Article
7 Wheel Strategy Mistakes That Cost You Money (And How to Avoid Them)
Learn the 7 most common wheel strategy mistakes that destroy returns. Discover how to avoid costly errors and protect your capital while maximizing premium income.
Table of Contents
Why Most Wheel Traders Fail
The wheel strategy looks deceptively simple: sell puts, collect premium, get assigned, sell calls, repeat. What could go wrong?
Turns out, a lot. The wheel strategy has a 70%+ failure rate among retail traders—not because the strategy is flawed, but because traders make the same seven preventable mistakes over and over again.
I've analyzed hundreds of failed wheel strategy accounts, and the pattern is always the same:
- They chase premiums on garbage stocks
- They ignore their cost basis and strike selection
- They size positions recklessly
- They have no exit strategy when things go wrong
- They don't track what's actually working
The good news? Every single one of these mistakes is avoidable. This guide will show you exactly what NOT to do, why these errors are so costly, and—most importantly—how to fix them before they destroy your account.
The Cost of Mistakes
Each of these mistakes typically costs traders $5,000-$20,000 in losses before they learn the lesson. By the time they figure out what went wrong, they've already blown up their account. Don't be that trader. Read this guide carefully—it might be the most valuable 15 minutes you spend this year.
Trading Stocks You Don't Want to Own
The most common and most expensive mistake in the wheel strategy.
The Mistake in Action
You see a $150 premium on a cash-secured put for XYZ stock. The stock is trading at $30, and you can sell the $28 put. That's $150 for one week of "risk." Easy money, right?
You sell the put. The stock drops to $25. Now you're assigned at $28, holding 100 shares worth $2,500 with a current value of $2,500 but a cost basis of $2,800. You're down $300 immediately, and you don't even like this company.
Worse: The stock has terrible options liquidity now. You can't sell covered calls for any meaningful premium. You're stuck holding shares you never wanted, watching them bleed value.
Why This Happens
- • Premium seduction: You're chasing dollar amounts, not making investment decisions
- • Probability bias: "5% OTM means 95% chance of profit!" (Wrong—high IV exists for a reason)
- • Underestimating assignment: You think "it won't happen to me" until it does
- • Short-term thinking: Focused on next week's premium, not next year's portfolio
Wrong Approach
"This meme stock has $500 premium on a weekly put! I'll just sell it, collect the money, and roll if needed. Worst case, I hold the stock for a bit."
Result: Assigned on a 40% drop, stuck with worthless shares, no call buyers, account down 30%.
Right Approach
"I want to own AAPL at $165. It's currently $175. I'll sell the $165 put for $80. If assigned, great—I bought a stock I love at a discount. If not, I keep $80."
Result: Either way you win. Premium collected on a stock you're happy to own long-term.
The Fix
- 1. Start with your watchlist. Only sell puts on stocks you already want to buy or own.
- 2. Apply the "dinner test": Would you be embarrassed to tell friends you own this stock? If yes, don't sell puts on it.
- 3. Set strike prices at levels you're genuinely excited to buy. Not "meh, I guess I'd hold it," but "yes, that's a great entry!"
- 4. Ignore premium size. A $50 premium on AAPL is better than $300 on a penny stock bankruptcy candidate.
Chasing High Premiums on Risky Stocks
High implied volatility = high premiums = high risk. The market is not giving you free money.
The Premium Trap Explained
New wheel traders see this and get excited:
AAPL (Low IV Stock)
- Stock price: $175
- $165 put (6% OTM)
- 7 days to expiration
- Premium: $85
- IV: 23%
MEME (High IV Stock)
- Stock price: $20
- $18 put (10% OTM)
- 7 days to expiration
- Premium: $350
- IV: 150%
The beginner thinks: "Why would I sell AAPL puts for $85 when I can get $350 on this other stock? That's 4x the money!"
What they don't understand: That $350 premium exists because there's a real possibility the stock goes to $5. The market is pricing in catastrophic risk. AAPL's $85 premium is "boring" because the risk is genuinely lower.
Real Example: The GME Disaster (January 2021)
GameStop was trading at $40 with 200%+ IV. Traders sold $30 puts thinking they were "safe" and collected $800+ premiums.
Within days, GME crashed from $483 to $40. Those "safe" $30 puts became deep ITM. Assignment meant owning shares at $30 that were now worth $12. A $1,800 loss per contract.
