The Wheel Strategy Isn't Riskless. Here's What I've Learned the Hard Way (And What I'm Still Learning)

My first article on this blog was about why I started treating covered calls as a business. I talked about the upside — weekly income, passive-ish cash flow, capital that works while I'm living my life. I meant all of it.

But I'd be doing you a disservice if I only told you the good parts.

The wheel strategy isn't gambling. It's not a get-rich-quick scheme. But it is real risk with real money, and some of those risks I'm still figuring out myself. This article is my attempt to be honest about the uncomfortable parts — not to scare you off, but because I think understanding the risks before you feel them is the whole point of learning from someone else's experience.

The One That Gets You First: The Stock Just Keeps Falling

Think about the game of double dutch jump rope. Two people are swinging two ropes in opposite directions, and a third person is standing on the outside watching, waiting for exactly the right moment to jump in. Jump in too early or too late and you get tangled up. That's what entering a stock position can feel like. You're watching the rhythm of the price, trying to time your entry — and sometimes you jump in and immediately trip.

Me, buying APLD at $32.

That's what happened to me with APLD.

I bought in at $32 a share. The stock dropped — not a little, but down to around $21 at its lowest. That's a paper loss of over $1,100 on a $3,200 position. On paper. But it didn't feel like "on paper." It felt like a mistake.

Here's where the wheel strategy gets emotionally complicated during a drop: I couldn't just sell covered calls at any strike and feel good about it. At $21, a covered call at a $23 strike would have generated maybe $60 — but what if the market spiked? I'd be obligated to sell my shares at $23 when I paid $32. That's not a covered call doing its job. That's locking in a painful loss.

So I paused. Two full weeks of not selling anything. I sat on the position while the stock sat in the low $20s. No premium coming in. Just me reading articles about the company, trying to decide if I still believed in it. The articles weren't negative enough to make me bail, so I stayed. But that two-week silence was genuinely uncomfortable. I felt like I was bleeding slowly and had stopped the bandage from doing anything.

Eventually the stock started to recover. When it climbed back toward $27, I finally had room to sell a covered call at $29 — still below my $32 entry price, but at least now I wouldn't be dramatically underwater if it got called away. I started collecting premium again. Each week the premium chipped a little more off my effective cost basis. It started to feel worth it.

When the Stock Runs Past Your Strike — In Either Direction

This is the one most people describe as "missing out" — and that framing is accurate but incomplete.

When you sell a covered call, you've agreed to sell your shares at a specific price. If the stock rockets past that strike, your shares get called away. You keep the premium and collect the gain up to your strike — but then you watch the stock keep climbing without you. It doesn't cost you money in the traditional sense. But it costs you upside, and on a high-momentum stock, that gap can sting.

The reverse version happens with cash-secured puts. If the stock drops hard below your strike, you're buying 100 shares at a price above where it's trading. You start the covered call phase already underwater.

I've accepted both as part of the deal. The wheel trades certainty of premium now for uncertainty of what the stock does next. That's the agreement you sign when you sell the contract.

Assignment Is a Feature, But It Can Still Surprise You

When you sell a cash-secured put, assignment is actually the strategic goal. My Premium Tracker grading system scores assigned puts higher than puts that expire worthless, specifically for this reason. Expiring worthless means you collected premium but didn't get the stock you were targeting. That's a missed step in the wheel.

But assignment on a covered call feels emotionally different — especially for stocks I plan to hold for a long time.

I have positions I genuinely intend to hold for the next 20 years. Nvidia is one of them. When those shares get called away, there's a real fear that I'll never get back in at a price I'm comfortable with — that the stock will go on another massive run while I'm sitting on the sidelines in cash. That fear is real, and I don't think it fully goes away.

I've bought shares back after assignment at a higher price, only to watch the stock drift back down to where it was. In those moments, I paid more to reenter than I needed to. The emotion cost me money.

What I've noticed over time: most stocks don't just go straight up forever. If you look at the price behavior over a typical month, it's jagged — up, down, sideways, back up. After getting assigned a few times on the same stock, I've learned that the re-entry opportunity usually comes. You almost always get your shot to buy back in if you're patient and not emotional about it.

