Comparing the Wheel to Other Strategies

The Wheel Strategy isn't the only way to generate income from options, nor is it always the best choice for every trader or market condition. To truly master the wheel, you must understand how it compares to alternative approaches—both in options trading and broader investment strategies.

This chapter provides that context. We'll examine the wheel alongside covered calls, naked puts, credit spreads, iron condors, and traditional buy-and-hold investing. You'll learn the specific advantages and limitations of each, helping you choose the right tool for the right situation.

Many traders start with covered calls—buying 100 shares and selling calls against them. It's simpler than the wheel because you skip the cash-secured put phase entirely.

How Covered Calls Work

You purchase shares at market price, then sell out-of-the-money call options to collect premium. If the stock stays below your strike, you keep the shares and premium. If it rises above, you sell at a profit.

Advantages of Covered Calls

• •Simpler execution—only one leg (the call)
• •You control entry price (buy shares when you want)
• •Good for existing stock holdings you want to monetize
• •Requires less management than full wheel

Disadvantages of Covered Calls

• •No premium collected on entry—you pay full market price
• •Larger capital requirement upfront
• •Less flexible than wheel (can't wait for assignment at lower price)
• •Miss the initial put premium that lowers cost basis

Comparison Example: AAPL at $170

Verdict: The wheel offers better capital efficiency and lower effective cost basis. Covered calls work best when you already own shares and want to generate income without selling them outright.

Some traders sell cash-secured puts perpetually without ever transitioning to covered calls. They close profitable puts, then sell new ones on the same or different stocks.

How CSP-Only Works

Continuously sell puts. When they're profitable (50-75% of max profit), close them and sell new puts. If assigned, immediately sell the shares and start selling puts again.

Advantages of CSP-Only

• •Maximum flexibility—no shares tying up capital
• •Can chase high-IV opportunities across different stocks
• •Faster capital turnover (weekly expirations possible)
• •Simpler tracking—only puts to manage

Disadvantages of CSP-Only

• •Forced to close at loss or hold shares if assigned
• •Miss covered call income phase of wheel
• •Can get stuck in assigned positions with no exit plan
• •Requires constant position hunting

Verdict: CSP-only offers flexibility but lacks the systematic income continuation that covered calls provide. The wheel's strength is its seamless transition from put to call, creating uninterrupted cash flow.

Naked puts are similar to cash-secured puts, but you don't reserve the full capital to cover assignment. Instead, you use margin, allowing much larger position sizes.

How Naked Puts Work

Sell puts with only a fraction of the capital required for assignment. Your broker requires margin (typically 20-30% of the position value). This leverage amplifies returns—and losses.

Advantages of Naked Puts

• •Capital efficiency—control $50K in positions with $10K capital
• •Higher absolute returns when successful
• •Can run many more positions simultaneously

Disadvantages of Naked Puts

• •Extreme risk during market crashes (margin calls)
• •Can blow up entire account if multiple positions assigned
• •Psychological stress from leverage
• •Requires portfolio margin approval (typically $125K+ account)

Verdict: Cash-secured puts (the wheel) sacrifice some return potential for sleep-at-night safety. Unless you're an experienced trader with sophisticated risk management, stick with cash-secured positions.

A covered strangle combines the wheel's two legs simultaneously: you own shares, sell a covered call above current price, and sell a cash-secured put below current price.

How Covered Strangles Work

Own 100 shares of XYZ at $100. Sell a $110 call for $2 and a $90 put for $2. You collect $400 total premium. If the stock stays between $90-$110, both options expire worthless and you keep all premium.

Advantages of Covered Strangles

• •Double premium—collecting from both call and put
• •Profits in range-bound markets
• •Higher income potential than wheel alone

Disadvantages of Covered Strangles

• •Requires significant capital (shares + put cash reserve)
• •Can get assigned on put, requiring you to buy 100 more shares
• •More complex to manage and adjust
• •If stock drops sharply, you're now holding 200 shares of a declining stock

Example Risk Scenario:

Stock drops from $100 to $85. Your put is assigned. You now own 200 shares with average cost $92.50, and the stock is at $85. You're down $1,500 unrealized—double what the wheel would risk.

Verdict: Covered strangles offer higher income but require more capital and introduce assignment risk on both sides. Best for experienced wheel traders looking to juice returns in stable, low-volatility environments.

Credit spreads (bull put spreads, bear call spreads) are defined-risk strategies where you sell an option and buy a further out-of-the-money option to cap losses.

How Credit Spreads Work

Example: XYZ at $100. Sell $95 put for $2, buy $90 put for $0.50. Net credit: $150. Max loss: $350 (difference between strikes minus credit).