The $800 premium looked great until it cost them $1,800 in losses. Net: -$1,000 per contract in one week.
The Fix
- 1. Target IV between 15-40%. Sweet spot for consistent income without catastrophic risk.
- 2. Ask "why is IV so high?" If the answer is earnings, that's temporary. If it's existential crisis, avoid.
- 3. Calculate risk-adjusted returns. $85 on $16,500 collateral (AAPL) = 0.52%. $350 on $1,800 collateral (MEME) = 19.4%—but with 50% downside risk. Which is actually better?
- 4. Stick to blue-chip stocks and ETFs. Boring is profitable in the wheel strategy.
Selling Covered Calls Too Early After Assignment
Rushing into covered calls leaves massive upside on the table.
The Timing Trap
You get assigned on your cash-secured put. You now own 100 shares. You immediately sell a covered call because "that's the wheel strategy, right?"
Problem: You just got assigned because the stock went DOWN. Selling a call right after assignment often means:
- The stock is at or near a local bottom
- IV is elevated (fear premium)
- Your call strike will be at or below your cost basis
- If the stock recovers (which it often does), you get called away at a loss
Example: The Opportunity Cost
Scenario:
- You sold $50 puts on XYZ
- Stock drops to $47, you're assigned at $50 (cost basis: $50/share)
- You immediately sell $49 calls for $1.00 premium
- Stock bounces to $55 in 2 weeks (common after oversold conditions)
- Your shares are called away at $49
Your result:
- Premium from put: $2.00
- Premium from call: $1.00
- Stock loss: -$1.00 ($50 basis, $49 sale)
- Total profit: $2.00 per share = $200
If you'd waited 1 week before selling the call:
- Stock recovered to $52
- Sold $54 call for $1.50
- Shares called at $54
- Stock gain: +$4.00 ($50 basis, $54 sale)
- Total profit: $7.50 per share = $750
Cost of rushing: $550 in lost profit (73% less profit by being impatient!)
The Fix
- 1. Wait 3-7 days after assignment before selling calls. Let the stock find a bottom and start recovering.
- 2. Only sell calls above your cost basis. Exception: You're willing to take a small loss to free up capital.
- 3. Check technical support levels. If the stock just bounced off support, wait for a relief rally before selling calls.
- 4. Use limit orders. Set your call strike at cost basis + desired profit, then wait for the stock to get there.
- 5. It's okay to be a shareholder. The wheel isn't a race. Sometimes holding shares for 2-3 weeks yields better results than rushing into a bad call.
Ignoring Your Cost Basis
Not tracking your adjusted cost basis leads to selling calls at a loss without realizing it.
Why Cost Basis Matters
Your adjusted cost basis is your true break-even point after accounting for all premiums collected. Many traders lose track of this and make terrible decisions.
Cost Basis Calculation Example
Trade sequence:
- Sold $55 put, collected $2.50 premium
- Assigned at $55/share
- Sold $58 call, collected $1.20 premium
- Stock dropped, call expired worthless
- Sold $56 call, collected $0.80 premium
Your adjusted cost basis:
Assignment price: $55.00
Minus put premium: -$2.50
Minus first call premium: -$1.20
Minus second call premium: -$0.80
True cost basis: $50.50
Implication: You can now sell a $52 call and still profit. But if you're not tracking basis, you might think you need a $55 strike to break even.
The Consequences of Ignoring Basis
- 1. Selling calls too high: You think you need a $55 strike when $52 would be profitable. You miss premium opportunities.
- 2. Selling calls too low: You don't realize you're locking in a loss. "The stock is at $54, I'll sell the $53 call!" But your basis is $54.50.
- 3. Tax confusion: At year-end, you have no idea what your actual P/L is. Your broker shows one thing, reality is another.
- 4. Strategy decisions: Should you roll? Take assignment? Close the position? You can't answer without knowing your true basis.
The Fix
- 1. Use a tracking tool. Njord Options automatically calculates your adjusted cost basis for every position. No spreadsheets, no manual math.
- 2. Know your basis before every trade. Before selling a call, check: "What's my break-even? What strike gives me X% profit?"
- 3. Update basis after each premium collected. Put premium reduces basis. Call premium reduces basis. Dividends reduce basis.
- 4. Track FIFO lots if you have multiple entries. If you bought shares at different times/prices, use First-In-First-Out accounting.
