Never-Ending Wheel Strategy: A Step-by-Step Guide to Generating Income and Share Accumulation
The Wheel strategy is a popular options trading approach that allows investors to generate income while accumulating shares of quality stocks at a discount. It’s an excellent strategy for both beginners and experienced traders who want to combine options income with long-term stock ownership. I’m going to present a modified version where a stock position is held indefinitely and the options income is used in a multitude ways. Here’s how it works.
Step 1: Using a Synthetic Short Put (Buy/Write Strategy)
Instead of selling a cash-secured put, an alternative approach is to initiate a synthetic short put by purchasing 100+ shares of a stock and simultaneously selling an in-the-money covered call. A call option gives the market maker the right to purchase your shares at a specific strike price before expiration. This method mimics the risk-reward profile of a short put while allowing investors to mitigate some risks and get a very good entry price on stock.
Unlike the traditional wheel, 100% of funds are invested to open the trade. Because the short call starts in the money, the bulk of the position has a slight hedge and there is still some room for capital appreciation. This is a very bullish position so entry is critical.
- Choose a stock you’d be happy to own.
- Buy 105-150 shares of the stock.
- Sell an in-the-money call option with a strike price below the current market price.
If the stock price stays above the strike price, your shares can be called away at a profit when the extrinsic value of the options has declined to close to zero. Typically this happens at expiration but can also happen when the call option goes deep in the money or the underlying has a dividend payout larger than the remaining extrinsic value.
Step 2: Selling or Roll Covered Calls FOREVER
Once you own the shares, the next step is to sell covered call options against your position.
The strategy is a cycle. The goal is to consistently generate income and accumulate shares. This strategy follows the principle: buy low, sell high.
3 Potential Outcomes
The extrinsic value of all options eventually decays to zero. Options close to at the money will retain this value longer and options further out of the money or deep in the money will see the extrinsic value decline sooner. When the options have little extrinsic value, it’s time to roll. I use 0.1% of underlying value as a easy calculation, which means on a $50 stock, when the extrinsic value is $0.05 or less, it’s time to roll.
There are only three potential actions required. When the extrinsic value of the short call is depleted, roll the covered call out to the longer duration.
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If the Underlying price declines: retain the shares and can then sell covered calls at a new strike price and more cash flow
- Consider buying more shares when the underlying prices are low
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If the Underlying price stays the same:
- Rolling the covered call out in time for either a debit or credit.
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If the Underlying price increases: you retain the shares and can then sell covered calls at a new strike price.
- Consider selling shares when the underlying prices are high and the cash balance is depleted
How to determine what strike to select
I use the current value of the position relative to the potential returns. I weigh both the probability of profit (higher POP% has less underlying movement risk) vs the annualized potential return on capital (higher POP % has less potential)
I typically am choosing multiple strikes for a blended return:
I post these screenshots live to Discord each month and it's one of the perks of being a member of the Drawbridge Elite, click here to see the tiers.
This often means I'm playing very close to at the money and frequently paying to roll up to higher strikes. If I run out of cash to pay for the cost of rolling up, I can sell off a couple of shares.
Here is an example of where my strikes were relative to the underlying SPLG over the past 2 years. When the stock traded lower in Oct 2023, I sold calls out of the money (above the current underlying value). The result of this trade is a 12% annualized return over the past 2 years. 
Some underlyings have wild swings and I try to keep my Covered call strikes relatively consistent. I trade TNA which is a 3x bullish ETF. Typically holding it long term would result in an overall loss. This trade has generated 35% over the past year even though the ETF is worth less than my cost basis. The key to this trade was to roll for very small credits when the stock had high valuation and try to keep my strikes close to the average stock price.
Benefits of the Never-Ending Wheel Strategy
- Steady Income: You collect premiums from selling options at every step.
- Lower Cost Basis: By starting with in the money calls, the entry is at a discount compared to market prices.
- Defined Risk: You only trade stocks you’re willing to own, reducing downside risk.
- Compounding Potential: Reinvesting option premiums and gains can accelerate portfolio growth.
Key Considerations
- Choose liquid stocks with tight bid-ask spreads to minimize slippage.
- Be mindful of implied volatility; higher IV means higher premiums but also greater risk.
- Manage risk by selecting stocks with strong fundamentals to avoid holding declining assets.
By following the Never-Ending Wheel strategy, traders can generate passive income while maintaining exposure to quality stocks. It' is a buy-and-hold strategy with the opportunity to enhance portfolio returns, the Never-Ending Wheel offers a structured approach to profiting from the options market.