trading at $25.05, let’s say we start by selling the $23 puts with 45 days until expiration.

Selling these could earn us around at $0.72, or $72 per contract. Remember: Always use a limit order to maximize returns; don’t settle for the bid price.

By selling the $23 puts, we’re getting a 2.9% return on cash-secured capital, bringing our breakeven down to $24.33. If INTC stays above $23 by expiration, we keep the premium and can sell more puts, potentially achieving a 23.2% annual return through regular premiums. But if INTC dips below $23, no problem—we’re assigned shares at our chosen price and begin to use a covered call strategy with our newly acquired shares.

Step Two
If we’re assigned shares, we move to a covered call strategy. Suppose we sell the $27 calls with 45 days left until expiration on INTC at $0.80, or $80 per contract, with a strong 78.7% probability of success. This gives us a static return of 3.2% over 45 days. Should INTC stay under $27, we can continue selling calls. With this approach, we could potentially generate a 25.6% annual return. And if INTC rallies above $27, our shares are called away, locking in both premium and any capital gains.

The Bottom Line

The wheel strategy provides steady income and helps manage risk while lowering cost basis over time. It's not a scheme to get rich overnight. It’s a disciplined, methodical strategy that generates consistent returns month after month on stocks or ETFs you’re comfortable holding long-term. If you have questions, please feel free to reach out.