How to Own Stocks For Free Without Using Your Own Capital: The Wheel Strategy Explained

For decades, the buy-and-hold strategy has been a cornerstone of long-term investing.

The idea is simple: purchase quality stocks, hold them for years or even decades, and let time and compounding do the rest.

While this method has proven to be effective, there’s a more strategic approach that not only allows you to own stocks potentially for free, but also generates additional income along the way.

This strategy revolves around using options to eventually own stocks by committing lesser amounts of your own capital upfront.

The ultimate goal? To create a self-sustaining cycle of income generation and stock ownership, commonly known as the Wheel Strategy.

The Concept: Owning Stocks Without Your Own Capital

The foundation of this strategy lies in selling options to generate income, which is then used to purchase stocks.

Imagine being able to acquire shares in a company without having to put up all the cash upfront. Instead, you earn enough from selling options eventually to cover the cost of the stock entirely.

This approach reduces your initial outlay and when you accumulated enough premiums, you could potentially own the stock for free.

Step 1: Selling Put Options to Gain Capital

The first step in this strategy is selling put options. Before selling a put on a stock, it's wise to have enough capital in your brokerage account in case the stock gets assigned. This is called a cash-secured put.

When you sell a put, you’re essentially offering to buy a stock at a certain price (the strike price) by a specific date.

In exchange for this commitment, you receive a premium from the buyer of the option. This premium is yours to keep, whether the stock drops to the strike price or not.

If the stock price falls and the put option gets exercised, you’re obligated to buy the stock at the strike price (1 option contract equals to 100 shares).

However, because you received the premium upfront, your effective purchase price is actually lower than the strike price—giving you a discount on the stock.

Step 2: Buying the Stock and Selling Covered Calls

Once you’ve either accumulated enough capital or have been assigned the stock through the put options, the next step is to sell covered calls.

A covered call is when you sell a call option on a stock you already own.

This means you’re offering to sell your shares at a certain price (the strike price) if the stock reaches that level by the option’s expiration date.

In return, you collect a premium, which adds to your overall income.

The beauty of this step is twofold. First, you continue to earn income through the premiums received from selling the covered calls. Second, if the stock price does not reach the strike price, you keep the stock and can sell another covered call, repeating the process.

If the stock price does reach the strike price and the call option is exercised, you sell your shares hopefully at a profit, as the strike price is typically above your original cost basis.

Step 3: The Cycle Continues

Once your stock is called away (sold) through the covered call, the cycle begins anew. You return to selling put options, generating income, and positioning yourself to acquire shares again.

This continuous loop—often referred to as the Wheel Strategy—allows you to build wealth over time by leveraging options to buy and sell stocks.

Benefits of the Wheel Strategy

• Acquiring Stocks at a Discount: By selling naked puts or credit put spreads, you can enter positions at a lower cost basis, effectively getting a discount on the stock price.
• Generating Income: Every step of the cycle involves generating income, whether through selling puts or covered calls. This income can be reinvested, saved, or used to purchase more shares.
• Forcing Profits: Selling covered calls “forces” you to take profits when the stock price rises to the strike price, helping you avoid the temptation of holding onto a stock indefinitely without realizing gains.
• Compounding Gains: As you repeat the cycle, the premiums collected from options selling can compound, leading to significant wealth accumulation over time.