The cryptocurrency world is incredibly exciting, but let's face reality—active trading and market speculation can be stressful, especially for beginners. Fortunately, the wheel strategy offers crypto traders a sigh of relief. This two-step options strategy allows crypto options traders to reduce direct involvement and shift to a more passive approach.
It's no surprise that the wheel strategy is favored by both seasoned options traders and newcomers exploring options strategies. Want to add this two-step options strategy to your trading toolkit? From explaining the wheel strategy to its pros and cons, here’s everything you need to know to learn and master the crypto options wheel strategy.
What Is the Wheel Options Strategy?
The wheel strategy is a two-step options strategy composed of two separate options strategies: cash-secured puts and covered calls. When combined, the wheel creates a robust cyclical options strategy often used by traders to generate a steady income stream over time.
By creating put and call options contracts, traders profit from the associated premiums, regardless of the underlying asset's price movements. Thus, you’ll typically enjoy the full impact of the wheel strategy in sideways markets, where prices trade within a specific range.
Understanding Calls, Puts, and Options Premiums
Let’s dive deeper by clarifying the two key options types:
- Call Options: A call option grants the buyer the right to purchase a specific amount of crypto at a predetermined strike price before expiration. As the call seller, you collect a premium for granting this right. If the crypto’s price exceeds the strike price before expiration, you may have to sell the crypto at the strike price.
- Put Options: A put option grants the buyer the right to sell a specific amount of crypto at a predetermined price before expiration. As the put seller, you collect a premium for this right. If the crypto’s price falls below the strike price before expiration, you may be obligated to buy the asset at the strike price.
Now that you grasp these terms, let’s explore how a typical wheel strategy works.
How the Wheel Strategy Works: A Step-by-Step Breakdown
Selling Cash-Secured Puts
As mentioned, the wheel strategy consists of two main phases. The first step involves selling cash-secured puts, earning you a premium. If the price drops below the strike price before expiration, you’ll be assigned the crypto at the preset price, using funds you’ve reserved earlier. This happens because the put contract is now in-the-money (ITM), allowing you to buy the asset at a discount.
Selling Covered Calls
Owning the underlying asset now lets you enter the second phase of the wheel strategy. Here, you can sell covered calls, granting buyers the right to purchase your crypto at a specific price upon expiration. By selling covered calls, you collect another premium while agreeing to sell your holdings at the call’s strike price. Note that covered calls limit your upside potential if the crypto’s price surges above the strike price.
For a deeper dive, here’s a step-by-step guide illustrating the wheel strategy with Ethereum (ETH).
Setting Up the Wheel Strategy: A Practical Example
| # | Step |
|---|---|
| 1 | Select a base crypto asset (e.g., ETH). |
| 2 | Sell cash-secured puts. If OTM: Repeat. If ITM: Proceed to covered calls. |
| 3 | Sell covered calls. If OTM: Repeat. If ITM: Unlock capital for new puts. |
Step 1: Choose a Base Crypto Asset
Stick to reputable cryptos you’re comfortable holding long-term, as market volatility may force prolonged ownership.
Step 2: Sell Cash-Secured Puts
Example: Sell a put for ETH at a discount. If ETH stays above the strike price (OTM), repeat. If it drops (ITM), you’re assigned ETH at the strike price.
Step 3: Sell Covered Calls
With ETH now held, sell calls. If OTM: Keep ETH and premium. If ITM: Sell ETH at the strike price and recycle capital into new puts.
Benefits of the Wheel Strategy
- Passive income potential via recurring premiums.
- Lower risk compared to active trading.
- Educational value for mastering options trading.
Risks to Consider
- Market volatility can lead to unexpected assignments.
- Potential losses if prices move unfavorably.
- Greek metrics (e.g., Delta, Theta) require understanding for advanced use.
FAQs
1. Is the wheel strategy suitable for beginners?
Yes, its structured approach makes it beginner-friendly.
2. What’s the ideal market condition for the wheel?
Sideways or slightly bullish markets.
3. How much capital do I need?
Enough to cover the put’s strike price and potential assignments.
👉 Start trading crypto options today
Final Thoughts
The wheel strategy offers a systematic way to earn passive income in crypto, balancing risk and reward. Always manage risk and start small.
👉 Explore advanced options strategies
This content is for informational purposes only and does not constitute financial advice. Trading crypto involves risk.
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