Premium Selling and the Triple Income Wheel Strategy

Selling option premium and or running what is called the wheel strategy also sometimes called the triple income strategy is a very popular strategy to generate passive income with out much risk.

To begin the strategy we start off with selling a cash secured put in a stock you would like to own.  You pick a strike price below the current market price to sell a put. If the stock is trading above your strike price at expiration you keep the premium received and do the process over again.  If you get assigned you receive 100 shares of stock and move on to the next part of the strategy.

Now owning 100 shares of stock we want to sell a call.  We will choose a strike price above our purchase price.   We will hold onto the stock and sell calls until it eventually gets called away.

Wheel Strategy

An example:

Assume XYZ is trading for $9 a share.  The 8.5 Put has a bid of .13 with only 21 days to expiration.  This represents a return on risk of 1.6% or 27% annually.  If XYZ in 21 days is trading above $8.5 we would keep our credit received of $13 and do the process over again.

But eventually we will get assigned and someone will put 100 shares of XYZ to us for $8.5

Now the stock is trading for $8.5 and the 9 Call has a bid of .20 with just 21 days to expiration.   Now after 21 days the stock has rebounded and is now trading for $9.20 so our stock was called away for $9.

In this case we earned $13 from the put, $50 from stock and $20 from the call. bringing our total to $83.  Our total risk was $850 giving us a return of a little over 9%.  If the stock we chose also paid a dividend that would just increase our overall return.

 

8 thoughts on “Premium Selling and the Triple Income Wheel Strategy”

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  3. I was a frustrated trader that kind of gave up on swing trading and buying options. When I turned 50, I started looking for a way to produce income from my holdings. That’s when I found the wheel trade. I love it. I have been working it for about 7 months. The income is great and makes the idea of retirement exciting not stressful. Now that I see how valuable my capital because of the income it can bring, I worry about capital preservation. What are your thoughts on capital protection. ( my capital had no problem going down when I was in buy and hold mode)

    1. Buying options can be very frustrating when they don’t move in your intended direction. Selling options and running the wheel strategy has been one of the easiest and safest ways I have found in generating capital. As I transition from the growth phase to income generation phase I will try and balance my account from higher IV stocks into lower IV ETFs. An ETF Is not subject to earnings and huge swings like a stock would be subject to. You can also look into hedging. A butterfly spread can be cheap insurance. Diagonal put spreads are another option but can get expensive. Thanks for your comment and good luck.

        1. U could use it just as a hedge in general. I Use an ETF like SPY June expiration as an example buy the 400 and 360 put and sell 2 of the 380. Cost 125. Max profit is 1875 if SPY is trading at 380 at expiration. Max loss is 125 the price of the spread.

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