The Options Wheel Strategy

The Options Wheel

Note that When it comes to The Options Wheel Strategy, People refers to many variation. This variation discusses the most simplest one which tells to rotate the wheel for one time only. 

Step 1: Choosing the Correct Stock For Options Wheel

Although our suitable candidate for discussion is SunTV. Let’s discuss this with BankNIFTY.

In Part 3, You learned Your first step which is “Picking a stock or index”.
Also, Only pick a stock that you are bullish on, or think will rise in the long term.

We are discussing parts that are like “digestible chunks” before We come to the main part. In Theta, We used to do – Slow Turtle

Sales growth 5Years < 10 AND

Market Capitalization > 50000 AND

Average return on equity 5Years >15 AND

Price to Earning >10

Apart from these stocks, We add indexes like “NIFTY” and “BankNIFTY”. Now, if any of these above stocks come into the “High IVP” scanner too, then that’s it. We jump the ship.
Step 2: Sell a Cash Covered Put

First, We shall discuss the strike price. 

There are three rules – 

  • Rule 1: Your premium should be at least 1% of the stock’s price.
  • Rule 2: Wait for a “down” day.
  • Rule 3: Check the illiquidity of the Strikes
We shall talk about these rules in a detailed manner. We shall discuss the “Cash Covered” Part while discussing the Rule 2.


Rule 1: Your premium should be at least 1% of the stock’s price.

Rule 2: Wait for a “down” day.

  • You will only sell the puts on a down day!
  • The IV will matter significantly if it is a down day.
  • The Price of Premium will be high on that day.

Always remember, You know IV is high because the option’s price is high. Not the other way around.
The more the fear of fall, the more the premium price, the more the IV.

Confusion Alert: So, if We talk Price of options will be high because of IV. It is a wrong statement but You will pardon it because that’s the norm.

One of the other primary reasons to hate to start this strategy on a day when the market goes up too high, the difference between the premium of the futures and the spot gets more high.

Also, As You are going to sell put options, You profitability is limited too. What if the scrip rises 10% ?

Anyways, Let’s do with Biocon – 

The lot size of Biocon is 2300.

Cash Needed for buying 2300 Biocon shares = 2300*382.5 = 879750

Note – By “Cash Covered Put”, It is meant that You should be able to take the delivery of the shares if the breakeven of the Put options is breached. So, It will need minimum 9L of margin. 

Let’s find our strategy reverse-wise from Rule 1: Your premium should be at least 1% of the stock’s price.

1% = 8797.50

Assuming 20% cost of brokerage and slippage, let’s make it 1.2%

1.2% = 10557

Let’s have a look at the Biocon on the NSE website.

And find the PE strike price which has a premium of 10557. It will be priced at 10557/2300=4.59


  • We are supposed to make 1.2% in a month.
  • Today is 22/5.
  • Expiry will be just after 4 days. (Mon, Tue, Wed, Thu)

So, select the next month’s expiry

Rule 3: Check the illiquidity of the Strikes.

  • Now We have to choose a strike price with more premium than 4.59
  • The strike price that has more premium than 4.59 is 365. We can see from the bid and ask of 365PE next month’s Biocon that it is illiquid.
  • So, We are choosing the strike price of 370.

Here is an illustration with Biocon June Puts and their Bid and Ask that will show you clearly the case of illiquidity –

Step 3: Case A - When there is Profit

Anyways, We can tweak with Rule 1.


  • A lower strike price will result in lower risk, but a lower premium.
  • A higher strike price will result in higher risk, but a higher premium.

Step 3: Repeat until Loss (edited)

If the option expires worthless, Repeat the same thing in the next month.

But, there are a few complications in the Indian Stock Market as We write this article.

  • We have something called ” Margin Expansion” and “Physical Delivery”.
  • We need to close the options before the Margin expands.
    • If our net profit is more than 1% post charges, We do not do anything and follow the method in the next expiry.
    • If our net profit is less than 1% post charges, You consider that premium in the next month’s strike selection.


Now, Do you understand What do I mean by “Considering that premium in the next month’s strike selection?”

Step 3: Case B - When there is Loss

What if the option does not expire worthlessly and ends in unlimited loss? This will become tricky and mathematical next.

Let’s look at a theoretical example to see exactly how the strategy works when the option does not expire worthlessly.

  • So far, We have sold 370PE at 7.6.
  • Our Account value should be more than 2300*382.5=879750.
  • Our Trade took margin of 190448.05 so far.
  • More than 689301.95 INR margin should be blank in the account.

