The wheel strategy is a popular options trading technique designed to generate consistent income by cycling between selling cash-secured puts and covered calls.
The process starts with selling a cash-secured put on a stock you’re willing to own; if the option is exercised, you purchase the stock at the strike price. Once you own the shares, you then sell a covered call against them, collecting additional premium income.
If your shares are called away, you simply start the process over by selling another cash-secured put, effectively “turning the wheel” and repeating the cycle.
This strategy is favored by income-focused investors who want to potentially acquire stocks at a discount while earning regular option premiums. The wheel strategy can help reduce the cost basis of stock ownership and provide steady returns, but it does require active management and carries risks—especially if the stock’s price drops significantly after assignment. To maximize effectiveness and manage risk, it’s important to choose fundamentally strong, liquid stocks and carefully select your strike prices. With the right approach, the wheel strategy can be a powerful addition to your investing toolkit.