The Wheel Strategy: Combining Cash Secured Puts and Covered Calls for Continuous Income

If covered calls let you earn income on stocks you own and cash secured puts let you get paid to wait for stocks you want, then the Wheel Strategy is where the two come together.

The Wheel is a systematic approach that cycles between selling puts and selling calls, creating a continuous stream of premium income while also building long-term positions. It’s a favorite among income-focused investors because it’s simple, repeatable, and flexible across different market conditions.

In this post, we’ll explore how the Wheel works, its benefits and risks, step-by-step examples, and best practices to run it effectively.

At its core, the Wheel Strategy is an income-generating loop built on two pillars of options trading:

1. Cash Secured Puts (CSPs): Sell puts on stocks you’d like to own. If assigned, you buy them at your strike price (often at a discount).

2. Covered Calls (CCs): Once you own the shares, you sell calls against them to generate more income until the shares are called away.
   

Once the shares are sold via the call assignment, you circle back to selling puts again, hence the “wheel.” It’s systematic, rules-based, and designed to produce steady cash flow.

Here’s how a typical Wheel cycle plays out:

1. Sell a Cash Secured Put
   • Example: XYZ stock is trading at $52. You sell a put with a $50 strike.

   • You collect a premium upfront (say $1.50 per share = $150 for the contract).

   • You keep $5,000 cash reserved to buy 100 shares if assigned.

2. If Assigned, Buy the Shares
   • If XYZ falls below $50, you’re assigned and purchase 100 shares at $50.

   • Your effective cost basis = $50 – $1.50 premium = $48.50.

3. Sell a Covered Call
   • Now holding 100 shares, you sell a call above your cost basis, say at $55, and keep the premium ($1.00 in this case).

   • If the stock rises and the option is exercised, you sell at $55 + keep the call premium (bringing your effective cost basis down to $48.50 – 1.00 = $47.50)

   • If the stock stays below $55, you keep the premium and can repeat the call sale.

4. Repeat the Cycle
   

• Once shares are called away, you go back to selling puts, and the wheel keeps turning.
  

Let’s assume you continued to sell another covered call, now at $52.50, for another $1.00 premium. This time you get assigned, so you sell your 100 shares at $52.50 with an effective cost basis of $46.50 for a total profit of $600 using ~$5000 cash reserved. That’s a 12% return on what would most likely be a 3-4 week process.

1. Consistent Income Stream

Every step (puts and calls) generates premiums and this strategy will continue to generate income as long as you have open positions. 

2. Discounted Stock Purchases

CSPs let you buy shares below current market prices. CSPs are a great way to lock in a lower price for a stock you believe in, and if you don’t manage to get in at that price, you still take some return through premiums. 

3. Structured, Rules-Based Approach

This approach helps keep emotions out of trading decisions. Personally, it’s one of the big reasons I love this strategy. You set a price you are willing to pay for your shares when selling puts and you set a price you are willing to sell at when you sell calls. And while you wait for either of those prices to be reaching, you collect premiums along the way.  

4. Scalability

You can run it with a single stock or multiple at once, depending on cash available. You can also sell more contracts to double or triple your exposure/return in the stock. The strategy remains the same, but its potential grows with your capital. 

We did just talk about all the great reasons to use the Wheel strategy, but like all options strategies, the Wheel isn’t risk-free. Key risks include:

• Capital Requirements

Each put requires cash to buy 100 shares, so it can tie up significant funds. In our example above, we needed to have $5000 dedicated to that trade to sell the cash-secured puts. And once the put was exercised, we also had to use that $5000 to buy the shares which would be there until the shares were finally sold 2 cycles later. The market offers other methods that do not require as much capital requirements, but with considerably more risk.

• Downside Exposure

If the stock falls sharply, you could be forced to buy well above the new market price. This is where the real loss can come into the Wheel. Say we bought XYZ stock at $50, as per our example, but the stock had actually dropped to $40. You are under your cost basis by $8.50 per share, and selling the calls that far OTM (out-the-money) would not be paying you very much in premium. You would be potentially selling at a loss if you tried to still get the $1.00 premium mark, or be waiting with your shares for longer than originally anticipated if it takes longer to get back to the $50 – $55 range we were originally trading in. This is why it is key to choose stocks you actually believe in and would be happy to hold if things didn’t go exactly as you predicted.

