Options Wheel Strategy Explained

What Is the Options Wheel Strategy?

Basically, the wheel in options trading is a sequential method that involves selling cash-secured puts, with a subsequent selling of covered calls. Both options are expected to be assigned. The process of selling the contracts is cyclical, hence the strategy is called “the wheel”.

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The strategy has been gaining traction among traders, especially those dealing with volatile assets like Bitcoin. Traders can capitalize on the premiums received from selling contracts while also potentially benefiting from the price movements of the base asset.

However, the strategy also requires a keen understanding of the market and the base asset and a disciplined approach to trading. The wheel strategy is not just about selling options. It's about managing risk, understanding market dynamics, and making strategic decisions based on the behavior of the base asset.

Let’s break down the strategy and dig deeper into its components.

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What Is a Cash-Secured Put?

The first component of an options wheel is a cash-secured put. It is a type of options strategy where an investor sells a put contract and also holds a sufficient amount of cash to purchase the base asset if it reaches the contract's exercise price.

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This strategy is often employed when the investor is neutral or mildly bullish on the base asset and would be willing to buy more of it if the price drops to a certain level. Selling a cash-secured put is a way for an investor to potentially buy the base asset at a lower price while receiving a premium for selling the contract.

What Is a Covered Call?

Another component, a covered call, is a strategy where an investor holds a long position in an asset and sells call contracts on that same asset to generate additional income. This strategy is typically used when the investor has a neutral view on the asset, meaning they believe it will not significantly rise or fall in price in the near future. Selling a covered call is a way for a market paricipant to generate income from an asset they already own, while also potentially benefiting from a moderate rise in the asset's price.

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Cash Secured Put vs Covered Call

Cash-secured puts and covered calls are both options strategies that offer opportunities for income generation. Each of them has its own pros, cons, and risk profile.

Cash Secured Put

A cash-secured put implies selling a put contract and keeping enough cash on hand to purchase the base crypto if the option is exercised. Comparing the two, a cash-secured put can be used when you're neutral to slightly bullish on a crypto and wouldn't mind owning it at a lower price. On the other hand, a covered call can be used when you already own a crypto and are neutral to slightly bearish, and wouldn't mind selling it at a higher price.

  • Advantages: this strategy allows you to earn profits from the premium earned when selling the put. Additionally, if the put is exercised, you'll end up buying the base crypto at a discount to the present market value (minus the premium earned).
  • Disadvantages: the main risk here is if the base crypto declines significantly in price. In this case, you would still be obligated to buy the crypto at the strike, which would now be higher than the market price. The potential loss can be large if the crypto price drops significantly.

Covered Call

A covered call strategy involves owning (or buying) the base crypto and selling a call on that crypto.

  • Advantages: this strategy also allows you to earn profits from the premium earned when selling the call. If the crypto price stays below the exercise price, you keep the premium and still own the crypto.
  • Disadvantages: the risk is that if the crypto price goes above the exercise price, you would have to sell your crypto at the exercise price, missing out on any additional profit above that price. Another risk is, if the crypto price falls significantly, the loss on the crypto position could exceed the premium earned from selling the call contract.

How to Trade the Wheel Strategy

Trading by the wheel options strategy include a systematic and cyclical process:

  1. Selling a cash-secured put. Start by selling a cash-secured put on the asset you're interested in. You receive a premium for selling this derivative.
  2. Assignment or expiry of put option. Should the base asset price dip beneath the strike, you will be obligated to purchase the asset (this is known as assignment). Conversely, if the price stays above the strike, the contract will be worthless upon expiry, permitting you to retain the premium.
  3. Selling a covered call. If the put option is assigned, and you end up buying the asset, the next step is to sell a covered call. That is, you sell a call contract against the owned asset. Again, you receive a premium from the sale of the call.
  4. Assignment or expiry of call option. In the event the price of the asset rises above the strike, you're obligated to sell the asset (assignment). However, if the price remains beneath the exercise price, the call expires unexercised, enabling you to pocket the premium.
  5. Repeating the process. Whether the call is assigned or expires, you simply start the process again by selling another put contract.

Remember, the wheel strategy requires careful consideration of various factors such as the choice of base asset, exercise prices, and market conditions. Having a solid grasp of options trading and risk management is also important.

