Generate consistent income through covered calls and cash-secured puts. Learn the strategy that professional traders use to outperform the market.
A systematic approach to generating income from stocks you want to own
Start the wheel by selling a put option at a strike price you'd be happy to buy the stock at. You collect premium immediately and have the obligation to purchase shares if the stock drops below the strike.
If the stock price falls below your strike at expiration, you'll be assigned 100 shares per contract. This is actually good-you now own a quality stock at your chosen price, with the premium reducing your cost basis.
Now that you own the shares, sell call options against them at a strike above your purchase price. You collect more premium and keep any appreciation up to the strike price.
If your shares get called away, great! You've realized the full profit. Now start over with cash-secured puts. If not called away, keep selling covered calls. Either way, you're collecting premium consistently.
No. But the Options Wheel enforces buy-low, sell-high behavior by systematically entering at lower strikes and exiting at higher ones. This can provide solid returns from premium collection in sidways and slightly bearish markets.
This is the #1 rule. If your put gets assigned, you'll own 100 shares per contract. Only sell puts on stocks you'd be genuinely happy holding long-term - not just ones with high premiums.
Earnings announcements cause massive price swings that can blow through your strike overnight. Always check the earnings calendar first. Either close your position before earnings, or avoid selling options that expire after an earnings date. This takes 30 seconds to check on any finance site.
Too cheap (under $20) and premiums are tiny in dollar terms. Too expensive (over $150+) and you need a lot of capital to get assigned. The sweet spot gives you meaningful income without tying up your whole account in one position.
Mid-to-large cap companies (over $2B market cap) are more stable, have better options liquidity, and are less likely to make sudden extreme moves. Small caps can be volatile in ways that aren't reflected in IV until it's too late. Market cap is shown on any stock's summary page.
Look for stocks with high options volume and tight bid-ask spreads (under $0.10 ideally). Wide spreads eat into your premium. Good liquidity means you can enter and exit positions without giving up too much edge. Check the options chain - if spreads look wide, move on.
A stock trading at a reasonable valuation gives you a margin of safety if assigned. Price-to-Book (P/B) under 3 suggests the stock isn't wildly overpriced relative to its assets. A P/E ratio in line with or below its industry average means you're not overpaying for earnings. Overvalued stocks have further to fall - if you get assigned at an inflated price, you may wait a long time to sell covered calls profitably.
Look for profitable companies with manageable debt, consistent revenue growth, and a real competitive advantage. You're not just trading a ticker - if assigned, you're a shareholder. Avoid companies burning cash or at risk of going bankrupt. A quick look at the income statement and balance sheet covers this.
If you get assigned and are holding shares while waiting for the price to recover, a dividend-paying stock pays you to wait. You collect premium from covered calls AND dividend income at the same time. Look for a dividend yield of 1–4% from a company with a long history of consistent payments.
Don't run the wheel on five tech stocks at once. If the sector crashes, everything moves together. Spread across different sectors - tech, healthcare, consumer staples, energy - so one bad sector doesn't wipe out your whole strategy. This is a portfolio-level habit to build over time.
Check the 50-day and 200-day moving averages on any free charting site. Ideally the stock is trading above both, or at least the 200-day. A stock in a long-term uptrend is more likely to recover if you get assigned and less likely to go to zero.
The Relative Strength Index (RSI) measures momentum on a scale of 0–100. Avoid selling puts on stocks with an RSI above 75 - they're overextended and more likely to pull back hard. An RSI between 40–65 is a healthier entry zone. RSI is visible on any free chart with one click.
IV determines how much premium you collect. Too low (under 20%) and premiums are barely worth it. Too high (over 80%) and the market is pricing in something scary. Aim for IV between 25–60% for the best risk/reward balance. Your broker's options chain will show IV.
IV Rank tells you if current volatility is high or low compared to the past year. An IVR above 30 means options are relatively expensive right now - you're selling premium when it's inflated, which is exactly what you want. IVR above 50 is ideal. Available on most brokers and options screeners.
Beyond earnings, watch for FDA decisions, product launches, lawsuits, or major macro events that could spike or crash the stock. These create binary outcomes that options pricing can't fully account for. A quick news search before entering a position takes two minutes.
Look at the chart for price levels where the stock has bounced before - these are "support" zones. Selling your put strike at or near a strong support level means there's historical evidence the stock holds at that price, lowering your assignment risk.
Model your potential returns and understand the mechanics
P&L at expiration - premium is yours to keep
Ready to put your options strategy into practice? Open an account with Robinhood (my favorite brokerage for options trading!) to start trading the wheel today.
Start Trading on RobinhoodEnter any ticker to score it live against every Wheel criteria
Data sourced from Yahoo Finance via a CORS proxy. For educational purposes only - not financial advice. Always verify with your broker before trading.