The Wheel in Motion
Step-by-Step

Think of the wheel as a four-stage loop:

• •Sell a cash-secured put (collect premium; potential obligation to buy).
• •Assignment or expiration (either you buy the shares or the put expires worthless).
• •If assigned → own the shares, then sell a covered call (collect premium while holding).
• •Call assignment or expiration (either shares are called away and you realize gains, or you keep them and sell another call). Then repeat.

Below is a condensed visual timeline of the cycle:

We'll now walk each step in detail, with numbers, decisions, and alternative plays.

Before you ever click "sell," prepare:

Capital to deploy:

Each standard option contract represents 100 shares. If you sell one cash-secured put at strike $50, you must have $5,000 cash reserved.

Position size rule:

Many wheel traders limit any single position to 2–5% of total trading capital. If you have $100,000, risking $4,000–$5,000 per ticker is prudent.

Broker permissions:

Ensure you have options privileges (selling puts/calls). Know margin rules and how your broker displays assigned positions.

Watchlist:

6–12 candidate tickers you'd actually want to own. (Blue-chips, ETFs, or dividend payers preferred.)

Calendar & alerts:

Track earnings, ex-dividend dates, and macro events. Avoid selling puts immediately before unpredictable events unless premiums justify it.

Decision: Why this put?

You choose a ticker and a strike because:

• •You want to own the stock at that price (or better).
• •The premium collected makes the effective purchase price attractive.
• •The probability metrics (delta, probability of assignment) fit your plan.

Example setup (numbers are illustrative):

• •Stock: DEF Corp (DEF) currently trading at $50.
• •You like DEF and would buy shares at $46.
• •You sell a 30-day $46 put for $1.20 premium per share ($120 per contract).
• •Collateral required = $4,600 (100 × $46).

Immediate math:

• •Premium received: $120 (cash now).
• •Effective buy price if assigned: $46 − $1.20 = $44.80.
• •Return on collateral if put expires worthless: $120 / $4,600 ≈ 2.61% for 30 days.

Execution and order mechanics

• •Use Sell to Open order for the put.
• •Set a limit price that matches the mid or slightly better than the quoted bid (avoid aggressive market sells unless urgent).
• •Confirm the trade ticket shows "cash-secured" or that you have full cash available.

After you sell

• •Record the trade in your journal (ticker, strike, expiration, premium, collateral).
• •Set alerts for significant price movements and for a few days before expiration.
• •Accept that two things can happen: the put expires worthless (you keep premium), or it is assigned (you buy the stock at strike).

Path A — Put Expires Worthless (the simple loop)

If DEF stays above $46 through expiration:

• •The put expires worthless.
• •You keep the $120 premium.
• •Your collateral is freed.
• •You can either sell the same put again (same strike/expiry if available) or pick a new strike/ticker.

Key decisions post-expiration:

If the premium is similar and your probability profile unchanged, you can repeat the put sale. If the stock rose significantly, consider moving strikes higher for similar premium but lower probability of assignment—or switch tickers.

Path B — You Get Assigned (the wheel steps into motion)

If DEF drops below $46 and the put holder exercises (or you are assigned at expiration):

• •You are obligated to buy 100 shares at $46 = $4,600.
• •You still keep the $120 premium, so your effective cost basis is $44.80.
• •Assignment may occur before expiration (rare but possible), especially right before ex-dividend dates.
• •Record the new position: you now "own 100 DEF at $44.80 (effective)."

Once you own the stock, you have several routes. The wheel's simplest route is to sell a covered call against those shares. But the timing and strike selection matter.

Decide your goal with these shares

• •Short-term plan: Collect income and potentially sell the shares at a target price.
• •Long-term plan: Keep for dividends/growth—covered calls can be used conservatively to lower basis.
• •Alpha play: If you strongly believe in a quick rebound, you might wait or buy protective puts (not typical wheel behaviour).

Sell a Covered Call (the second gear)

You sell a call against your 100 shares (Sell to Open). Choose:

• •Strike: Ideally above your breakeven or target sell price.
• •Expiration: Weekly options give faster income; monthly options give larger immediate premium.