Below, we will take a closer look at the process of selling the two contracts used in this strategy.

Sell a Put Option

Initiating the wheel strategy begins with the act of selling a put option. Here's a brief overview of the process:

  • Decide on the asset you're interested in. This could be a crypto, a commodity, or a cryptocurrency like Bitcoin.
  • Select the strike price at which you'd be comfortable buying the asset.
  • Initiate the sale of the put option by executing the trade through your account, thereby obtaining the premium from the purchaser of the derivative.
  • Wait for expiry or assignment of the put. If the price of the asset falls below the strike, you're obligated to buy the asset at the exercise price (assignment). On the contrary, if the price stays above the exercise price, the option expires unexercised, allowing you to keep the premium.

Remember, selling a put involves risk. If the price of the asset falls significantly, you could end up buying the asset at a price much higher than its current market value. Therefore, it's important to only sell put contracts on assets you'd be comfortable owning.

Sell a Covered Call

Selling a covered call is the next step in the wheel after a put option has been assigned. Here's a brief overview of the process:

  • Hold the base asset. To sell a covered call, you must already own the base asset.
  • Select the strike price at which you'd be willing to sell the asset.
  • Execute the sale of the covered position and collect the premium offered by the option buyer.
  • Wait for expiry or assignment. In the scenario the asset rises above the exercise price, you're obligated to sell the asset at the exercise price (assignment). If the price remains below the strike, the contract reaches expiration without being exercised, allowing you to retain the premium.

Covered calls sale also carries certain risks. There is a chance that the price of the crypto rises significantly. As a result, you will have to sell the asset at a price significantly lower than its current market value.

The Wheel and Exercise Prices: Which Options to Choose?

Choosing the right strike for your options is a crucial part of the wheel strategy. The strikes can significantly impact your potential returns and the risk level of your strategy.

Source: Optionalpha

When selling options as part of the wheel strategy, market participants often choose OTM contracts. This is because OTM contracts allow traders to collect premiums while also providing a buffer against adverse price movements.

For example, when selling a put, choosing an OTM strike means you're agreeing to buy the asset if it falls to a price that's below the present market value. This gives you a chance to potentially buy the asset at a discount if the price falls.

When selling a covered call, choosing an OTM strike means you're agreeing to sell the asset if it rises to a price that's above the present market value. This allows you to potentially sell the asset for more than its current price, in addition to the premium you receive.

However, the choice between ITM, ATM, and OTM options will depend on your outlook on the base asset and your risk tolerance. It's important to carefully consider these factors when choosing your exercise prices.

How Do I Choose the Strike Prices of My Options?

The selection of an appropriate strike plays a crucial role in achieving success when executing a wheel technique. Picking inappropriate exercise prices could expose you to unnecessary risk or limit your potential earnings. To guide you in this process, it's essential to comprehend how theta decay and implied volatility (IV) play a significant role.

Theta Is Your Best Friend

Theta, also known as time decay, is one of the Greeks in options trading. It represents the rate at which the contract's value decays over time. In the context of the wheel option strategy, which involves selling covered calls and cash-secured puts, you want to be on the selling side of theta decay.

Source: Optionalpha

To maximize theta decay, it's typically best to sell options that are 30–45 days to maturity. Within this period, theta decay accelerates, which benefits derivative sellers. The strike you choose should also be out-of-the-money (OTM). This means selecting a higher exercise price for your calls and a lower exercise price for your puts, compared to the current crypto price. Remember that with this technique, your goal is to keep the premium and not necessarily to acquire or dispose of the base crypto.

Implied Volatility (IV) Crush

Implied volatility represents the market's forecast of a likely change in a crypto's price. Greater implied volatility suggests a larger price swing. In the wheel strategy, an IV crush – a sudden drop in IV – can result in lower option premium. This is usually observed after specific events, like earnings announcements.

Source: Optionalpha

Selling options when the IV is high is generally beneficial, as the premium will be larger. But you need to be wary of an impending IV crush. If you sell contracts before such an event and IV drops after, the option value (and thus the premium you receive if assigned) can be significantly less than expected. The selected strike should, therefore, provide enough cushion to account for these possible price movements.

How Much Money Do You Need?