• Capped Upside

Covered calls limit gains beyond the strike price, meaning you miss out on big runs. If XYZ stock actually flew to $60 after you sold your calls at $55, you would still be forced to sell at $55. We have ways of managing this, like rolling the calls, or we can just let it sell on its own. If you believe in continued upward momentum of the stock, rolling the stock could be a great strategy to capture more upside. Continuously rolling up can also very quickly eat at your total return, so we must be careful here. Personally, I stick to my strike prices. I’ve learned the hard way that continuously rolling trying to catch every bit of upside you can actually leads to less return. In the market, the most disciplined and emotional controlled people come out on top. 

• Management Needed

Rolling, adjusting strikes, and monitoring market volatility take discipline and a deeper understanding of option price movement. As mentioned before, with options comes various management tactics and price fluctuations that come with high volatility events and time factor. As I mentioned before, I stick to my strikes and accept my 12% in 3 week time frame. That is a great return for my goal. and risking my investment for a potential few more percent has never been worth it.

The Wheel works best on stable, fundamentally sound stocks—not speculative or highly volatile names.

The Wheel is a simple and strong strategy, but the use it effectively and consistently, there are some key things to be aware of.

• Create your Strategy and Stick to it

As with all strategies in the market, discipline is key. Determine your strategy on how you identify good stocks, good strikes, and good time frames for trades based on your goals. Once you have that, stick to it. The easiest way to lose money in the market is let your emotions run wild and constantly second guessing or adjusting your strategy. Trust me, I’ve done it.

• Pick the Right Stocks

Stick to companies you’re comfortable owning long term, ideally with stable fundamentals and good liquidity in options. Warren Buffet makes this point in various talks I have seen. You want to invest in companies that you believe in, that you understand, and that you see are backed by good fundamentals. I stick to the technology sector, because that it where I understand the most about the companies I buy and their roadmaps. I have the same 10 to 20 stocks I focus on. Attempted to track all 50k+ total stocks in the world, or even 100+ is unnecessary. If you have the time and interest, by all mean, be my guest, but know that it is necessary to make consistent returns in the market. 

• Choose Strikes Carefully

For puts, aim below current price to give a margin of safety. For calls, place above cost basis to lock in profit if called. The specifics of how far you set your strike price vs. the time frame of the option are dependent on your strategy. Using Greeks, like the delta of a contract or the Implied Volatility can give you a better idea of how much upside you want to capture vs. premium.  

• Mind Expiration Dates

Shorter expirations provide faster premium income and more flexibility, but much faster price movement. As the option sellers, the time factor of options is on our side, and the closer we are to expiration dates, the faster that takes effect. I usually focus on the fact that my capital will be held for this position for as long as that expiration date. The premiums for a long term option could look very tempting, but you must keep in mind that your money/shares are being held hostage until that time. Your total return over time is important to factor in here. 

• Diversify

Run the wheel on more than one ticker to reduce concentration risk. As with any strategy, diversification is an important part of any portfolio. It’s a level of risk management that always needs to be in your mind, regardless of how you decide to interact with the markets. If you decide to ignore this, or any other level of risk management, make sure you are aware and prepared for the potential risks. 

I’ll repeat this over and over again.

Stay Disciplined.

Don’t chase volatile premiums. Slow and steady is the goal. Stick to your strategy, don’t let the your emotion make you deviate from your strategy.

The Wheel Strategy is one of the most practical ways to combine cash flow with long-term investing discipline. By cycling between cash secured puts and covered calls, you’re always earning income, whether you’re waiting for shares, holding them, or selling them.

The trade-off is tying up capital and capping your upside, but for income-focused investors, these are often acceptable compromises. If your goal is to earn steady income, buy quality stocks at discounts, and let a rules-based system guide your decisions, the Wheel may be the missing piece in your portfolio strategy.

• What It Is: A systematic strategy that cycles between selling cash secured puts and covered calls to generate ongoing premium income.

• Why It Works: You get paid whether you’re waiting to buy shares (puts), holding them (covered calls), or selling them; This creates a continuous loop of income.

• Main Risks: Requires significant cash reserves, exposes you to downside if the stock falls sharply, and caps your upside potential once shares are owned.

• Best Fit For: Income-focused investors who want a rules-based, repeatable strategy that balances risk with steady returns.
  

Pro Tip: Stick with fundamentally strong, liquid stocks you’re comfortable owning long term to maximize success and reduce risk.