Example continuation:

• •You own 100 DEF at effective $44.80.
• •You decide to sell a 14-day $48 covered call for $0.90 = $90 premium.

Outcomes:

• •If DEF stays below $48 by expiration: you keep your shares + $90.
• •If DEF rises above $48: shares get called away; you sell at $48, realize capital gain up to $3.20 per share ($48 − $44.80) + premiums ($120 + $90).

Mechanics of the covered call order

• •Use Sell to Open a call.
• •Use a limit order for the premium you want.
• •Ensure commissions/fees are accounted for.
• •Record the position and set an expiration alert.

Call Expires Worthless → Repeat Selling Calls

If DEF remains below $48:

• •You keep the $90 call premium.
• •You still own shares and can choose to sell another call (rolling forward or pick a new strike/expiry).
• •This "collect and repeat" is the core income machine while owning shares.

Example ongoing yield:

Monthly premium flow: $120 (initial put) not recurring unless you sell puts again; but $90 every 14 days from covered calls compounds to ~6% monthly if repeated—illustrative only.

Shares Called Away → Back to Selling Puts (wheel restarts)

If DEF closes above $48 at expiration (or option is exercised early):

Your 100 shares are sold automatically at $48.

Total realized for the cycle:

• •Capital gain on stock: $48 − $44.80 = $3.20 × 100 = $320
• •Premiums collected: $120 (put) + $90 (call) = $210
• •Total cash realized: $530 on a $4,480 effective cost → 11.82% return on that capital over the cycle (ignoring fees and taxes).

Now you have cash again; you can deploy it into new cash-secured puts—start the loop anew.

Real situations are messy. Sometimes price moves make you uncomfortable with assignment or with losing upside. That's where rolling comes in: closing the current option and opening a new one (different strike and/or expiry).

Rolling a Put (before assignment)

If the stock approaches your put strike before expiration and you want to avoid assignment:

• •Buy to Close the put you sold.
• •Sell to Open a new put with the same or later expiration and possibly a lower strike (for credit).

This may cost you debit to buy back the put, but new premium received offsets that cost. Rolling buys time and lowers assignment probability.

When to roll puts:

• •You still want the stock but at a lower basis.
• •You want to delay assignment until you're comfortable.
• •The new premium compensates you for the extra risk.

Rolling Calls (if you want to keep shares)

If a covered call is about to be assigned but you want to retain shares (you like the long story or dividend):

• •Buy to Close the call.
• •Sell to Open a new call with a later expiry or higher strike.

This sacrifices some immediate profit to keep ownership. It's common for dividend capture or long-term holdings.

Costs:

You may pay to buy back the call, particularly if the stock rallied. Ensure the math makes sense.

To make the process concrete, here's a realistic timeline with dates, decisions, and journal entries. (Dates are illustrative—think in "Week 1, Week 2" terms if preferred.)

Early Assignment

Though most assignments happen at expiration, early exercise can occur—often around ex-dividend dates (call holders exercise to capture dividend). If you are risk-averse:

• •Avoid selling calls shortly before ex-dividend unless the premium compensates.
• •Keep cash to repurchase shares if assignment occurs and you want to stay long.

Earnings and Unexpected Events

Selling options through earnings can yield high premiums but high risk (big gap moves). Wheel practitioners usually avoid selling puts before earnings of the underlying unless strategy is explicitly speculative. If you own shares, consider closing calls before earnings to avoid being called away during volatile moves.

Large Gaps (Black Swan moves)

If a stock collapses (e.g., -30% gap) while you are assigned, you may be left with a large unrealized loss. Mitigations:

• •Diversification across tickers.
• •Position size discipline to limit impact.
• •Stop losses or protective puts if you prefer to hedge (this reduces yield).

The wheel limits tail risk by staying in high-quality names and not overleveraging.

A disciplined journal is your most predictive tool. For every trade record:

• •Date, Ticker, Type (put/call), Strike, Expiry, Premium, Collateral.
• •Rationale (why this strike/expiry?).
• •Outcome (expired/assigned/rolled).
• •Net P&L and realized return on collateral.
• •Emotional notes (did you hesitate, panic, or follow rules?).

