The Wheel Options Strategy or the Triple Income Strategy is an option play where an option trader tries to profit from a trade on a single stock in three different ways.
Step 1 is where the trader sells cash secured put options and collects the premiums on a stock that they wanted to buy at a specific price to hold a position in over the long term. If the short put options expire worthless or they are closed for a profit before expiration then the premiums end up being 100% profit.
Step 2 of The Wheel is to sell covered calls on the stock after you are eventually assigned. Sell a call option in the stock with a strike higher than the stock’s cost basis to create a chance of profitability if the out-of-the-money call option stock goes in-the-money and the stock is assigned. The stock can become a new source of income by selling covered calls multiple times for more premiums which will also lower the cost basis of the stock if they expire worthless.
Step 3 is if the stock that is now owned goes higher in price movement but the covered call doesn’t go in-the-money then you profit from the premium and capital gains over your entry price.
Step 4 is the final step in The Wheel and the option play ends when the covered call on the stock goes in-the-money and is assigned and the stock is called away. All the premiums should add up to a profit so that all the premiums that were collected from selling both the cash secured puts before the stock was assigned and then all the covered calls before the stock was called away, along with selling the stock eventually for a profit should create Triple Income. The Wheel Option Play could be considered quadruple income if the stock inside the play paid a dividend while you were holding it waiting for the covered call to go in-the-money.
The purpose of this option strategy is to sell the put at a price level with a low probability of the price being reached and the put option going in-the-money and being assigned. However, if the put option that was sold out-of-the-money does expire in-the-money and the underlying stock is assigned then the option seller will buy and hold the stock as an investment or long term position trade. Whether the put is assigned the first time or if multiple puts expire worthless the option premium received inside this play will lower the cost basis of the stock if bought.
This play is for stocks that you want to be paid to buy at the price you want to buy the dip at any way. This play should only be done on the highest quality stocks with strong fundamentals or stock market index ETFs. The risk is in the stock or ETF position itself. If the underlier plunges in price and you buy it at a loss as the put is assigned and then goes even lower before the covered call goes in the money it will be unprofitable when you sell the stock. The power is in the time the option trader is willing to hold the stock like an investor until it gets back to the entry price, which is also where the risk lies.