The Wheel (aka Triple Income) Strategy

Explained
Original Post: See Edits at the bottom for updates.
I've been asked and have explained The Wheel strategy many times, so I thought it may be
a good idea to write it down all in one place for posterity!
This is the options strategy I use most often and IMHO it is about as safe and reliable as
options trading gets. You will NOT get fantastic returns and it is quite boring and slow, but
with the proper stock and patience, it can result in reliable profits and income. A 10% to
20%+ return is not difficult depending on a few factors, mostly based on stock selection,
experience managing short puts and calls, plus the trader's patience.
The Wheel (sometimes called the Triple Income Strategy) is a strategy where a trader sells
cash secured Puts to collect premiums on a stock or stocks they wouldn't mind owning
long term. If the options expire or closed for a profit without being assigned, the premiums
are all profit. The goal is to set up trades and avoid being assigned, but it is understood
that if the put is assigned the account will buy and hold the stock. Through the collection of
premiums, the initial cost basis of the stock can often be lower than the strike price paid.
The next step of The Wheel is to sell covered calls on the stock shares if assigned. It is
highly preferable to sell a call with a strike higher than the stock's cost basis, but this is not
always possible. This is repeated over and over to collect even more premiums that
continue to lower the stocks cost basis, and along with any rising stock price movement,
works back to break-even or a profit.
At some point the call is exercised and the stock called away, or you can simply sell the
stock, but when you add up all the premiums collected from selling the puts and calls, plus
it is desired and common to end up selling the stock for a profit, this results in the Triple
Income. If the stock pays a dividend while you own it then you can collect that as well
(Quadruple income!).
Below is a graphic showing a simple spreadsheet to track the Credits and Debits to keep
track of the overall position.
Step #1: Stock Selection - Most traders who have had a bad experience with the wheel have
chosen the wrong stock. The stock(s) you chose must be a good candidate and one you
don't mind owning for some length of time, as it is possible you could own it for months.
Use your own criteria that fits your account and there is no one-size-fits-all way to choose
stocks as only you can determine if you think the company is a good one to trade and hold
if needed. Below are my general guidelines:
 A profitable company that has solid cash flow
 Bullish, or at least neutral chart trend and analyst ratings
 Priced around $10 to $50 Edit: $15 to up to about $100 now due to a higher
account balance, but so I can afford to take the assignment if needed and I
stay away from sub-$10 stocks as a rule
 A stable chart without wild gyrations (especially those caused by CEO
tweets!)
  A nice dividend is always a good thing, both that you may collect it if
assigned the stock but also that dividend stocks tend to be more stable and
predictable
Use your own fundamental analysis criteria to create a watchlist of 10 or so stocks that you
can trade. If you find some lower priced ETFs, or have a larger account for the more
expensive ones, then these can be included and make good candidates due to their
normally steady movement, no ERs, and no CEO tweets. I look at my watchlist every few
weeks and change it accordingly.
Step #2: Sell Puts - Selling short or Cash Secured Puts (CSPs) indicate you have the
cash/margin to buy the stock if it is assigned. Be aware of any upcoming ER or other events
that could cause a spike or movement in the stock, it is best to close or have the Put expire
prior to the event, in effect skipping it and then continue selling CSPs afterward if the stock
still meets the criteria.
Sell a Put on the selected stock: Below is a suggested model, but up to the individual
trader:
 30 to 45 DTE offers a good premium as the time decay curve starts to
accelerate
 70% Prob OTM or higher (~.30 Delta)
 A number of contracts are based on account size and if it is able to handle an
assignment
 The Put can be closed at a 50% profit using a GTC Limit Order to close
automatically. A put can then be sold on the same stock or another based on
your opening criteria.
 Enter the Credits received, and any Debits paid to close or roll, on the
Tracking P&L file
 Roll for a credit if the Put is challenged when possible, and provided a net
credit can be made it can be rolled as long as needed which can also be used
to track the stock's movement by changing the strike price. See this post for
more on rolling puts to avoid
assignment: https://www.reddit.com/r/Optionswheel/comments/lliy8x/
rolling_short_puts_to_avoid_assignment/
 If a credit cannot be made then it is best to take an assignment of the stock
The SP should be able to be sold over and over to collect as much premium as possible,
and often never be assigned. If there is a fundamental change in the stock, close your
position for an overall net profit and then move on to review and/or move on to another
stock.
If assigned then Sell Covered Calls as shown in Step #3.
