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The wheel

A cycle of selling cash-secured puts until assigned, then selling covered calls on the shares until they are called away.

The wheel collects premium on both sides of stock ownership. Sell a cash-secured-put; if assigned, sell covered-calls against the shares; when called away, start again.

It is often described as low risk, but it carries full downside exposure to the stock. It works on stocks you would be content to own and fails when a stock you were wheeling drops 40% and stays there.

Example: sell the $50 put for $1.50 and get assigned at $50. Sell the $52 call for $1.20 monthly. After two months the stock is called away at $52. Total: $1.50 + $2.40 + $2.00 = $5.90 per share over three months on $5,000 of capital.

Related: cash-secured-put, covered-call, assignment, premium

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.