Alpha Algo Trader

The wheel, explained

How the cost basis comes down

The mechanism that turns a losing position into a profitable one without needing the stock to recover.

Written from a live book — day 54, 157 fills posted.

Every credit you collect while holding shares is subtracted from what those shares effectively cost you. Do that weekly and the basis falls on a schedule, whatever the stock does.

What that looked like on one position

$120.77
basis at first assignment
$116.92
after a second put was assigned
$111.55
after weeks of calls

Three things drove it down: a second put sold below the market and assigned, covered calls sold against the shares and bought back cheaper, and those calls rolled down when the stock fell and up again when it recovered. None of it required predicting anything.

The stock did not have to climb back to where the trade started. The basis came down to meet it.

The trade-off, stated honestly

Selling calls against shares caps the upside. If the stock gaps far above your call strike, you leave money on the table. That is the price of getting paid to wait, and it is a price worth paying on positions you entered because you were prepared to own them — not because you were predicting a rally.

This is not theory.

The algo runs this every trading day and every fill is posted publicly — wins and losses, updated hourly, on a paper account.

See the live book Try it free for 30 days

The wheel, lesson by lesson

01Name your price, get paid for itWhat a cash-secured put actually is — who pays you, why, and the two ways it ends.6:3102Getting paid to sellYou own the shares. Now the same trade runs the other way.6:4903How the cost comes downBasis: what the shares really cost after everything you have been paid.6:4004Paid from both sidesThe covered strangle: the trade that pays you twice while you wait.6:3405Picking the companyThe only rule in this series you cannot recover from getting wrong.6:3406Picking the priceWhere to agree to buy: below the floor, not above it.5:2207How much on one stockAbout a fifth of the account per stock, and start with half of it.3:5608Finishing the tradeCalled away is the good ending. The mistake is reaching for more.4:17
09Put or call — the same tradeAt the same price they are the same bet. The difference is where the cash sits.in production
10How a machine runs itThe rules, unattended, against a public book.in production
Watch the series on YouTube →

More on the wheel

What is the wheel strategy?What is a wheel strategy in options trading?How to pick a stock you would ownHow does a wheel strategy work step by step?What assignment actually looks likeWhat does selling options in a wheel strategy actually mean?The risks, and what we do about themWhat are the main risks of using a wheel strategy?Wheel vs covered callsHow does a wheel strategy compare with a covered call strategy?