Strategies
Wheel Strategy
First an OTM short put, then a covered call after assignment. That repetition is what creates the classic wheel cycle.
Description
What matters most
The cycle starts with an OTM short put on a stock you genuinely want to own. If the stock stays above the strike, the put expires worthless.
If assigned, you take 100 shares and then sell an OTM covered call against them to collect the next round of premium.
Delta often serves as a guide: short put around 30 to 35 delta, covered call often around 30 delta.
Example: Coca-Cola
- KO is assumed at 64.00 USD.
- Short put 62 put for 0.85 USD.
- Assignment 100 shares at 62.00 USD.
- Basis after put premium 61.15 USD.
- Covered call 64 call for 0.70 USD.
- Total premium 1.55 USD per share.
- If called away at 64 the full cycle earns 3.55 USD per share.
- Then a new OTM short put starts the next wheel cycle.
The wheel cycle at a glance
- Cash-secured putKO: short put 62, premium 0.85 USD. Reserve 6,200 USD for possible assignment.
- Assignment: 100 sharesIf assigned, buy at 62 USD. Effective basis after put premium: 61.15 USD.
- Covered CallShort call 64, another 0.70 USD premium. Below 64: keep shares and potentially sell another call.
- Called away → new putIf assigned, sell at 64 USD. Example cycle: 355 USD result before fees. Then restart the wheel.
Summary
Key points
- Start OTM short put.
- After assignment OTM covered call.
- Advantage Premium collected on both sides.
- Drawback Full stock downside after assignment.
- Heuristic Often 30 to 35 delta for the put and about 30 delta for the call.