Quick answer
What is the wheel strategy?
The wheel strategy is a repeating options-income cycle: sell cash-secured puts on a stock until you are assigned shares, then sell covered calls on those shares until they are called away, then start again with puts. You collect premium at every step, and your stock purchases and sales happen at strikes you chose in advance.
Key takeaways
- 01Step 1: sell puts. Step 2: if assigned, sell calls. Repeat.
- 02Example: $1,050 total on $9,500 in four months (calm market).
- 03Main risk: owning the stock through a large fall.
- 04Premium on stock options is usually short-term income.
| Step 1 | Sell cash-secured puts |
|---|---|
| Step 2 | If assigned, sell covered calls |
| Step 3 | If called away, restart |
| Best market | Flat to gently rising |
| Worst market | Sharp, lasting decline |
| Tax | Mostly short-term |
The Short Answer
What is the wheel strategy?
The wheel strategy is a repeating options-income cycle: sell cash-secured puts on a stock until you are assigned shares, then sell covered calls on those shares until they are called away, then start again with puts. You collect premium at every step, and your stock purchases and sales happen at strikes you chose in advance.
In the four-month example below, the wheel collects $850 in premium and $200 of share gain on one contract with $9,500 of cash at risk. Its weakness is a stock that falls hard after assignment: you own it all the way down, and covered calls at your cost basis may pay very little.
The Cycle
How does the wheel strategy work?
Sell a cash-secured put
Choose a stock you want to own and a strike below the market. Hold cash for assignment. See cash-secured puts.
Repeat until assigned
If the put expires, keep the premium and sell another.
Sell covered calls on the shares
Once assigned, sell calls at or above your cost basis.
Repeat until called away
When the shares are called, you are back to cash, and the wheel restarts.
Worked Example
What does one turn of the wheel look like?
| Month | Trade | Outcome |
|---|---|---|
| Month 1 | Sell $95 put for $2.50 | Stock $98: expires; +$250 premium |
| Month 2 | Sell $95 put for $2.20 | Stock $92: assigned at $95; +$220 premium |
| Month 3 | Sell $97 call for $1.80 | Stock $94: expires; +$180 premium |
| Month 4 | Sell $97 call for $2.00 | Stock $99: called away at $97; +$200 premium |
Chart
Where the wheel's profit came from (one contract, four months)
Total: $1,050 on $9,500, about 11.1% in four months, in a market that drifted sideways. That is a good outcome, not a typical one.
The Downside
What happens if the stock keeps falling?
Suppose you are assigned at $95 and the stock falls to $60. Calls at $95 are now nearly worthless, and calls near $60 risk locking in a $35 loss if exercised. Many wheel traders end up holding a large unrealized loss and collecting small premiums. Over a full cycle, the wheel's downside is close to owning the stock.
Do
- Wheel only stocks you would hold through a 40% drop
- Size each position so assignment never strains your cash
- Decide in advance how you will handle a large decline
Don't
- Wheel volatile stocks for their high premium alone
- Sell calls below your cost basis without accepting the loss
- Treat premium as free money
Where Embark fits
The wheel is a monthly job with stock-like downside. What could your existing shares target in income?
Run your ticker to see the income target on a position you already own.
- No option account, strike selection or monthly rolling required to pursue income
- §721 in-kind contribution of the stock you own: $0 tax at contribution
- Targets 10%+ annual income; a target, not a guarantee, with a 3-year lock-up
Run the numbers
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Taxes
How is the wheel taxed?
For individual stocks and ETFs, put and call premium is taxed when each option expires or is closed, usually as short-term gain. An assigned put's premium lowers your share basis; an exercised call's premium is added to the sale proceeds. Shares held under a year produce short-term gains. In a taxable account at the top bracket that is up to 40.8% federal; many wheel traders run it in an IRA instead.
Embark
Is there income without managing a wheel?
The wheel is a hands-on, monthly program with stock-like downside. If your capital is already in appreciated stock, Embark accepts it in kind under §721, with $0 tax at contribution, and targets 10%+ annual income without you trading options. Target, not guarantee; 3-year lock-up; accredited investors only.
FAQ
Frequently asked questions
Is the wheel strategy profitable?
It earns steady premium in flat or rising markets; in sharp declines it can lose about as much as owning the stock.
What stocks are best for the wheel?
Liquid stocks with active options that you would be comfortable owning through a large decline.
How much money do you need for the wheel?
Enough cash to buy 100 shares at the put strike for each contract.
What happens if a wheel stock crashes?
You hold shares bought at the strike and can only sell calls at low premiums or accept a loss.
Is the wheel the same as a covered call strategy?
It includes covered calls but adds the cash-secured put phase before you own shares.
How is the wheel taxed?
Mostly as short-term capital gains on individual stocks; premium also adjusts the basis or proceeds of assigned shares.
Sources
Primary sources
Sources
- OCC: Characteristics and Risks of Standardized Options (Options Disclosure Document)
- Cboe: Cash-secured put writing and the Cboe S&P 500 PutWrite Index (PUT), 1986–2023
- 26 U.S. Code §1234: Options to buy or sell (tax on option writers)
- IRS Publication 550: Investment Income and Expenses (options and Section 1256)
- 26 U.S. Code §1411: Net investment income tax
- 26 U.S. Code §721: Nonrecognition on contribution to a partnership
Cite this article
Embark Funds Research. “The Wheel Strategy Puts, Shares, Calls, Repeat.” Embark Funds, updated October 29, 2026. https://www.embarkfunds.com/insights/wheel-strategy-options-income
Not tax, legal or investment advice: This article is educational and is not tax, legal, investment or Medicare advice. Rules and dollar amounts change every year and depend on your facts. Work with a CPA or financial planner before acting. Embark income figures are targets, not guarantees. Contributed shares have a 3-year lock-up, and Embark is open to accredited investors only.
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