Step #3: Sell Covered Calls - Using the tracking file determine the net stock cost which is
often already below where the stock is. As selling puts is usually the most profitable, some
traders just sell the stock and move on to selling more CSPs, or sell a very high-value ITM
Call that is sure to be called away and adds to the profit.
If your net stock cost is above the current market price and you keep the stock, then the
goal is to sell CC premium to continue adding to the Credits and lowering the net stock cost
below where the stock is trading before it gets called away.
Sell CCs, again here is a suggested process:
 Sell a Call above the net stock cost whenever possible, however, at times you
may need to trade the strike below to get some good premium. Note that I
will settle for a lower premium to be farther out to avoid the risk of early
assignment and give the stock a chance to stabilize and possibly start to
recover.
 Edit: Depending on the net stock cost I may sell an ATM CC for the next
expiration date if it can result in a net profit. If the stock is below the net
stock cost that I'll look out to where I can sell a CC above the net cost to
result in a profit if assigned. If I cannot sell a CC a reasonable time out (30ish
DTE) then I am willing to hold the stock to wait for it to move back up. Same
as CSPs: 30 to 45 DTE, 70% Prob OTM or higher
 If the call is not assigned then it can be closed for some level of profit and
another sold until the net stock cost is below the current stock price.
 Track Credits and Debits, plus any Dividends captured, on the tracking file
 Continue this until the net stock cost is below the strike price at which time
the stock can be left to be called away (some note that it cost less in fees to
close the option and just sell the stock which accomplishes the same thing)
Step #4: Review and go back to Step #1 - This is why it is called the wheel as you start over
again. The tracking file makes it easy to see the P&L, review the trade to verify the numbers
and then look for the next, or same, stock to sell CSPs in Step #1.
As they say, rinse and repeat.
Risks and Possible Problems: The single biggest issue for this strategy is the stock price drops
significantly, but this is no more risk than just owning the stock outright.
Stock Drops: The reason to make these trades on a stock you wouldn't mind owning is
because of this risk, and if a good stock is selected then this should be a very rare
occurrence plus not a major issue.
 The price of the stock may drop well below the CSP strike and rolling for a
credit will not be possible causing assignment.
 If CSPs were sold over and over the net stock cost may be much lower
mitigating this drop in price.
 Management is to sell CCs over and over to allow time for the stock to
recover, this can take time but when added to the CSP premiums collected
the position can get "healthy" faster than you may think, however, this does
take a lot of patience!
 There may be rare occasions when a stock is no longer viable (Enron?) and
the position needs to be closed for a loss, again this shows the critical
importance of stock selection.
Stock Rises: Many see this as a problem, but I personally do not as if the CC strike is above
your net stock cost then the position profits, but just not as much.
 The stock is assigned and you sell CCs only to have the stock run well past
your strike price.
 In most cases closing the CC and selling the stock outright can cause a
bigger loss than just letting the stock be called at the strike price.
  It is, in this case, you may lament the profits that were "lost" by having the
CC, but provided the above is done properly the position will still profit.
Impatience: By far this causes the most losses from this strategy!
 First, if you can't roll for a credit let the CSP play out! If you close the CSP
early it will cause a major loss.
 If you get assigned the stock and sell CCs, do not try to "save" the stock
through buying it back at an inflated price! If you can't roll for a credit then
let the stock be called away and sell more CSPs to start the process over
again provided the stock is still a viable candidate.
 Recognize it may take months selling CCs to build the premium up to a point
where the net stock cost is less than the current stock price, but it will
happen eventually if you can keep the CC from being exercised early.
A Tracking P&L File graphic is included and shows Credits and Debits to know where the
position is at any given time. Note the stock price can be entered as a Credit to show where
the position is at any given time. This is simple to create and use. NOTE: I do not send out
copies as it would take me longer to do that than you recreating the 3 formulas.
Hopefully, this is a thorough and detailed trading plan, but let me know of any questions,
typos or improvements you may have! -Scot

EDIT #1: Hello All, the response to this post has been amazing, thanks for the many who
have contributed or inquired. Wanted to add a few things up front that seem to be causing
confusion.
1. The goal of this strategy is to collect the premium, NOT be assigned stock!
While being ready and able to take the stock is part of the plan, being
assigned is always to be avoided. If you sold a CSP 1 time and were assigned,
you are either doing something wrong or are terribly unlucky by picking a
stock that tanked.
CSPs should be sold over and over or rolled for a credit, to avoid assignment. You should
be collecting 4 to 5 or more premiums worth several dollars before getting assigned. Some
who have contacted me sold a CSP and just waited to be assigned, this is not the strategy.