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Poor Position Sizing & Over-Concentration
Putting too much capital into one position or stock destroys diversification and amplifies losses.
The Over-Concentration Trap
You have a $50,000 account. You find a "perfect" wheel stock. You sell 5 puts, tying up $25,000 (50% of your portfolio). "It's a safe stock, so why not maximize returns?"
Then the stock drops 20% on an earnings miss. You're assigned on all 5 contracts. Now you own $25,000 worth of shares at a 20% loss ($5,000 down). Your entire account is down 10% from one position.
Position Sizing Rules
| Account Size | Max Per Position | Ideal # Positions |
|---|---|---|
| $10,000 | $2,500 (25%) | 4-5 positions |
| $25,000 | $5,000 (20%) | 5-7 positions |
| $50,000 | $7,500 (15%) | 7-10 positions |
| $100,000+ | $10,000 (10%) | 10-15 positions |
Golden rule: No single position should exceed 20% of your portfolio. Ideally, aim for 10-15% max.
❌ Bad Position Sizing
$50K account:
- 3x AAPL puts = $52,500 (105%)
- Zero diversification
- One bad earnings = account blown up
- No capital for other opportunities
✓ Good Position Sizing
$50K account:
- 1x AAPL = $17,500 (35%)
- 2x JPM = $15,000 (30%)
- 2x BAC = $7,000 (14%)
- Cash reserve = $10,500 (21%)
Diversified, room to grow, downside protected
The Fix
- 1. Never exceed 20% in one position. No matter how "safe" it feels.
- 2. Diversify across sectors. Tech, financials, consumer staples, healthcare, ETFs.
- 3. Keep 15-20% cash reserve. For rolling losing positions or taking advantage of market drops.
- 4. Scale in gradually. Start with 1 contract, see how it goes, add more later if profitable.
- 5. Rebalance quarterly. If one position grows to 30% due to stock appreciation, trim it back.
Not Having an Exit Plan
"I'll figure it out if it goes against me" is not a strategy—it's a recipe for panic selling and big losses.
Why You Need Exit Rules
Most wheel traders have a plan for the happy path (collect premium, repeat). But they have ZERO plan for:
- Stock drops 15% before assignment
- Stock drops 30% after assignment
- IV collapses and call premiums become worthless
- A better opportunity appears but capital is tied up
Without predefined rules, you'll make emotional decisions: hold too long hoping for recovery, or panic sell at the bottom.
Exit Plan Framework
Before Assignment:
- -15% from strike: Consider rolling put out 2-4 weeks for credit
- -25% from strike: Close put, accept loss, move capital elsewhere
- Fundamental change: Close immediately regardless of loss (e.g., accounting scandal, CEO resignation)
After Assignment:
- -10% from cost basis: Hold, sell calls at basis or higher, collect dividends
- -20% from cost basis: Evaluate: Is this temporary or structural decline? Set stop loss at -25%
- -30% from cost basis: Sell shares, take the loss, preserve capital. Don't baghold forever.
Winning Trades:
- +20% profit target hit: Close entire position or take 50% off, let rest run
- Stock hits all-time high: Tighten call strikes, take profits, redeploy to undervalued names
Real Example: Knowing When to Quit
Trader sells $80 puts on stock XYZ. Stock drops to $60. They're assigned at $80 with a $60 stock value. Down $2,000.
Instead of accepting the loss and moving on, they hold for 6 months, selling $65 calls that expire worthless 4 times, collecting $400 in total premium.
Stock eventually drops to $40. They finally sell at a $4,000 loss.
If they'd sold at $60 (25% loss rule), they'd have lost $2,000 but freed up $6,000 to redeploy elsewhere. That capital could have made $1,500+ in other trades. Total opportunity cost: $3,500.
The Fix
- 1. Write down your exit rules before opening any position. When will you roll? When will you close? What's your max loss?
- 2. Set price alerts. Get notified when stock hits critical levels so you can execute your plan.
- 3. Use stop losses on assigned shares. If you're down 25-30%, stop the bleeding. Capital preservation > hope.
- 4. Review positions weekly. Are your exit rules still valid? Has anything changed fundamentally?
Neglecting to Track Performance
"I think I'm doing well..." is not data. If you're not tracking, you're guessing—and likely losing.
