The Wheel Strategy: Puts, Assignment and Covered

Step 1: sell the put

• The investor collects premium and accepts the obligation to buy shares at the strike.
• The underlying should be something the investor would be comfortable owning if assignment occurs.

Step 2: assignment

• If the put is assigned, the investor becomes long shares at the strike price.
• Premium lowers the effective purchase price, but a large underlying decline can still create a substantial unrealized loss.

Step 3: covered calls

• The investor can sell calls against the shares, collecting premium in exchange for giving up some upside above the call strike.
• A call sold too aggressively can force the investor to sell shares at a price they later regret.

What the wheel does not solve

• It does not eliminate market risk.
• It does not guarantee income every month.
• It does not make a poor-quality underlying safe.
• It can concentrate a portfolio if multiple put assignments occur during the same selloff.

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