If you are getting assigned more than a couple of times a year you may want to look at the
stocks you are trading and how well you are managing your position. Getting assigned the
stock should be a very rare occurrence.
2) As you select the stock and sell the CSP expect to get assigned. Be sure it is a low cost
enough stock so that you can handle the shares and still make other trades. If you're
trading a $150 stock, be aware you could have $15K tied up for a while and be prepared to
do that.
3) Going along with #2 I trade small and use lower to mid cost stocks. The premiums are
not as juicy and the attraction of a TSLA or AMZN is hard to resist, but you are better selling
1 contract at a time for 10 positions than 10 contracts in one position and have to take 1000
shares.
It is always good account management to not trade more than about 5% of your account in
any one stock to avoid news or movement from the stock from blowing up your account. It
is also a good idea to keep 50% of your buying power available for safety and to take
advantage of opportunities.
4) There have been negative nellies telling me this won't work and being critical. Note that
this is not my strategy and I don't make any money from it being used or not. My time was
spent in an effort to show one method options can more safely be traded, so if you have
had a bad experience or think there are better ways, then feel free to post them!
5) Lastly, I have not done any research on this vs buying and holding stock. I've traded for
more than 20 years with most of that time focused on stocks, and I did well!
Where I see the main differences are that options give leverage so I can collect premium
from more stocks than just buying a couple, so this spreads out my risk. Also, I very much
like the shorter time frame as I can move on to other stocks should one drop or run up. If
done well you may only get assigned a couple of times a year and often be out of the stock
in a couple of weeks.
OK, I think you will see this is not sexy or exciting trading, it is boring and you make $50 per
position in many cases, but they add up. For those looking at huge returns and the
excitement of major risk, this is not for you. If you want a more reliable way to trade
options then this may be good to check out.

EDIT #2: I've updated this post now that it is unlocked. Some changes include:
 Stock price minimums moving up as I now have a larger account
 Selling CCs based on if the net stock cost is above or below the current stock
price
 Added a rolling put link.
 There are many different wheel strategies today with some selling ATM puts,
others only selling covered calls (not sure how that is a wheel), and several
other variations. This is what I trade and it is up to you how you trade.
Rolling Short Puts to Avoid Assignment
Edit - Title should read "Rolling Short Puts to Help Avoid Assignment". As we know, not all
assignments can be avoided.
While some trade the wheel with the goal of being assigned, my goal is to avoid
assignments as a short put can be more capital efficient and flexible compared to owning
the stock. Since I want to avoid assignments I will roll over and over so long as I can collect
a net credit.
My process calls for rolling out a week or two keeping the same strike price as soon as the
stock price drops to the put strike price and I am convinced the stock will keep dropping. If
a roll to a more advantageous strike can be made and still collect a net credit then it makes logical
sense to do so.
When the stock hits the strike price the put option is ATM and the premium is very rich so a
roll will often bring in a large net credit. This net credit helps lower the net stock cost if
assigned but also increases the overall credit to help the trade profit if the stock moves
back up.
In many cases, the trade can be closed for a profit over the next weeks as the stock
recovers. If not and the option stays ITM then I look to roll out another week or two when
the net credit is good.
I’ve rolled for many months collecting credits each time and either the stock finally moves
back up to collect a net profit, or if the put can no longer be rolled for a net credit I’ll let the
option expire and the stock assigned to then sell covered calls. Based on the credits
collected the net stock cost is usually much lower and this makes selling covered calls
above that net cost much easier. The call premium collected will continue to lower the net
stock cost to help reduce the break even price so the trade can be closed for a net profit.
A technique that can be used is to also sell another short put to juice returns and help the
position recover faster. This means there could be another stock assignment so be sure
you still believe in the stock and are ready to buy more shares if assigned. The good news
is another assignment will dilute to lower the net stock cost.
With patience and time nearly any wheel position can be brought back to at least a scratch
loss or a small net profit.
Edit- Earnings Reports - If a put needs to be rolled over an ER then I find it best to roll out a
good 30 days past the report date as this collected a very high premium amount, plus gives
the stock a long time to settle back into a new trend. If the stock moves up on the ER a net
profit may be obtained quickly, but if not then the added premium will help reduce the net
stock cost if assigned at the later date.
Edit2 - In response to a question about this not being clear I will roll a week or two at the
same strike price, but if I can collect a net credit to move the strike in my favor I will do so
as well.