Glossary · reference sheet · Options
The Wheel
The full cycle, the math, and the failure modes.
Cycle
- Leg 1Sell CSP at desired entry; assigned → own at strike − premium.
- Leg 2Sell covered calls above basis; called away → cycle restarts.
- Basis mathEach premium lowers effective basis; both legs stack.
Failure modes
- Sustained bearAssigned at tops; calls worthless; basis bleeds.
- Melt-upCalled away early; re-entry at worse prices.
- Vol spikePremium balloons → oversizing temptation.
Guardrails
- Position capOne wheel ≤ 15–20% of option capital.
- Entry testWould you buy at the strike with zero premium?
- Trend ruleStop selling calls if basis underwater + trend broken.
- DD exitPre-commit a total drawdown exit for the position.
How to use this sheet
Read a row as a claim, not a fact: the term, what it means, and the condition that makes it matter. Each term has its own page, and the lessons it belongs to are linked from there.
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.