The Wheel is one of the most popular options trading strategies. But according to Dan Passarelli, understanding the basic mechanics is not enough. Successful wheel trading requires clear objectives, careful calculations, systematic trade management, and the right mindset.
Learn how Dan Passarelli trades the Wheel strategy
Dan Passarelli
Dan Passarelli is a former market maker at the Chicago Board Options Exchange (CBOE), where he started his career in 1993. He later became an options educator and founded Market Taker Mentoring. He is also the author of several books, including Build Consistent Wealth with Options, which focuses on his approach to covered calls and cash-secured puts.
- Dan Passarelli’s books about options trading
- Build Consistent Wealth with Options
- Trading Option Greeks
- The Market Taker’s Edge
The Wheel strategy: simple in theory, harder in practice
The traditional wheel strategy involves alternating between two options trades:
- Cash-secured puts: Sell puts to collect premium, with enough cash available to purchase the shares if assigned.
- Covered calls: Once you own the shares, sell calls against them to collect additional premium, potentially selling the shares through assignment.
The process repeats, generating options premium along the way.
But Dan believes many traders approach the strategy without a clear plan. They pick a stock, choose a strike and expiration, and hope for the best.
When the stock moves against them, they become frustrated or abandon the strategy.
- Other videos about the Wheel
- Paul Gundersen: The Wheel strategy
- Paul Gundersen: The Wheel Strategy Masterclass
- Levi Woods: The Wheel strategy with a twist
- Karl Domm: The Safe Wheel strategy
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Two objectives: skate or trade
Before entering a Wheel trade, Dan decides what he wants to achieve. He distinguishes between two objectives, which he calls “skate” and “trade.”
Skate – generating income: The objective is simply to collect options premium without getting assigned. He sells a cash-secured put or covered call, hoping to keep the premium without buying or selling shares.
Trade – building and managing a long-term stock portfolio: Here, the option is a tool for investing. He sells cash-secured puts when he wants to acquire shares at an attractive price, or covered calls when he wants to sell shares that have become too expensive. The option premium provides additional income while he waits for his target price.
Dan estimates that he actually wants assignment in 40–50% of his Wheel trades.
This distinction is fundamental to his approach. It determines which stocks he selects, how he chooses strikes, and how he manages positions when the market moves against him.
Most importantly, it changes the psychology: If your objective is to acquire shares at $135, getting assigned at that price means your plan has worked—not that your trade has failed.
Why Dan doesn’t select strikes by delta
One of Dan’s more controversial views concerns strike selection.
Many options traders use delta as their primary guide. They might consistently sell puts at 20 or 30 delta, for example.
Dan rejects that approach.
He argues that the options pricing model does not give one particular delta an inherent mathematical advantage over another.
Instead, he bases strike selection on his trading objective.
For skate trades, he primarily uses technical analysis, including support and resistance levels, RSI, and his proprietary PAS bands indicator.
For trade trades, he focuses more on fundamental analysis and stock valuation. He considers metrics such as P/E ratios, price-to-book ratios, and discounted cash flow models to identify attractive buying or selling prices.
He also combines technical and fundamental analysis when appropriate.
As a result, Dan sometimes sells at-the-money or even in-the-money options instead of automatically choosing far-out-of-the-money strikes.
Choosing expiration dates and calculating returns
Dan doesn’t follow a fixed rule for days to expiration either.
Instead, he compares opportunities using implied volatility, theta, and the premium available at different expiration dates.
One technique involves dividing an option’s premium by the number of days until expiration to compare average daily time decay.
He also calculates what he calls the skate yield.
For a cash-secured put, he divides the premium received by the strike price and annualizes the result.
This helps him compare different options trades and evaluate whether their potential returns justify the risks.
The objective is not simply to collect the largest premium, but to find a trade that makes mathematical sense.
The cycle-recycle approach to managing trades
A central concept in Dan’s approach is what he calls cycle-recycle trading.
Rather than treating every option transaction as an independent trade, he tracks a longer sequence of positions.
A cycle ends when he has locked in a net profit. If an option moves against him, he may roll it rather than immediately accepting the loss.
He uses two specific rolling techniques.
The net zero roll: He buys back an option and sells another at a different strike or expiration, collecting approximately the same premium he pays to close the original position. This extends the trade without changing its accumulated net credit.
The premium gambit roll: He aims to close the original option at its initial selling price, effectively canceling that transaction, before selling another option.
Dan emphasizes the importance of tracking all premiums and adjustments to understand the profitability of the complete trading cycle.
Of course, rolling does not eliminate risk. He acknowledges that some positions eventually require accepting a loss.
Why he doesn’t always wait until expiration
Dan typically places a good-till-canceled buy-to-close order immediately after opening a position.
For liquid options, his target is often three cents. For less liquid options, he typically uses five cents.
The objective is to lock in profits and move on to another opportunity.
He explains that collecting 80% of the available profit in just 20% of the planned holding period can significantly improve annualized returns compared with waiting until expiration.
This is another example of how he uses calculations rather than fixed rules to manage the wheel strategy.
The missing 15% of wheel trading
Toward the end of the interview, Dan makes an interesting observation.
He suggests that conventional explanations of the wheel strategy get traders about 85% of the way there.
The remaining 15% consists of the details: setting objectives, selecting appropriate strikes, calculating returns, managing losing positions, and maintaining the right psychology.
He argues those details can make a profound difference.
His overall philosophy is to treat the wheel not as a collection of individual options trades, but as a systematic, long-term investment process.
