The Options Wheel

Step 1: Sell to Open cash covered put(s)

• Result 1A: Stock closes OTM, premium is collected immediately and put(s) expire worthless.
• Result 1B: Stock closes ITM, premium is collected immediately then take assignment of shares.
  • If Result 1A : Repeat Step 1
  • If Result 1B: Progress to Step 2

Step 2: Sell to Open covered call(s) *above cost basis*

• Result 2A: Stock closes OTM, premium is collected immediately and shares are kept.
• Result 2B: Stock closes ITM, premium is collected immediately and shares are called away. *sold at strike price*
  • If Result 2A: Repeat Step 2
  • If Result 2B: Repeat Step 1 *Wheel Repeats*

Main Risks: If  the stock is assigned after selling a put and there is a significant pullback, it may not be possible to sell a covered call above cost basis (strike you were assigned at minus the premium collected) and collect the desired premium. After assignment, selling a call below the cost basis can result in shares being called away (sold) at a price lower then the cost basis thus resulting in a losing trade.

Final Points: Strikes with lower DTE (days to Expiration) will have the highest Theta which is ideal for this strategy. Weeklies will present the highest opportunity for turn over (more rotations of The Wheel). Strikes that are ATM (At The Money) or slightly OTM (Out of The Money) will have the best premium and be ideal for this strategy. Do not sell strikes ITM (In The Money) unless you have accounted for your resulting call away price and cost basis.