How To Use Put Credit Spreads to Complement a Wheel Strategy Portfolio

The Wheel Strategy is a popular and straightforward approach for investors new to options trading.

Its simplicity and profitability make it an attractive choice, and it requires minimal maintenance.

The strategy typically involves selling cash-secured puts and, if assigned, transitioning to selling covered calls.

However, holding a cash-secured put means you need enough cash on hand to purchase the underlying stock if the option gets exercised.

This can tie up a significant portion of your capital.

The Challenge of Cash-Secured Puts

While the Wheel Strategy is effective, it does have a drawback.

If a large portion of your capital is committed to cash-secured puts, you may miss out on other opportunities.

For instance, a short-term sell-off in top-tier stocks such as Google or Apple might create an excellent opportunity to sell puts for attractive premiums.

However, if your cash is already tied up, you might not be able to take advantage of these situations.

What Are Put Credit Spreads?

This is where the put credit spreads can complement your Wheel Strategy.

A put credit spread is an options strategy that involves selling a put option while simultaneously buying a lower strike put option within the same expiration period.

Below are some advantages of using put credit spreads:

Capital Efficiency: Unlike cash-secured puts, put credit spreads requires less capital. This allows you to keep more of your cash available for other opportunities.

Risk Management: The lower strike put option you buy acts as insurance, capping your maximum loss.

Profitability: You still collect a premium, which can add to your overall returns, even if the stock doesn’t move as expected.

If you're interested in learning more, I've written a comprehensive guide on put credit spreads, including recommended parameters for new positions.

How to Use Put Credit Spreads in a Wheel Strategy Portfolio

When a temporary sell-off occurs in a quality stock, you can sell a put credit spread instead of a cash-secured put.

Here are the steps:

1. Sell a Put Option: Choose a strike price where you believe the stock will stay above until expiration.

2. Buy a Lower Strike Put Option: This step limits your potential loss, creating a spread between the two strike prices.

By using put credit spreads, you can generate additional premium income while limiting your downside risk.

Example Scenario

Imagine there’s a temporary sell-off in Apple stock.

During a quick sell-off, implied volatility increases, allowing you to capture a higher premium.

Instead of selling a cash-secured put, you might sell a $150 put and buy a $145 put, creating a $5 wide put credit spread.

A sell-off usually causes the stock to be oversold, making a slight rebound likely.

This rebound decreases the stock's implied volatility, enabling you to close the credit spread and lock in your profit (I aim for a 50% profit target).

Even if you're wrong, your maximum loss is limited to the spread width minus the net premium received.