Step 1: Cash-Secured Puts

The Wheel Strategy begins with selling cash-secured puts (CSPs). This is the cash secured put wheelentry point and the foundation of how to run the wheel strategy. This is how you collect premium while waiting to potentially buy a stock at a discount. You're selling someone the right to sell you shares at a specific price, and you collect premium for taking on that obligation.

What Is a Cash-Secured Put?

A cash-secured put means you sell a put option and have enough cash in your account to buy 100 shares at the strike price if you're assigned. The cash is "secured" or set aside for this purpose.

Example

Stock XYZ is trading at $50. You sell 1 put option with a $45 strike for $1.50 premium ($150 total). You need $4,500 cash secured (100 shares × $45). You collect $150 immediately. If the stock stays above $45, you keep the $150. If it falls below $45, you're assigned and buy 100 shares at $45.

Strike Selection

Choosing the right strike price is crucial. You want a balance between premium income and a comfortable entry price if assigned.

General Guidelines

  • 5-15% Below Current Price: This provides a discount if assigned while still collecting decent premium
  • Out-of-the-Money (OTM): Strike below current stock price reduces assignment probability
  • Delta 0.20-0.30: This typically corresponds to 5-15% OTM and gives good premium-to-risk ratio
  • Price You'd Be Happy to Pay: Only sell CSPs at strikes where you'd be comfortable owning the stock

Strike Selection Example

Stock at $50. Options: $45 strike (10% OTM) pays $1.50, $40 strike (20% OTM) pays $0.75. The $45 strike offers better premium while still providing a 10% discount if assigned. This is typically the sweet spot.

Days to Expiration (DTE)

How far out should you sell your puts? This affects premium, assignment risk, and time in the trade.

  • 30-45 DTE (Recommended): Best balance of premium and time decay. Premium is substantial, and you have time for the stock to move in your favor
  • Weekly (7 DTE): Higher premium per day but more assignment risk. Good for experienced traders
  • 60+ DTE: More premium but capital tied up longer. Less efficient for the Wheel

Premium Collection

When you sell a CSP, you collect premium immediately. This is your income, regardless of what happens next.

Premium Factors

  • Implied Volatility: Higher IV = more premium (but also more risk)
  • Strike Distance: Closer to current price = more premium
  • Time to Expiration: Longer DTE = more premium
  • Stock Price: Higher-priced stocks typically have higher absolute premiums

When Do You Get Assigned?

Assignment happens when the stock price is below your strike price at expiration. You're obligated to buy 100 shares at the strike price.

  • At Expiration: If stock price < strike price, you're assigned automatically
  • Early Assignment: Rare but possible if put goes deep ITM and has little time value
  • Your Cost Basis: Strike price minus premium received (e.g., $45 strike - $1.50 premium = $43.50 effective cost)

Assignment Example

You sold a $45 put for $1.50. Stock closes at $42 on expiration. You're assigned 100 shares at $45. Your cost basis is $43.50 ($45 - $1.50 premium). You now own the stock at a discount to where you sold the put, ready for Step 2 of the Wheel.

Best Practices for Step 1

  • Only Wheel Stocks You'd Own: If assigned, you'll own the stock. Make sure you're comfortable with it
  • Maintain Cash Reserves: Keep enough cash secured for all open CSP positions
  • Diversify: Don't put all capital into one stock's CSP
  • Monitor Positions: Check weekly to see if you need to manage the position
  • Set Realistic Expectations: Not every CSP will be assigned, and that's okay—you still collect premium

Next Step

Once you're assigned shares, you move to Step 2 of the Wheel Strategy.

Step 2: Assignment & Owning Shares →