The wheel options strategy is one of the most popular methods for generating consistent income in the stock market. It’s a favorite among retail traders because it’s relatively simple, involves selling options (which benefits from time decay), and can be applied to stocks you’re bullish on.

In this interview, Canadian retail trader Levi Woods explains his unique twist to the wheel options strategy.

Watch how Levi Woods trades the wheel options strategy

The video was produced with Streamyard – an easy-to-use and amazing tool for live streaming and recording.

Experienced retail trader from Canada

Levi Woods is a seasoned retail trader with over two decades of experience in the stock market. He started trading in 1996—back when trades were made over the phone! Since 2014, he has focused on options trading, mastering strategies like the wheel, covered calls, and more complex techniques.

Levi is also the founder of Drawbridge Finance, where he teaches traders how to simplify their strategies and achieve consistent returns. He also regularly publishes new videos on his YouTube channel.

The traditional wheel options strategy

Before diving into Levi’s twist, let’s recap how the traditional wheel options strategy works. It typically involves three phases:

1. Selling a cash-secured put: You sell an out-of-the-money put option, collecting premium upfront. If the stock stays above the strike price, you keep the premium and repeat the process.
2. Assignment and owning shares: If the stock falls below the strike price, you’re assigned the shares. Now, you own the stock and move to the next phase.
3. Selling covered calls: You sell a call option against your shares. If the stock rises above the call’s strike price, your shares are called away, and you start over. If not, you keep the premium and sell another call.

While effective, this approach does have some disadvantages, which Levi tries to address in his version of the wheel options strategy.

Levi’s twist: The never-ending wheel

Levi says his modified wheel strategy simplifies the process and reduces costs. Let’s call it the never-ending wheel.

Here’s how it works:

• Step 1: Buy shares and sell In The Money calls: Instead of selling cash-secured puts, Levi buys shares outright and sells in the money covered calls. This creates a synthetic short put position, mimicking the first phase of the wheel.
• Step 2: Roll calls to lock in profits: When the extrinsic value of the call drops to near zero, Levi rolls the call to the next month, locking in profits and avoiding assignment. He may change to both in the money calls and out of the money calls, depending on the price action.
• Step 3: Build a long-term portfolio: Levi focuses on stocks or ETFs he wants to hold long-term. By reinvesting premiums into more shares, he grows his portfolio over time.

A core feature of Levi’s modified wheel options strategy is that he plans to never get assigned the shares, hence “the never-ending wheel”. Rather, his goal is to use the strategy to build up his portfolio of shares over time. He reinvests collected premiums into new shares when he sees a good opportunity.

Owning the shares + ITM covered call = short put

Levi replaces selling cash-secured puts with owning the shares and selling in the money calls. To understand why, we need to realize that owning the shares and selling calls against them has the same profit profile as selling a put.

Here is an example with two positions on SPY, illustrated by OptionStrat. The current price in both cases is $953.88.

Graph 1 shows the profit/loss curve at expiration for a short put at 585 with 30 days to expiration.

Graph 2 shows the profit/loss curve for owning 100 shares and a short call at 585 with 30 days to expiration.

As you can see, the profit/loss curves are more or less identical. This fact is the basis for Levi’s way of trading the wheel.

Management of the wheel options strategy

Levi explains how he manages his trades in the video interview. Please watch the full interview if you are interested in the details.

Key benefits of Levi’s strategy

According to Levi, these are some of the advantages with his way of trading the wheel.

• Lower fees: By avoiding cash-secured puts, Levi reduces trading costs, which is especially important for Canadian traders with high brokerage fees.
• Minimal assignment risk: Selling in-the-money calls and rolling them before expiration significantly reduces the chance of assignment. This helps Levi reach his goal of growing his position in the shares.
• Hands-off trading: In one of the underlying, Levi only trades 12 times a year, making the strategy great for busy traders.
• Consistent income: With a target of 20% annual returns, the strategy is designed to generate reliable cash flow.

Would you like to know more? Levi Woods has written a summary of his never-ending wheel strategy.