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Wheel strategy terms, explained in one page

The wheel uses about twenty words over and over. Here is each one in a single plain line, grouped by when you meet it, then the main ones at work on one trade.

Options guide · 6-minute read · Updated 2026-10-26

The three words that name the strategy

The wheel strategy is two trades taken in turn. These three words describe it:

• The wheel: sell puts until you get the shares, then sell calls until they are sold, then start again.
• Cash-secured put: you sell a put and keep enough cash to buy 100 shares at the strike.
• Covered call: you own 100 shares and sell a call that lets someone buy them at the strike.

The parts of every option

• Option premium: the price the buyer pays you when you sell an option. Quoted per share; one contract is 100 shares.
• Strike price: the price at which the shares change hands if the option is used.
• Expiration date: the last day the option exists.
• Days to expiration (DTE): how many days are left until that date.
• Options chain: the table on your broker that lists every strike and date, with their prices.

Opening, closing and assignment

• Sell to open: the order that starts a trade where you are the seller.
• Buy to close: the order that ends that trade early by buying the option back.
• Expire worthless: the option ends with no value, and you keep the full premium.
• Assignment: the buyer uses the option, so you must buy (put) or sell (call) the shares at the strike.
• Early assignment: assignment before the expiration date. US stock options allow it.
• Rolling: closing an option and opening a new one at another date or strike, in one order.

The numbers you track

• Collateral: the cash or shares your broker holds to back the option you sold.
• Cost basis: what your shares really cost you, after the premiums you've collected.
• Break-even price: the stock price where the whole trade is neither up nor down.
• Delta: how much the option's price moves when the stock moves $1. Often read as a rough chance of finishing in the money.
• Theta: how much value the option loses each day from time passing. Sellers want this.
• Implied volatility: how big a move the market is pricing in. Higher means bigger premiums and bigger risk.

The words at work on one trade (an illustration, not a trade idea)

A made-up stock, XYZ, trades at $50. You sell to open one 30 DTE put at a $45 strike. The premium is $1.00, so you collect $100. Your collateral is $4,500 in cash.

The stock falls. At expiration, XYZ is $42. You get assignment: you buy 100 shares at $45. Your cost basis is $44, which is also your break-even on the shares.

As XYZ fell toward the strike, delta grew, so the put lost more for each dollar of drop. Implied volatility often rises in a fall, which lifts the put's price too. Theta kept working for you the whole time, just not fast enough to cover the drop.

Questions