Advantages of Credit Spreads

• •Defined risk—you know max loss upfront
• •Lower capital requirement than cash-secured puts
• •Can trade more positions with same capital
• •Avoid assignment in most cases (can close before expiration)

Disadvantages of Credit Spreads

• •Lower premium collected (buying protection reduces income)
• •Can hit max loss quickly in volatile moves
• •No "wheel out" of bad position—loss is realized
• •More commissions (two legs per position)

Comparison: Wheel vs Credit Spread

Verdict: Credit spreads offer higher ROC with defined risk, but lack the wheel's flexibility. If you want to own the stock and generate continuous income, use the wheel. If you want quick, defined-risk trades without assignment, use spreads.

An iron condor combines a bull put spread and a bear call spread on the same stock, profiting when the stock stays within a range.

How Iron Condors Work

XYZ at $100. Sell $90/$85 put spread (collect $1.50) and sell $110/$115 call spread (collect $1.50). Total credit: $3.00. Profit if stock stays between $90-$110.

Advantages of Iron Condors

• •Profit from range-bound markets
• •Defined risk on both sides
• •High probability of success (wide profit zone)
• •Capital efficient

Disadvantages of Iron Condors

• •Complex to manage—four legs
• •Difficult to adjust when breached
• •Lower premium per position
• •Not suitable for trending markets
• •Commission costs add up quickly

Verdict: Iron condors excel in low-volatility, range-bound environments. The wheel works in all market conditions. If you believe a stock will trade sideways for 30-45 days, consider condors. If you want consistent income regardless of direction, stick with the wheel.

The PMCC replicates a covered call using LEAPS (long-term call options) instead of owning shares, drastically reducing capital requirements.

How PMCC Works

Instead of buying 100 shares of XYZ at $100 ($10,000), buy one deep ITM LEAPS call with strike $80, expiring in 1+ years (cost: ~$2,500). Then sell short-term calls against it just like covered calls.

Advantages of PMCC

• •Massive capital efficiency (75% less capital than shares)
• •Can run 4x more positions with same capital
• •Limited downside (can only lose LEAPS premium)
• •Leverage amplifies returns

Disadvantages of PMCC

• •LEAPS decay over time (theta loss)
• •No dividends (shares receive them, options don't)
• •More complex to manage—two expiration dates
• •Requires higher options approval level
• •Can't "wheel" out—no transition to puts

Verdict: PMCC is excellent for smaller accounts ($10K-$30K) that want covered call income without buying shares. However, it lacks the wheel's complete cycle. Consider PMCC as a capital-efficient alternative to covered calls, but not a full wheel replacement.

Let's step back and compare the wheel to the most common investment strategy: simply buying stocks and holding them long-term.

How Buy-and-Hold Works

Purchase quality stocks or index funds. Hold for years or decades. Benefit from capital appreciation and dividends. Minimize taxes with long-term capital gains treatment.

Advantages of Buy-and-Hold

• •Simplest strategy—requires minimal time
• •Tax efficient (long-term capital gains)
• •Participates in unlimited upside
• •Historically ~10% annualized returns (S&P 500)
• •Psychological ease—no constant decisions

Disadvantages of Buy-and-Hold

• •No income unless stocks pay dividends
• •Full exposure to market crashes (can lose 50%+ in bear markets)
• •Requires decades to compound meaningfully
• •Doesn't adapt to changing market conditions

When the Wheel Beats Buy-and-Hold

• •You need current income (premiums vs waiting for appreciation)
• •Markets are choppy/sideways (wheel profits, buy-and-hold stagnates)
• •You want to lower cost basis systematically
• •High-IV environments (wheel thrives, buy-and-hold suffers)

When Buy-and-Hold Beats the Wheel

• •Strong bull markets with persistent uptrends
• •You want zero time commitment
• •Tax efficiency is paramount
• •You're investing for 20+ years

Dividend investing shares the wheel's goal: regular income. But the approach differs dramatically.

How Dividend Investing Works

Buy dividend-paying stocks (e.g., Coca-Cola, AT&T, Verizon). Hold them. Collect quarterly dividends (typically 3-5% annually). Reinvest dividends to compound returns.

Dividend Investing Advantages

• •Passive income—no management required
• •Dividends grow over time (many companies raise annually)
• •Psychological satisfaction of "getting paid to hold"
• •Qualified dividends taxed favorably

Dividend Investing Disadvantages

• •Lower yields (3-5% vs wheel's 20-30%)
• •Dividends can be cut during recessions
• •Full downside exposure (no premium cushion)
• •Takes massive capital to generate meaningful income

Income Comparison: $100,000 Portfolio

Verdict: The wheel generates 6x more income than dividend investing. However, dividends require no work and are more tax-efficient. Consider wheeling dividend stocks to capture both income streams.