Let’s assume Biocon ended in 360.6 in the June expiry. In this case, there are two ways –

  • If We wait for Physical Delivery, In India, It takes around 6 days minimum (give or take) for those shares to reflect in the account.
    If We close before margin expansion, We take a hit of losses as it will be near ATM or ITM (because – We assumed Biocon will end below our strike. So, We are assuming it is falling too.)
  • Now, We are not waiting for physical delivery. So, If we exit, Let’s understand how the price behaves near the expiry for ATM, near OTM, and ITM options.

If We see Biocon May 390PE at 8.75 while Biocon trading at 382.5. It is quite good to exit because the breakeven of the 390PE here is 390-8.75=381.25

So if we hold till expiry and Biocon stays at it is where We will gain 382.5-381.25 = 1.25.

2875 INR in 879750 INR is approximately 0.33%. It is insignificant.

If it is insignificant, You can add this premium to the next month’s strike’s premium i.e. choose the next month’s strike with 1.25 more premium in it.

If it is significant, it is time to “turn the wheels”.

Step 4: Construct the Covered Call

Now, it will look complicated if We discuss the “turn the wheels” part of this strategy factoring in the “early exit” in options before the margin expansion.

So, Let’s assume, Biocon ended in 360.6 in the June expiry.

  • We had sold 370PE at 7.6.
  • The Breakeven of that was 370-7.6=362.4.
  • We will end up getting 2300 shares of Biocon in 362.4.

Our Net Loss right now is (362.4-360.6) = 1.8 points which translate to 1.8*2300 = 4140 INR. Right?

Now, Let’s “turn the wheels”.

Time to sell a call option and make it a covered call. 

Now, Note – The cost of a covered call is considered free because You will get the margin by pledging the shares.

Even with its worst haircut, if the stock is selected from our stock selection criteria, the haircut will be good. (Haircut = Term used for pledge system. Dabur has a 20% haircut means if You have 100 INR worth shares of Dabur, You will get 80 INR instantly the moment You pledge it.)

  • Now, the question is simple. Which strike price?
  • Answer -> Sell any strike above your breakeven point.

Your breakeven point is 362.4.

Sell 370CE or Sell 380CE or Sell 390CE.

For a more methodological way, You can see if the premium of that strike is more than 1% like You were checking while selling put options. 

  • It just adds one more condition to check if it is above your breakeven point.
  • You can keep pocketing this premium every time one of your contracts expires worthlessly.

Now if the stock is consolidating in the same place for a long time, it will be awesome. Like, As We are speaking, ITC is more or less being traded at 200 and has not been impacted in the stock market crash induced by Corona Virus.

There are even memes coming out – 

It will work wonders in cases of stocks like this.

Also, in the selection of covered calls, We can summarize choosing the strike price like –

Select the strike price –

  • Which is above your BEP.
  • Which has
    1. More premium than your current loss. OR,
    2. More premium than 1% of the net value of the stocks. OR,
    3. POP > 70% per the definition of Delta OR,
    4. POP > 70% per the definition of Standard Deviation

Now, With each profitable iteration of the “Covered Call” setup, Our BEP decreases! (We are not referring to the Break-Even Point of Covered Call but the whole system itself.)

Suppose We had sold 380CE at 5 and it became 0. Our breakeven point is reduced from 362.4 to (362.4-5) = 357.4.

So, Summarizing –

Step 1: Picking a stock or Index
Step 2: Sell a Cash Covered Put
Step 3: Repeat until Loss
Step 4: Construct the Covered Call

Step 5: "Turn the Wheel"

The moment You come to profit by doing this covered call method which is –

  • Hitting the BEP in Call options in Covered Call. Or,
  • Hitting the BEP by Eating premiums of Call options in Covered Call.

Congratulations, You have turned the wheel.

Just Jump back to the First Step and Sell Put again.

Premium on Futures Price
  • In the case of Indexes like NIFTY and BankNIFTY, We have spots like NIFTYBEES and BANKBEES.
  • You can also buy futures of the stocks, instead of buying the spots.
  • If you buy the futures of the stocks, it will have a premium which you need to consider as an interest cost.

Cash Needed for buying 2300 Biocon shares = 2300*382.5 = 879750

Margin needed to buy Biocon June Future @ 386.1 is 238288.05. You can see that here – 

The premium of Biocon June Future
= 386.1-382.5
= 3.6 points ~ 2300*3.6
= 8280 INR

8280 INR is sort of interest for 1 month for 879750 - 238288.05=641461.95 INR right?

That’s roughly 1.29% per month.

The Devil is in the details.

Construction of Synthetic Futures

Now, Let’s construct this – 

  • Sell 380PE at 11.4
  • Buy 380CE at 17.1
You can see in this Payoff graph that – It is equivalent to buy June futures at 380+17.1-11.4=385.7

Option Payoff Graph

You should be aware of “Premium of Futures” and “Synthetic Futures Construction” because sometimes You may get a sweet deal from the devil too. Right?