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Traders and investors love how the wheel option strategy offers you a road to long-term passive income. Find out how to execute it with our simplified guide.

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The wheel strategy (a.k.a "options wheel strategy") is a two-step "Buy Low-Sell High" income strategy used by stock options traders who sell cash-secured puts and covered calls in order to receive stock at a discount, and then sell at an above-market price. With just a few small adjustments, crypto traders can also benefit from this strategy.

An investor continually sells (writes) Out-of-The-Money (OTM) cash-secured puts to collect option premium.

If at the predetermined expiration date the option expires worthless, the writer keeps all the premium — repeating the process until a put eventually expires In-The-Money (ITM).

A put option expiring in-the-money (ITM) exercises automatically.

Unlike traditional equity options where a physical transfer of ownership takes place when exercising an option contract — Bybit's USDC crypto options are "cash-settled". Here, no position transfer takes place. Instead, the option seller's account is credited or debited to the associated cash (

The option contract expires at a settlement price of $19,000 and the seller's account receives a credit of +$1,000 USDC (

Strike Price - Settlement Price + Premium Received

At this point, the option seller enters the market and purchases one BTC, before moving to step 2 of the wheel strategy.

Now holding the underlying crypto asset, the investor sells out-of-the-money (covered) calls to generate a consistent income.

When a call option eventually expires in-the-money — there are two available options:

Sell the underlying crypto asset and return to Step 1 selling cash secured puts.

Keep the underlying asset and continue selling covered calls to generate income.

The most important factor when using the wheel strategy is ensuring your trading account has enough capital to cover the difference between the strike price and the settlement price if the option expires in-the-money. Here, the account balance guarantees the short put is "cash-secured".

Selling a put option is a high-risk strategy with limited upside (collected premium) and significant potential downside — the difference between the strike price and the settlement price, minus the premium received.

For this reason, the chosen strike price should represent a level you are happy to open a long-term position in the underlying asset.

When deciding which put option to sell, there are two main considerations:

If the goal is for the option to expire worthless (collect premium), selling a put with a strike price way below the current market price works better - the lower the strike price, the less chance the option will expire in-the-money. The trade-off is that option premiums decrease the further out-of-the money you go.

If the aim is acquiring the underlying crypto asset, choose a higher strike price you believe will expire in-the-money — ideally not by too much as to offset the amount of premium received.

Before deciding which maturity (expiration date) to sell, consider how the option premium changes over time. All options lose value (time decay) as the expiration date draws near. We can measure exactly how much value an option will lose by using Theta.

Theta is an options Greek measuring the rate an option premium declines over time - as an option moves closer to expiry, time decay speeds up — at expiration the option has zero time value.

A handy way to visualize theta is to imagine a snowball rolling down a mountain. At the top of the mountain, the snowball is small and moving slowly. As it rolls further down the mountain, it speeds up, growing larger along the way, until it reaches the bottom (expiration).

An option with a theta of -0.50 will lose $0.50 each day whereas an option with a theta of -2.00 will lose $2.00 per day. Theta is always represented as negative as it always has a negative effect on an option's price.

Theta is highest for At-The-Money (ATM) options (the strike price is equal to the current price of the underlying asset) decreasing when a strike price moves further into-the-money or out-of-the-money.

For best results, selling near-dated puts with between 30-40 (DTE) offers a good way to maximize time decay whilst not being tied to a less flexible longer-term contract.

In the same way the account balance "secures" the short put, the underlying asset provides the "cover" for the short call. For this reason, you must hold the underlying crypto asset while the short call contract is active.

When choosing which strike price to sell, consider the same factors used to determine which put to sell:

Similar to the put, selling a near-dated call option with between 30-40 DTE offers a good mix of value and flexibility.

Another useful metric to help decide which strike prices will work best when using the wheel options strategy is Delta.

Delta is the amount an option premium changes for every $1.0o change in the underlying asset. Call options have a positive delta ranging between 0 and 1 - whereas put options carry a negative delta ranging between -1 and 0.

For call options, the delta tells us how much the price will rise when the underlying asset ticks higher by $1.00 and how much the price will drop when the underlying asset drops by $1.00. This works in reverse for put options, which lose value when the underlying asset rises, and gain when the underlying assets fall.

