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The Wheel

Wheel2 legscreditbullish to neutral

The full cycle: sell puts until assigned, then sell calls against the shares until they are called away, then start again. Not one trade — a loop.

What it is

The wheel is a sequence, not a structure. Sell a cash-secured put on a stock you would own. If it expires, keep the premium and sell another. If it is assigned, you own shares — now sell covered calls above your basis. When the shares are called away, you are back to cash and the loop restarts.

Every leg collects premium, and the premium accumulates against the cost basis at each turn. That is the mechanism: an assignment is not an exit, it is a phase change.

The diagram above shows the position mid-cycle, which is the state the payoff can actually describe. The loop as a whole has no single payoff curve because it has no single expiry.

How it is built

Priced off the guide's shared chain, on a $50 stock. Every figure beneath the diagram is computed from these legs by the same engine the Strategy Builder uses.

ActionWhatStrikeQtyPrice
Buyshares—100 sh$43.50
Sellcall$551$1.20
$0$55now $50$42.30stock price at expiryprofit / loss
Max profit
$1,270
Max loss
−$4,230
Break-even
$42.30
Net debit
$4,230

Collateral held: $4,350 — the gross amount tied up, before the premium received.

That net figure includes buying the shares. The option premium on its own is $120 received.

The wheel mid-cycle: 100 shares carried at a $43.50 basis — assigned from a $45 put with $1.50 already collected — and a $55 call sold for $1.20 against them. The basis, not the strike, is what the position actually carries, which is why the break-even sits so much lower than a freshly-bought covered call.

Reading the shape

Mid-cycle the shape is a covered call's, but shifted: the basis has already been reduced by the put premium collected on the way in, so the break-even sits below where a freshly-bought covered call's would.

Each completed turn lowers the effective basis again if the call expires worthless, which is what makes the loop compound.

How it is used

The wheel suits names you are content to hold — that is the entry requirement, not a preference. A wheel on a stock you do not want to own is a series of assignments you will fight.

Both AI Trader books run this loop and log every phase transition, which is what the CSP → Assigned → CC → Done bar on each position card is tracking.

The repair case is where the loop gets tested: a stock well below basis pays almost nothing for a call at that basis. Selling further out in time rather than lower in strike is how experienced wheel traders handle it — out in time, not down in strike, so no loss is locked in.

Track cost basis net of every premium the name has collected, across all legs and all turns. That blended figure is the only honest measure of where a multi-turn wheel actually stands.
The loop's weakness is a name that falls and stays down. You hold shares, calls at your basis pay little, and the capital is committed. Nothing about the mechanics breaks — but the position stops turning.
Premium collected is not the whole return. A wheel that collected $800 while the shares fell $3,000 is down, and reporting only the premium is the single most common way wheel results get overstated.

Like everything in this guide, these are descriptions of structures and conditions — context for your own decisions, not instructions to trade.

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