Choosing the right strategy depends on your goals, capital, time commitment, and market outlook. Here's a decision framework:

Advanced traders don't choose one strategy exclusively. They combine multiple approaches based on market conditions and individual stock characteristics.

Sample $150,000 Hybrid Portfolio

This allocation provides:

• •Consistent monthly income (wheel + spreads)
• •Long-term appreciation (index fund)
• •Flexibility (cash reserve)
• •Diversification across strategies

The best strategy isn't static—it changes with market conditions. Here's how to adapt:

Bull Market (Sustained Uptrend)

Best: Buy-and-hold, CSP-only (to get assigned at lower strikes)

Avoid: Aggressive covered calls (caps upside)

Wheel Adjustment: Sell further OTM calls (delta 0.20-0.25) to capture more upside

Bear Market (Sustained Downtrend)

Best: Credit spreads (defined risk), cash

Avoid: CSPs and wheel (assignments at falling prices)

Wheel Adjustment: Sell aggressive ITM covered calls if assigned, reduce new positions

Sideways Market (Range-Bound)

Best: Wheel, iron condors, covered strangles

Avoid: Buy-and-hold (stagnates)

Wheel Adjustment: Optimize for maximum premium, shorter DTEs

High Volatility (VIX > 25)

Best: Wheel (premiums explode), credit spreads

Avoid: Buy-and-hold (wild swings), naked options

Wheel Adjustment: Sell closer strikes for higher premium, be prepared for assignments

Low Volatility (VIX < 15)

Best: Buy-and-hold, PMCC

Avoid: Wheel (premiums shrink)

Wheel Adjustment: Longer DTEs (45-60 days), consider pausing for better entries

Raw returns don't tell the full story. We must consider risk. Here's how each strategy performs on a risk-adjusted basis:

Sharpe Ratio Explained: Measures return per unit of risk. Higher is better. The wheel's 0.8 Sharpe ratio means it delivers strong returns relative to its risk—significantly better than buy-and-hold (0.4).

Credit spreads have the best Sharpe ratio (0.9), but require more active management and offer less flexibility than the wheel. Naked puts have terrible risk-adjusted returns (0.3) due to catastrophic loss potential.

Different strategies require different time investments. Here's the reality:

The wheel occupies a sweet spot: manageable time commitment, intermediate skill level, and moderate stress. It's accessible to part-time traders while still generating substantial income.

Some strategies work with small accounts; others require substantial capital. Here's the breakdown:

If you're starting with less than $10,000, consider credit spreads or PMCC until you build sufficient capital for the wheel. If you already have $25,000+, the wheel becomes highly practical.

Most successful wheel traders don't start with the wheel. They evolve through stages. Here's a typical progression:

Stage 1: Foundational Learning ($5K-$10K, Months 1-6)

• •Start with buy-and-hold or dividend stocks
• •Learn options theory (paper trading)
• •Practice with small credit spreads
• •Study market mechanics, volatility, Greeks

Stage 2: Covered Call Experience ($10K-$25K, Months 7-12)

• •Buy 100-share positions
• •Sell covered calls on holdings
• •Get comfortable with assignment
• •Build tracking systems

Stage 3: Introducing Cash-Secured Puts ($25K+, Year 2)

• •Add CSPs to your covered call positions
• •Experience full wheel cycle
• •Refine entry/exit criteria
• •Begin managing 3-5 wheel positions

Stage 4: Full Wheel Mastery ($50K+, Year 3+)

• •Run complete wheel portfolio
• •Add advanced adjustments (rolling, diagonals)
• •Experiment with variations (strangles, PMCC)
• •Optimize for tax efficiency and compounding

This progression minimizes risk while building skills systematically. Don't skip stages—each teaches essential lessons.

After comparing the wheel to every major strategy, certain unique advantages emerge:

No other single strategy offers this combination. Credit spreads lack flexibility. Buy-and-hold lacks income. Covered calls lack the entry efficiency. The wheel integrates the best of multiple approaches.

Honesty requires acknowledging where the wheel falls short:

These limitations aren't deal-breakers—they're trade-offs. The wheel exchanges unlimited upside potential for consistent, manageable income. For most traders seeking reliable returns, that's a worthy trade.

You now understand how the wheel compares to every major income strategy. The question isn't "which is best?"—it's "which is best for you?"

Consider your goals: Do you need income now or growth later? How much time can you commit? What's your risk tolerance? How large is your account?

For most traders seeking consistent monthly income with manageable risk and reasonable time commitment, the wheel represents the optimal balance. It's not the flashiest strategy, but it's the most sustainable.

In the next chapters, we'll explore advanced wheel variations and optimizations. But remember: mastering the basic wheel is more valuable than dabbling in complex alternatives. Build your foundation first.