The wheel strategy sounds like a dream for traders looking to make passive income. Sell cash-secured puts, collect premiums, and if assigned, sell covered calls—rinse and repeat. It’s simple in theory, but in reality, many traders lose money with this strategy. Here’s why.
Market Conditions for the Wheel Strategy
First, the wheel strategy works best in a stable or slightly bullish market. If the market crashes or the stock you’re wheeling drops hard, you’re stuck holding a losing position. The premiums you collected won’t make up for the loss in stock value. For example, if you sold puts on a stock at $50 and it crashes to $30, you’re now down $20 per share minus the small premium you earned. That’s a big hole to dig out of 23.
Another problem is poor stock selection. The wheel only works if you’re wheeling high-quality stocks you’d happily own long-term. But many traders chase high premiums from risky or overvalued stocks. When those stocks tank, they’re left holding the bag. One trader shared how they got assigned on a struggling stock (RIDE) and had to keep rolling calls just to break even. The premiums didn’t cover the losses.
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Timing Issues
Even with good stocks, timing matters. If you sell puts right before a market dip, you’ll get assigned at a bad price. Then, if the stock stays low, your covered calls might not generate enough premium to offset the loss. One trader mentioned being assigned Apple shares at $133 while the stock was trading at $124. The tiny call premiums didn’t help much, and they were stuck waiting for a rebound 3.
The wheel also ties up a lot of capital. Cash-secured puts require you to lock up cash to cover the purchase if assigned. That money could be working elsewhere. If interest rates are high, the opportunity cost is even greater. You might earn more from a simple savings account than from the small premiums of wheeling 210.
Emotional Side of Wheel Strategy
Then there’s the emotional side. Many traders panic when their positions go against them. They close trades early, take losses, or abandon the strategy altogether. One trader admitted to being down $25,000 in a week but stressed that staying calm and sticking to the plan was key. Panic-selling turns paper losses into real ones 3.
Another issue is overestimating the strategy’s returns. The wheel generates small, steady premiums—not huge windfalls. Some traders expect to get rich quickly, but the reality is slow, modest gains. If you’re not patient, you’ll get frustrated and make bad decisions. One expert noted that while the wheel can supplement income, it’s not a get-rich-quick scheme.
Taxes Considerations
Taxes can also eat into profits. Premiums from selling options are usually taxed as short-term capital gains, which have higher rates than long-term investments. If you’re wheeling frequently, the tax drag can reduce your net returns significantly 10.
Finally, the wheel isn’t set-and-forget. It requires constant monitoring. You need to adjust strikes, roll positions, and decide when to take assignment or let shares get called away. If you’re not actively managing it, you could miss key opportunities or let losses pile up 9.
Conclusion
So, is the wheel strategy bad? Not necessarily—but it’s not the easy money machine many think it is. To avoid losing money, you need the right stocks, patience, and discipline. Most importantly, you must accept that losses will happen, and the wheel won’t always save you. If you’re not prepared for that, you’re better off with a simpler strategy.