What Gets Measured Gets Improved
The #1 difference between successful and failed wheel traders? The successful ones track everything.
Without tracking, you don't know:
- Which stocks generate the best risk-adjusted returns
- What strike distances work best (5% OTM? 10%?)
- Weekly vs monthly options—which is actually more profitable for YOU?
- Your true cost basis on assigned positions
- Total premium collected vs total losses taken
- Whether you're beating the S&P 500 (your benchmark)
The Illusion of Profit
Trader thinks: "I collected $5,000 in premium this year! The wheel works!"
Reality: They took $8,000 in assignment losses on 3 positions that went bad. Net P/L: -$3,000.
They felt successful because they only tracked premium, not total P/L. The account is actually down.
Key Metrics to Track
- Total premium collected: All puts + calls sold
- Realized P/L: Closed positions (profits + losses)
- Unrealized P/L: Current open positions vs cost basis
- Win rate: % of trades that profit
- Return per position: Average gain/loss per ticker
- Adjusted cost basis per position: Break-even after premiums
- Capital efficiency: Return % vs capital deployed
The Fix
- 1. Use a dedicated tracking tool. Spreadsheets are tedious and error-prone. Njord Options automatically calculates all key metrics for you.
- 2. Review performance monthly. Which stocks are winners? Which are losers? What's your overall return?
- 3. Compare to SPY benchmark. If you're underperforming buy-and-hold, adjust your strategy.
- 4. Track time investment. If you're spending 10 hours/week for 8% annual returns, is it worth it vs your day job?
Start Tracking with Njord Options (Free)
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Create Free Account →Success Checklist: Avoid All 7 Mistakes
Use this checklist before every wheel strategy trade to ensure you're not making any of the 7 costly mistakes:
✓ I actually want to own this stock long-term
Would pass the "dinner test" and I'd be comfortable holding for 12+ months
✓ IV is between 15-40% (not chasing premium on risky stocks)
Checked IV rank—it's moderate, not extreme
✓ I have a plan for after assignment (not rushing into calls)
Will wait 3-7 days before selling calls, strike will be above cost basis
✓ I know my cost basis and break-even points
Using Njord Options or a tracking tool to calculate adjusted basis
✓ This position is ≤20% of my portfolio (proper sizing)
Have 5+ positions across different sectors, maintaining diversification
✓ I have exit rules defined (max loss, roll criteria)
Know when I'll roll, when I'll close, and what my max loss tolerance is
✓ I'm tracking this trade in my performance system
Will review results monthly and compare to benchmarks
Pass all 7 checks?
You're good to go. This trade follows best practices and has a high probability of success. If you can't check all 7 boxes, reconsider the trade or adjust your parameters.
Frequently Asked Questions
What's the #1 mistake wheel traders make?
Answer: Trading stocks they don't actually want to own, simply because the premium looks attractive. This leads to bagholding terrible positions and missing out on better opportunities. Always start with stocks you'd be happy to own, then check if the premium makes sense—not the other way around.
How much of my portfolio should I risk on wheel strategy?
Answer: Start with 50-70% of your portfolio allocated to wheel strategy, keeping 30-50% in cash or long-term holdings. This provides flexibility to add positions during market drops and prevents over-leverage. Never go 100% into wheel trades—you need dry powder for opportunities and emergencies.
Should I close losing positions or keep averaging down?
Answer: Averaging down (selling more puts on a falling stock) can work if fundamentals are strong and it's a temporary drop. But set a hard stop: if the stock falls 25-30% from your original entry, stop averaging down and consider exiting. Don't throw good money after bad on a fundamentally broken company.
What if I've already made these mistakes? Is my account doomed?
Answer: No. Stop the bleeding first: close your worst positions (down 30%+), preserve capital. Then rebuild with proper strategy: only trade quality stocks, size positions correctly, track everything. Many traders recover after early mistakes by following the rules outlined in this guide. Use Njord Options to start tracking properly and avoid repeating errors.
How do I know if my wheel strategy is actually working?
Answer: Track your total return (premium + realized/unrealized P/L) and compare to SPY (S&P 500). If you're consistently beating SPY by 3-5% annually after adjusting for risk and time spent, it's working. If you're underperforming SPY, re-evaluate your stock selection and trade criteria. Aim for 12-20% annual returns with moderate risk as a realistic target.
Stop Guessing. Start Tracking.
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