Strategy Source

Creator/Channel: Tom King

Published Date: Feb 14, 2024

Source: Why I Hate The Wheel (And How I Trade It)

Trade Setup

The Wheel is traditionally a systematic income strategy, though this specific variation is heavily modified for longer-term investors using highly efficient margin accounts to avoid the standard capital traps.

Action (Sell (-)/Buy (+))	Leg	DTE	Strike Price / Delta Target	Width
Sell (-)	Put	70 to 120	25 to 30 Delta	N/A (Naked)

• Total Capital Required: Substantial. Varies heavily by underlying, but the goal is to secure a 25% to 30% Annual Percentage Rate (APR) return on the required buying power. (Example from transcript: A -/CL70P (Oil Futures) requiring $6,000 in buying power to collect $1,500 in premium).
• Execution Context: The video demonstrates a theoretical model on a live options platform using MCD and /CL to conceptually explain the trade.

Strategy Application

The core cycle of The Wheel involves selling a cash-secured put, getting assigned the underlying shares if the price drops, and then selling covered calls against those shares until they are called away.

• Targeting the Strike: You will look to sell puts at the 25 to 30 Delta (Strike metric / Directional bias or “probability of success”).
• The Buffer Zone: Selling at a lower Delta automatically builds a cushion against price drops. For example, if Oil (/CL) is trading at $77, selling the 25 Delta put at the $70 strike gives you a 10% downside buffer before the asset breaches your risk zone.
• The Time Differential: Instead of trading the standard 30-to-45-day cycles, this approach pushes expirations out to 70 to 120 days. This provides a better return on margin and allows Theta (“time decay” mechanics) to work over a longer horizon where the expected move is often historically higher than the actual move.
• Market Environment: Only deploy this strategy on assets in a confirmed weekly uptrend (the underlying price must be above the 50 EMA on the daily chart, and the 21 EMA must be above the 50 EMA). The ideal entry is on a short-term daily pullback that bounces off the 21 EMA.

Risk Profile

• Wing Widths: Not detailed in source transcript. This strategy utilizes naked/cash-secured options and outright stock ownership, meaning there are no long wings to define your risk.
• Assignment & Capital Risk: The fatal flaw of the traditional Wheel as a trading strategy is that it features unlimited downside risk with capped upside potential. If assigned on a downtrending stock, you fully participate in the asset’s depreciation while only collecting a capped premium.
• Margin Inefficiency: Doing this in a standard Reg T margin account or Cash IRA ties up massive amounts of capital (e.g., being assigned 100 shares of MSFT requires over $40,000). To be viable, it must be traded using Portfolio Margin (PM) or SPAN margin (via Futures) to drastically reduce the buying power requirement.
• Capital Preservation Rules:
  • Never risk more than 10% of your total portfolio on any single underlying.
  • Only wheel high-quality, dividend-paying assets you are entirely comfortable owning for 6 to 12+ months.
  • Do not chase high premiums on highly volatile meme stocks.

Expected Outcome

1. Premium Collection (The Base Win)

The asset remains above your short put strike through expiration. The option expires worthless, you keep 100% of the premium collected, and you repeat the process.

2. The Assignment & Recovery (The Triple Income Phase)

The asset drops below your strike, and you are assigned 100 shares (or 1 futures contract). You now own the asset at a discount from where it originally traded, you potentially collect dividends while holding it, and you generate additional income by selling covered calls against it until the market rallies and takes the shares away.

3. The Downside Trap (The Drawdown)

The underlying asset enters a severe downtrend. You are assigned the shares and suffer heavy unrealized losses as the price continues to crash. Selling covered calls way up at your assigned strike yields pennies, tying up your capital for months or years in a losing position.

Management & Exit Triggers

• Primary Profit Target: Close the short put early if your current APR on the trade becomes greater than the original APR you calculated at entry, provided you still have more than 25% of the time remaining on the contract.
• Covered Call Exits (Uptrend): If assigned and the asset is trending up, sell your covered calls at the 25 to 30 Delta above your assigned price.
• Covered Call Exits (Downtrend): If assigned and the asset is downtrending or flat, sell your covered calls exactly at your assigned strike price.
• Capital Preservation Stop: Never sell a covered call below your assigned strike price. Doing so risks having your shares called away at a lower price, permanently locking in a capital loss.