The Wheel Strategy is a way to use Covered Calls and Cash Secured Puts together to generate additional passive income on stocks you plan to hold for long term.

The Wheel Strategy

Definitions

Call Option:

“When you buy a call, you pay the option premium in exchange for the right to buy shares at a fixed price (strike price) on or before a certain date (expiration date)."

reference - https://www.investopedia.com/trading/beginners-guide-to-call-buying/

Put Option:

“A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame."

reference - https://www.investopedia.com/terms/p/putoption.asp

Covered Calls:

“An investor holding a long position in an asset writes (sells) call options on that same asset to generate an income stream."

reference - https://www.investopedia.com/terms/c/coveredcall.asp

Cash Secured Put:

“The cash-secured put involves writing a put option and simultaneously setting aside the cash to buy the stock if assigned."

reference - https://www.optionseducation.org/strategies/all-strategies/cash-secured-put

Introduction

Step 1:

Sell Cash Secured Put for premium and wait for expiration. If put expires worthless, repeat Step 1, otherwise move to Step 2.

Step 2:

Close position by buying it back at a lower price or roll the position if outlook has changed. Once assigned to position or expired move on to Step 3 otherwise continue to sell more cash secured puts as current ones expire.

Step 3:

You’ve been assigned to your put option so now you’ve got 100 shares of the stock. Now begin to sell covered calls at strikes you’re comfortable exiting at. In addition attempt to start a new cycle by simultaneously selling a cash secured put at the now lower price.

Step 4:

Your covered calls will continue earning premium until they get assigned or expire. If they expire repeat Step 3 and continue selling more covered calls. If you get assigned move onto Step 5

Step 5:

You’ve now been assigned on one or more of your covered call options leaving you with the resulting cash from the sale at the agreed strike price. Using this cash you will begin the wheel over again and sell more cash secured puts

Wheel Strategy Guide:

Options Wheel Strategy Link

This strategy combines covered calls with cash secured puts (same thing but on the put side and collateralizing cash instead of stocks)

You start with cash and instead of buying your position outright, you write a covered put placing the cash up as collateral. For doing this you will collect a premium since somebody else has essentially paid you to take on some risk. The risk is that the stock drops drastically and you’re forced to buy at the put strike price.

Is that really a risk though as you were planning to buy on the open market anyway? Most consider this to be an acceptable and well defined risk to receive option premium.

Examples

Summary

Covered calls and cash secured puts are risk management strategies that can also be used to generate additional passive income on stocks you have bullish interest in.

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