The capital required to implement the wheel strategy depends on the base asset and the exercise price of the options you're selling. For instance, if you're selling a put on 1 BTC with an exercise price of $18,000, you need to have at least $18,000 in your account to cover the potential obligation of buying Bitcoin at that price.

Wheel Technique Example

To gain a deeper understanding of the wheel strategy, let us explore a few illustrative instances. These examples are not just about showing the mechanics of the wheel strategy; they're about illustrating the strategic decisions involved and the potential outcomes of these decisions.

Examples of Using the Options Wheel Strategy

The Wheel: Cash-Secured Put Example

Let's say Bitcoin is currently trading at $20,000. You decide to sell a put with a strike of $18,000, and for selling this contract, you receive a premium of $500.

If Bitcoin's price falls to $17,000, your put option will be assigned, and you'll have to buy Bitcoin at $18,000, even though it's currently worth $17,000. Nevertheless, you obtained a $500 premium for the sale of the put, which can help mitigate a portion of the loss.

So, your effective purchase price would be $17,500 ($18,000 – $500). This means you're buying Bitcoin at a $500 discount to the exercise price, and a $500 premium to the present market value.

If Bitcoin's price rebounds in the future, this could lead to a profitable trade. For instance, if Bitcoin's price rises back to $20,000, you could sell your Bitcoin for a $2,500 profit ($20,000 selling price – $17,500 effective purchase price).

The Wheel: Covered Call Example

Now, let's say you decide to sell a covered call on Bitcoin with a strike of $19,000, and you receive a premium of $400 for selling this option.

If Bitcoin's price rises to $20,000, your call will be assigned, and you'll have to sell Bitcoin at $19,000, even though it's currently worth $20,000. However, you received a premium of $400 for selling the call, which can offset some of the loss.

So, your effective selling price would be $19,400 ($19,000 + $400). This means you're selling Bitcoin at a $400 premium to the exercise price, and a $600 discount to the present market value.

Even though you're selling Bitcoin for less than its present market value, you're still making a profit because your effective selling price is higher than your effective purchase price. In this case, your profit would be $1,900 ($19,400 effective selling price – $17,500 effective purchase price).

While these examples illustrate how the wheel strategy can potentially lead to profitable trades, please keep in mind that they are simplified and profitability depends on a range of factors.

Covered Call Trade Outcomes

The outcome of a covered call trade can vary. Understanding the potential outcomes of a covered call trade is not just about knowing what could happen. It's about understanding the implications of these outcomes and being prepared to manage the potential scenarios.

The Wheel: Is It Worth It?

Here are different scenarios and potential outcomes of a covered call:

  • Price remains stable or falls. If the price of the base asset remains stable or falls, the call contract will likely expire unexercised. You retain possession of the premium and still own the asset, which you can use to sell another covered call.
  • Price rises above exercise price. If the price of the base asset surges beyond the strike price, it is highly probable that the call contract will be exercised. You'll have to sell the asset at the strike, but you'll profit from the premium and the price rises up to the exercise price.

Remember, you keep the premium earned from selling the covered call in both scenarios. The key difference is whether you keep or sell the base asset.

Bitcoin Options Wheel Strategy: Maximize Income & Manage Risk

When applied to Bitcoin, the wheel strategy can be a powerful tool for maximizing income and managing risk. Here's a brief overview:


In conclusion, the wheel strategy is a systematic approach to options trading that can generate profit and manage risk. It's particularly effective in volatile markets like Bitcoin. However, it requires a comprehensive understanding of options trading and a disciplined approach to risk management. The strategy implies selling put and call contracts, potentially buying the base asset at a discount, and selling it at a profit. The premium earned from selling options can provide a steady income stream. However, traders must be prepared for potential losses if the market doesn't move in their favor.


How Do You Choose Crypto for Wheel Strategy?

Choosing the right asset for the wheel strategy is crucial. You should look for assets that you're comfortable owning and that have a high level of volatility, as this can increase the premiums you receive from selling contracts. Bitcoin, with its high volatility and potential for large price swings, can be a good choice for the wheel strategy.

Is the Wheel Strategy Profitable?

This strategy can be profitable, particularly in volatile markets where options premiums are high. However, like all investment strategies, it's not without risk. The key to profitability with the wheel strategy is effectively managing these risks and choosing the right stocks or other assets and exercise prices.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.