Ready to go further
Next: see a defined-risk options example
The iron condor guide walks through a trade where the most you can lose is fixed from the start.
What is included
- What it is, in plain words
- The formula or mechanism, with exact arithmetic
- How it hits grid, martingale and DCA bots
- A check you can run before you switch a bot on
Who it is for
- People who run or plan to run a trading bot
- Anyone reading a backtest or a bot sales page
- Readers who want the numbers, not the pitch
- Not advice, and not a signal service
Key facts
- The wheel strategy has two steps that repeat. Sell a cash-secured put on a stock you would own. If you are assigned the shares, sell a covered call against them. If the shares are called away, start again.
- In the made-up example, a put at 48 for 1.00 pays $100 for holding $4,800 of cash, which is 2.08% for one period (calculated by us on 29 Oct 2026, exact).
- The wheel is not a free income. If the stock falls, you own it. In path C below the wheel lost $620 on 100 shares, and holding the shares lost $1,000.
- If the stock rallies after assignment, the call caps the gain. In path D the wheel made $380 while holding the shares made $800.
- A bot can run the steps mechanically. It cannot choose a stock that holds its value, and that choice carries most of the risk.
How the two steps work
Step one: the cash-secured put. You sell a put option on a stock trading at 50, with a strike of 48, and you hold $4,800 in cash (48 x 100 shares) to buy the shares if needed. You are paid 1.00 a share, so $100. If the stock is at or above 48 at expiry the put expires and you keep the money. If it is below, you buy the 100 shares at 48, and your cost after the premium is 47.00 a share.
Step two: the covered call. Holding the shares, you sell a call with a strike of 50 for 0.80. If the stock is at or above 50 at expiry, the shares are sold at 50. If it is below, you keep the shares and the $80, and you can sell another call. After both premiums your cost is 46.20 a share.
Cost after assignment = put strike - put premium
Cost after the call = cost after assignment - call premium
Result if called away = (call strike - cost after the call) x 100
Four paths, with the numbers
The stock starts at 50. Each path shows where it is when the put expires and, if assigned, when the call expires. The results are before fees, commissions and tax, and the prices are made up.
| Path | What happens | Price at put expiry | Price at call expiry | Wheel result | Holding 100 shares bought at 50 |
|---|---|---|---|---|---|
| A: Rises, never assigned | The put expires worthless, you keep the $100 and own no shares. | 52 | none | $100 | $200 |
| B: Assigned, then called away | Assigned at 48, then the shares are called away at 50. | 47 | 51 | $380 | $100 |
| C: Assigned, then keeps falling | Assigned at 48, the call expires worthless and you still hold the shares at 40. | 47 | 40 | -$620 | -$1,000 |
| D: Assigned, then rallies hard | Assigned at 48, then the shares are called away at 50. | 47 | 58 | $380 | $800 |
Path A is the best case for the put: a full 2.08% on the cash for the period, with no shares. Path B is the textbook wheel, with the put premium, the call premium and a small gain on the shares all collected, for $380. Path C is the risk the strategy hides. The premiums softened the fall, but the shares are still worth less than you paid, and the wheel result of -$620 is a real loss. Path D shows the other side: the strategy stops participating above the call strike, so a strong rally leaves most of the move to the buyer of the call.
The break-even price on the shares after both premiums is 46.20. Below that, you lose money on the position. The premiums reduce the cost but do not remove the exposure to the stock.
Where the wheel goes wrong
- Picking the stock for its premium. A high premium usually means the market expects a big move. The premium is the price of that risk, and the risk is the shares.
- Tying up large cash. A single contract holds $4,800 here. A small account can end up with a few contracts on one or two stocks, so one bad fall hits most of it. See position sizing.
- Calling the average gain steady. Many small premiums and one large loss look smooth until the loss arrives. The pattern resembles the one in martingale strategy, except the loss here is bounded by the stock reaching zero.
- Selling calls below your cost. A call strike under your cost basis locks in a loss if the shares are called away.
- Ignoring costs and tax. Commissions, assignment fees and the tax treatment of premiums change the result. Check your own rules.
- Testing only calm periods. A backtest that skips a crash makes the wheel look safe. See backtesting and max drawdown.
What a bot can and cannot do
A bot can sell the put, track the assignment, sell the call and repeat. It does not know whether the stock should be owned at all. The rules for which stock, what size and when to stop are the strategy, and they need testing with paper trading first. A defined-risk alternative on the option side is covered in the iron condor.
How to check a wheel idea
Write down the worst path for your stock and size, for example a fall of 30% right after assignment, and work out the loss. Compare it with the premiums collected in a year. If one bad event wipes out several years of premiums, the real return is not the quoted one. Check the average result with the expected value calculator.
What this page does not tell you
It does not say the wheel will make money, which stock to use or what premiums will be available. The prices are made up, options carry risk and are not suitable for everyone, and this is education, not advice.
Keep Going
Related Tools and Guides
Keep exploring
FAQ
Frequently Asked Questions
What is the wheel strategy?
A repeating options plan: sell a cash-secured put, and if you are assigned the shares, sell a covered call against them. If the shares are called away, start again.
How does the wheel strategy make money?
From the premiums on the puts and calls, and from any gain between your cost and the call strike. It loses when the stock falls by more than the premiums collected.
What is the risk of the wheel strategy?
You can end up owning shares that keep falling. The premiums reduce your cost, but they do not protect you from a large drop in the stock.
How much money do you need for the wheel strategy?
A cash-secured put holds the strike price times 100 shares in cash. At a strike of 48 that is 4,800 for one contract, in the made-up example here.
Is the wheel strategy better than buying and holding?
It did better in a fall or a flat market and worse in a strong rally in the paths on this page. Neither is better in every case.
Are the numbers on this page real?
Example numbers are made up to show how the maths works, and the page says so. A figure only counts as exact when the page says it was calculated on a stated date. Nothing you enter in a calculator leaves your browser.
Can I use this to decide whether to run a bot?
It can show whether a bot's numbers hold together and how much an account can lose. It cannot say what the market will do, and it is not advice. Use it to ask better questions, then read the terms of your own broker or exchange.
Is this financial advice?
No. It is general education about an options strategy. The prices are made up and it does not consider your situation. Options carry risk.
Know the Risk Before You Run It
Free calculators and guides, added every week. Leave your details and we will email you when new ones go up.
Trading carries a risk of loss