Over months, you'll see patterns: which tickers produce stable income, which strike distances maximize your comfort, and where you tend to make avoidable mistakes.

Track these KPIs for your wheel portfolio:

• •Premium income / month (gross).
• •Return on collateral / month (premiums ÷ collateral deployed).
• •Assignment rate (% of puts assigned).
• •Call away rate (% of covered calls exercised).
• •Average holding period for shares.
• •Win/loss rate by trade (expired vs assigned leading to gains/losses).
• •Max drawdown (largest unrealized loss on positions).

These metrics tell you whether the wheel is performing or merely noisy.

Premiums are typically taxed as short-term income in many jurisdictions—consult an accountant.

Assignment converts option premium into adjusted basis (you paid less for shares). Make sure bookkeeping accurately records premium as part of cost basis when assigned.

Cashflow timing: premiums arrive immediately, but capital is tied up when assigned. Ensure liquidity planning so you don't need to interrupt cycles.

Below is a simplified table you can replicate in a spreadsheet.

(Adjust for commissions and taxes.)

• •No plan before selling: Always know what you will do if assigned.
• •Too close strikes: Selling deep-ITM puts or calls invites frequent assignment and emotional trading.
• •Ignoring costs: Fees, commissions, and taxes eat into small premium gains—factor them in.
• •Overconcentration: Too many contracts on one ticker is dangerous.
• •Chasing premium: High premiums on junk stocks are tempting but often catastrophic.

After selling puts:

You might feel exposed if the stock drops—remind yourself the premium lowered your cost.

Upon assignment:

Calmly record the new basis and move to selling calls; don't panic-sell the shares.

While holding covered calls:

You may hate giving up upside when the stock gaps higher—remember that capital is cycled; you can reenter.

After shares called away:

Celebrate the effective yield and prepare the next put sale.

The wheel rewards temperament. Process trumps prediction.

Once comfortable, experienced wheelers add tactics:

Diagonal spreads:

Buying a longer-dated call while selling near-dated calls to tilt risk/reward.

Credit spreads instead of naked puts:

Limits downside by buying a lower strike put while selling the higher strike (less premium, more protection). Note: collateral dynamics change.

Synthetic approaches:

Combining options to mimic longs/shorts—complex and not necessary for most wheel traders.

Use advanced moves only with full comprehension—they trade simplicity for complexity.

Case Study A — The Steady Blue-Chip

• •Ticker: POP Co. $100.
• •Strategy: 1% monthly target per $10,000 allocation.
• •Outcome over a year: premium harvest stacked, occasional assignments, small realized capital gains, compounding lead to 18% gross annualized.

Case Study B — The Volatility Trap

• •Ticker: VOLT (speculative). High premiums tempted the trader.
• •Outcome: Large gap down during product failure; premiums earned over months were dwarfed by a single 40% drop.
• •Lesson: Avoid high-tail risk names for wheel core strategy.

Before selling a put:

If assigned:

If covered call nearing expiry:

• •Build a watchlist of 6–12 quality tickers.
• •Determine per-position allocation (2–5% rule).
• •Sell cash-secured puts OTM with 30–45 day expiries (or weekly if you prefer faster rotations) where premium compels you to own at that price.
• •If assigned, immediately sell a covered call (14–30 day).
• •Repeat calls until shares are called away or you choose to hold long term.
• •On shares called away, calculate total return and redeploy capital.
• •Maintain journal & metrics; adjust for mistakes and market drift.

Executing the wheel is an operational practice as much as a strategy. Each rotation teaches a small lesson—about position sizing, about your emotional reactions, about how different tickers behave. Over time you'll craft a rhythm: selling measured puts, accepting occasional assignments, collecting call premiums, and restarting. That rhythm becomes a source of confidence and steady returns.

When you walk through the cycle deliberately—ideally first on paper, then with small live size—you trade uncertainty for process. The wheel doesn't promise no losses; it promises a repeatable method to harvest premium and manage risk. The reward comes from many disciplined cycles, not a single perfect trade.