The wheel vs credit spreads: what happens to the same cash
A cash-secured put has a big possible loss, but it's backed by cash for every share. A put credit spread caps the loss per trade at a small number. The danger is that the small number makes it easy to sell too many.
The short answer
The wheel strategy starts with a cash-secured put. You sell a put and set aside the full cash to buy 100 shares at the strike. The loss isn't capped by the trade, but every dollar of it is already in your account.
A put credit spread sells a put and buys a lower-strike put as protection. The most you can lose is the gap between the strikes, minus the credit. You never need cash for the shares.
The spread uses far less cash per trade. That's its strength and its trap.
Side by side
| Cash-secured put (wheel) | Put credit spread | |
|---|---|---|
| Legs | One | Two |
| Cash held | Strike × 100 | Spread width × 100, minus the credit |
| Max loss per trade | Strike − premium, if the stock goes to $0 | Width − credit, fixed at the start |
| If assigned | You own 100 shares | Usually closed before, or both legs settle |
| After a loss | You hold shares and can sell calls | The money is gone; nothing to wheel |
| Contracts per $4,500 | One, on a $45 strike | Up to about ten, on a $5-wide spread |
| Account | Cash account works | Usually needs spread approval, often margin |
A worked example (an illustration, not a trade idea)
A made-up stock, XYZ, trades at $50. Two traders each have $4,500.
Trader A, the wheel: sells one 30-day $45 put for $1.00. Collects $100. All $4,500 is set aside.
Trader B, credit spreads: sells the $45 put for $1.00 and buys the $40 put for $0.30. Net credit: $0.70, or $70. Max loss per spread: $5.00 − $0.70 = $4.30, or $430. With $4,500, B sells ten spreads. That collects $700.
B's thinking: "My risk is defined. I can't lose more than I put up."
Trader C is there for comparison. C sells just one of B's spreads: $70 collected, $430 at risk.
Then XYZ reports bad news. It falls to $35 and stays there into expiry.
| XYZ at expiry | Trader A: 1 cash-secured put | Trader B: 10 put spreads | Trader C: 1 put spread |
|---|---|---|---|
| $52 | Put expires: +$100 | All expire: +$700 | Expires: +$70 |
| $44 | Assigned at $45; −$100, +$100: $0 | Each spread worth $1: −$300 | −$30 |
| $42 | Assigned; −$300, +$100: −$200 | Each worth $3: −$2,300 | −$230 |
| $38 | Assigned; −$700, +$100: −$600 | Max loss: −$4,300 | −$430 |
| $35 | Assigned; −$1,000, +$100: −$900 | Max loss: −$4,300 | −$430 |
Look at the $35 row.
Trader A is down $900 on paper. They own 100 shares of XYZ at a cost of $44. They can hold, sell calls, or wait.
Trader B is down $4,300. That's almost the whole account. There are no shares to sell calls on. The "defined risk" was defined at nearly 100% of the cash.
And look at the $42 row. A fall of only $8 already cost Trader B $2,300. Ten spreads turn a small move into a large loss very fast.
Defined risk is not small risk. A spread caps the loss per trade. The total is the cap times how many you sell. Trader C, with one spread, risks less than Trader A. Trader B risks almost five times more.
Why spreads tempt you to size up
A cash-secured put shows you the real exposure every time: $4,500 tied up for one trade. It's hard to forget.
A spread shows a small number: $430. Your account says you have room for ten more. Each looks harmless. Together, they make a bet that the stock won't fall more than a few dollars.
The wheel's cash rule is clumsy, but it does one useful thing. It stops you from selling more than you could pay for.
When credit spreads make sense
Spreads aren't bad. They're a tool with a different job:
- You don't want to own the stock, only to bet it stays above a level.
- The stock is too pricey to secure with cash, and you size the spread like one cash-secured put.
- You accept a small, capped loss in exchange for not owning shares after a crash.
The honest way to size a spread is by its max loss. If you'd only risk $500 on one idea, that's one spread, not ten.
Which fits you?
- Want to own the stock if it falls? The wheel fits. A loss leaves you with shares.
- Never want the shares? A spread fits, sized by its max loss.
- Picking spreads because the cash is smaller? Stop and add up the max loss of every spread you'd open.
In Canada, spreads are often limited in a TFSA or RRSP; covered calls are widely allowed, and cash-secured puts depend on the broker. Options permissions differ by broker. Our cash-secured put guide walks through every outcome of the wheel's first step.
Questions
Are credit spreads less risky than cash-secured puts?
Not by themselves. One spread risks less than one cash-secured put. But with the same cash, you can sell many spreads, and then the total loss can be far larger.
What happens to a put spread if the stock falls below both strikes?
Both puts are in the money. Your loss is the width of the spread minus the credit, and it stops there. Most traders close it before expiry rather than handle assignment on both legs.
Can I wheel with spreads?
Not in the usual way. The wheel needs you to take the shares and sell calls on them. A spread is built to avoid owning shares, so there's nothing to wheel after a loss.
How many spreads should I sell?
Add up the max loss of every spread you'd open. If that total would hurt you, sell fewer.
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