Typically, an at-the-money call option will have a delta of - or close to 0.50, meaning the premium will +/- $0.50 for every $1.00 move in the underlying price.

Delta decreases as a call option moves further out-of-the-money (higher than the current market price), and increases when a call option moves deeper into-the-money (lower) — the opposite is true for put options.

Delta is simply the options markets' way of telling us the odds of a strike price expiring in-the-money.

All things equal, an at-the-money option has a 50% chance of expiring in-the-money, and thus is a 50/50 bet - whereas a 0.20/-0.20 delta has a 20% chance of expiring in-the-money.

Higher Delta = Higher chance of expiring ITM.

Lower Delta= Lower chance of expiring ITM.

The wheel option strategy is suitable for investors with a good working knowledge of options trading.

Because crypto options are cash-settled, traders must always remember to acquire the underlying asset when a short put expires in-the-money and sell (if that's the aim) when a short call expires in-the-money. For this reason, the wheel option strategy is best suited to more experienced options traders.

Sideways trending markets with wide trading ranges and clearly defined support and resistance levels (round numbers are often best) works great for the wheel strategy, giving you several ways to yield positive returns:

The below chart shows how you can profit from the wheel strategy:

The breakeven point is the price at which an options strategy is neither making nor losing money. Because the wheel strategy has lots of moving parts, we can't pinpoint a specific breakeven point - instead, we must look at each individual component to work out their respective breakeven points.

The breakeven point when selling a cash-secured put is when it expires in-the-money (below the strike price) equal to the amount of premium received.

Here, the breakeven for the put writer is $18,000. If the put expires at $18,000 their account is debited -$2,000 (

Because the wheel strategy involves acquiring an underlying asset and then selling calls against it, we must also factor in the price of acquiring the underlying asset into our calculation.

Typically, the option seller buys the underlying crypto asset when the put option expires. Choosing not to can impact profitability in three ways:

The writer purchases the underlying asset at the same level as the settlement price:

Settlement Price of $18,000 - Purchase Price of $18,000 - no change

The option writer purchases the underlying asset below the settlement price:

Settlement price of $18,000 - Purchase price $16,000 — a saving of $2,000.

The writer purchases the underlying asset above the settlement price:

Settlement Price of $18,000 - Purchase Price of $20,000 — a loss of $2,000.

Note: To reduce risk you should purchase the underlying asset immediately if the short put option expires ITM.

We can work out the breakeven point for a covered call by calculating at which point the premium no longer offsets a drop in the underlying asset when the option expires.

Assuming an investor acquires one BTC at $20,000, then sells an out-of-the money call option, collecting a $2,000 premium, the breakeven point is $18,000. Here, the $2,000 premium offsets the $2000 drop in the underlying asset.

The sweet spot of an options strategy refers to the optimal price at the expiration date. Just as a wheel options strategy has more than one breakeven point, it also has several sweet spots:

When selling a cash-secured put, the ideal settlement price is when the underlying is equal to the strike price. Here, the option expires worthless and the seller keeps the premium.

Similar to the cash-secured put, the sweet spot for a short covered call is when the option expires at-the-money (expires worthless). The seller keeps the premium, and assuming the call was out-of-the-money when sold, the value of the underlying asset will be higher.

One of the main advantages of trading options is their flexibility. Unlike trading spot or perpetual futures where the only choice is whether to keep the position open or close it, options traders have several ways to adjust their position during adverse market conditions.

Let's assume BTC is trading at $22,000 and an investor sells one BTC $20,000 put option with 40 days-to-expiry and receives a $2,000 premium, believing the price will be close to $20,000 at expiry.

Half way through the contract, now with 20 days-to-expiry, the investor becomes more bearish, believing BTC may trade down to $18,000 before the option's expiration date.

The underlying price has dropped $500 to $21,500 and the option premium is still $2,000 (the time-decay has offset the negative price movement of the underlying).

Here are some ways they can adjust the position to reflect their new, more bearish outlook:

Because the wheel strategy is multi-faceted, in theory, there are several ways for it to play out at maximum profitably:

To understand the potential losses when trading the wheel strategy, we need to break it down into two parts:

Wheel Strategy: A Long-Term Strategy For Consistent Income

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