The wheel is a recurring income cycle: selling a cash-secured put collects premium; if the stock is assigned, selling covered calls against the shares collects more premium; if the shares are called away, the cycle restarts. Its discipline lives in two rules: only running it on stocks worth owning at the strike, and never selling a call below the shares' cost basis.
Modeled as a state machine, the wheel has five states: watchlist (eligible, no position), short put open, shares held after assignment, covered call open, and realized (called away, cycle complete). Each transition is an explicit event, assignment, expiration, or an early close, which makes the whole book auditable: every position is in exactly one state, and premium collected in each state accumulates into the cycle's realized outcome. Options Scanner models the lifecycle this way and asks the user to confirm each transition its broker-reconcile detects rather than committing state changes automatically.
The put seller reserves the full cash to buy 100 shares per contract at the strike. That reservation converts assignment from a margin emergency into the planned acquisition of a stock at a chosen price. The common strike convention targets around 0.25 delta inside a 30-45 DTE window, implying roughly one-in-four odds of taking assignment on each cycle; willingness to own the stock at that strike is the entry criterion that no amount of premium overrides.
After assignment, selling a call below the shares' cost basis locks in a loss if the shares get called away: the premium collected is small and certain, the capital loss is larger and locked in on assignment. The floor rule, no call strikes below recorded cost basis, removes the temptation to harvest rich premium at strikes that convert a paper drawdown into a realized one. When a stock has fallen far below basis, the honest options are holding, or closing the shares as a stock decision, not disguising the exit as income.
A roll evaluation fires when spot approaches or crosses the short strike with expiration near, typically inside two weeks. Rolling out in time, and sometimes down or up in strike, collects additional premium for extending the position's runway. In the final days before expiration the math usually favors letting the state machine advance, taking assignment or letting the call expire, rather than paying wide quotes to defer an outcome the structure was designed to accept.
A cash-secured put reserves cash for the full assignment: the strike times one hundred shares per contract. On a $50 strike that is $5,000 held aside per contract, whether or not assignment happens. Sizing arithmetic for the wheel therefore starts from the strike, not from the premium.
The position holds one hundred shares per contract at an effective basis of strike minus premium, and the covered calls sold against them collect further premium but do not stop the share loss. The structure's real risk is the stock itself, which is why wheel disciplines describe it as a strategy for names the trader is prepared to hold through a drawdown.
It still functions mechanically, but the premium collected per cycle shrinks with implied volatility while the capital reserved stays the same. The yield on reserved capital is volatility-dependent, and rule sets often measure it at entry rather than assuming last year's premium levels.