The wheel

Summary

Use the wheel when you would be content to own a stock a little lower than today: sell a $95 put for $1.41 ($141) with $9,500 set aside, and if assigned, sell covered calls until the shares are called away. Step one makes at most $141 and could lose $9,359 if XYZ went to zero. It breaks even at $93.59, the $95 strike minus the $1.41 premium.

Key terms

the wheel

A cycle that joins a cash-secured put and a covered call: sell puts until assigned, then sell calls until the shares are called away, then start again.

cash-secured put

Selling a put while setting aside the strike times 100 in cash to buy the shares if you're asked.

covered call

Owning shares and selling someone the right to buy them from you at the strike price.

assigned

When the option you sold is exercised against you, so a sold put makes you buy the shares at its strike.

called away

Having your shares sold at the strike price because you were assigned on a call you sold.

premium

What you pay for an option, which you don't get back, and the most you can lose when you buy one.

break-even

The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.

time value

The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.