Wheel strategy: from Sell Put to Covered Call
What is the Wheel strategy
Wheel = Sell Put Collect rent → The option is exercised to take over the shares → Sell Call Continue to collect rent → The option is exercised to sell the shares → Return to Sell Put
A complete cycle of collecting cash flow from the same stock over and over again.
Core logic: You already like this stock and are willing to hold it. Continuously reduce holding costs through options.
full cycle
The first stage: Sell Put (rent collection)
AAPL Current price $190 Sell AAPL $185 Put (expires in 30 days), receive premium $2.00
Result A: Expiration stock price > $185 → Not exercised
- Earn $2.00 Royalty for Free
- Continue next month Sell Put $185 (or adjusted based on stock price)
Result B: Expiration stock price < $185 → exercised
- Buy 100 shares AAPL at $185
- Cost: $18,500 - $200 Royalty = $18,300 (actual cost $183/share)
- Entering the second stage
The second stage: Covered Call (holding shares to collect rent)
You already hold AAPL 100 shares at a cost of $183/share.
Sell AAPL $195 Call (expires in 30 days), receive premium $1.50
Result A: Expiration stock price < $195 → Not exercised
- Earn $1.50 Royalty for Free
- Continue Sell Call, you can choose a higher exercise price
Result B: Expiration stock price > $195 → Exercised
- Sold 100 shares AAPL at $195
- Profit: $19,500 - $18,300 = $1,200
- Return to the first stage and continue with Sell Put
long term cash flow model
Suppose you continue to play the Wheel strategy for a whole year and receive premiums every month:
| month | operate | Royalty income | shareholding status |
|---|---|---|---|
| January | Sell Put $185 | $200 | Not exercised |
| February | Sell Put $185 | $180 | Not exercised |
| March | Sell Put $185 | $220 | exercised, shares received |
| April | Sell Call $195 | $150 | shareholding |
| May | Sell Call $200 | $130 | shareholding |
| June | Sell Call $195 | $160 | exercised, shares sold |
| ... | ... | ... | ... |
| annual | ~$2,000 |
If calculated based on the share acquisition cost of $18,500, the annual royalty income is about $2,000, and the annualized rate of return is about 10.8%.
This does not include the rise and fall of the stock itself.
Stock selection criteria
Not every stock is suitable for Wheel. OK Wheel Target:
| standard | illustrate |
|---|---|
| blue chip market | AAPL, MSFT, JPM, T, etc., the fluctuations are relatively controllable |
| Are you willing to hold it for a long time? | Don’t panic when your stock option is exercised, because you are optimistic about it |
| There are active options | Bid-Ask Small price difference and good liquidity |
| Stable dividends | You can also receive dividends and additional cash flow during the holding period |
| Volatility is moderate | IV is too low and the premium is small, IV is too high and the risk is high |
Not suitable for: small-cap stocks, high-volatility growth stocks, companies you don’t understand.
Risk of Wheel
- Stock prices continue to fall
You take over the stock and the stock price continues to fall. Sell Call's royalty income cannot make up for the stock losses.
Countermeasures: Set a stop loss position after taking over the stock, or Roll Call to lower the exercise price.
2. Stock prices skyrocket
You sold Call, and as a result the stock price soared and your stock was sold cheap.
Countermeasures: Accept this fact - Wheel The strategy is to give up skyrocketing returns in exchange for stable cash flow.
3. Opportunity cost
Capital is locked into one stock and other opportunities are missed.
Countermeasures: Do Wheel in a scattered manner, and cycle 2-3 targets at the same time.
Wheel The core mentality of strategy
You are not trading stocks, you are "managing" a stock.
- Collect rent (royalty) from it every month
- Occasionally it "lives" in your account (shares are taken over by exercise of options)
- You continue to collect rent (Covered Call)
- It "moved" away (the shares were sold after exercise of rights)
- You find it again and continue to collect rent (Sell Put)
Long-term goal: Through continuous royalty income, the cost of holding positions will be reduced to far below the market price.
Role of Hyperstock in Wheel
| stage | What to do with Hyperstock |
|---|---|
| Sell Put | Scan the optimal Put contract to see the exercise probability and annualized return |
| After taking over shares Sell Call | Scan the optimal Call contract to find the appropriate exercise price |
| Roll decision | Compare the costs and benefits of different Roll options |
| stock picking | Use Daily Selection to find suitable targets for Wheel |
⚠️ Risk warning: Wheel The strategy seems stable, but if you choose the wrong target (such as a company with deteriorating fundamentals), it may lead to serious losses. Make sure you know enough about the underlying and are willing to hold it for the long term.
Series ended
4 articles, from portfolio strategies to Wheel loops.
Next series: "Data and Observation: Using Data to Drive Option Decisions".