I've also noticed something that surprised me: after getting assigned and selling cash-secured puts to reenter, I often collect more premium on the put side than I was collecting on covered calls. So getting assigned doesn't have to feel like a setback. It can be a profitable step in its own right. The emotional part is just not wanting to be outside the stock for too long on a name you believe in long-term.

Implied Volatility Can Work Against You

I look for high implied volatility because it means better premiums. But high IV is high for a reason — the market is pricing in uncertainty. That same uncertainty that fattens your premium can also move your stock faster than you planned.

What I've noticed is that stocks go through phases. High volatility, then flat. Flat, then volatile again. When premiums get thin during a quiet stretch, my own greed gets tested. I find myself wanting to sell a strike closer to the current price just to keep up with my average weekly income target. That's exactly when I'm increasing my risk of getting assigned at a price I didn't really want.

For a stock like Nvidia, I try to stay patient. The premiums on a quieter week might be smaller, but Nvidia is a premium stock — I'd rather collect a little less and keep the position than chase income and lose the shares at the wrong moment.

One specific version of volatility risk I now watch closely: earnings announcements. Earnings happen four times a year for every stock, and in the days leading up to the report, implied volatility spikes — which makes premiums look great. But that's the trap. If the report disappoints, the stock can gap down overnight, far past any strike you selected, before you can do anything about it. And if the report is great, the stock can rocket past your strike and you miss all of that upside.

I know this. I've read about it. I wrote it in my own notes.

And then this week I sold a covered call on APLD — and forgot that earnings are this Wednesday.

The Strike Selection Puzzle

Choosing the right strike isn't just math. It's part art, part judgment, and occasionally part luck.

If I sell a covered call with a strike too close to the current price, I collect more premium but risk having my shares called away on a minor up move. If I sell too far out, I collect almost nothing and the premium barely seems worth the effort.

The best outcome, in my opinion, is when the stock closes just below your strike at expiration. That means you kept the full premium and your shares weren't called away — you didn't leave money on the table, and you didn't give up the position. In my grading system, Strike Precision is scored exactly on this principle: the closer the stock finishes to your strike at expiry, the better your grade. You maximized the premium without sacrificing the shares.

I've made both mistakes. I've sold strikes so far out that I collected $18 and thought that was somehow meaningful. I've also sold strikes too close and watched shares get called away when I really wanted to stay in the position. The only way to calibrate this is to track your trades, look at what you got right, and be honest about what you got wrong.

Capital Can Get Locked Up Quickly

The wheel requires capital at every stage. Selling puts requires enough cash to buy 100 shares if assigned. Selling covered calls requires holding 100 shares. If you get assigned on a put and the stock keeps dropping, you can end up with all your capital tied up in a losing position with nothing left to start new trades.

One option when this happens is rolling — buying back your contract and selling a new one further out in time or at a different strike, trying to buy yourself room. But I've become cautious about rolling for one specific reason: you have to pay premium to buy back the existing contract, and then you're selling a new one that usually collects less premium for more time. It can feel like you're spinning in place. That's my personal experience with it — I know traders who roll effectively and it's absolutely a valid tool. It's just not my default move.

Sideways Markets: Actually Not That Bad

I've seen some content about prolonged sideways action being a risk — and I want to offer a different perspective based on my experience.

When a stock moves sideways, I actually kind of like it. The premiums might get a little thinner, but the position is stable. If it gets assigned, fine — I was mentally prepared for that. And the scenario I genuinely enjoy most is when the stock drifts slightly up over the week without reaching my strike. The contract expires worthless, I keep the full premium, and I still have my shares. That's the ideal wheel outcome.

Going back to the grading system I built: the closer the stock finishes to your strike at expiration — without crossing it — the higher your Strike Precision score. A stock that closes $0.50 below your strike means you extracted nearly every dollar of available premium. That's not luck. That's a well-placed trade. Sideways-to-slightly-up is where that magic happens most reliably.

What I'm Still Learning to Accept

Running this strategy has taught me more about risk tolerance than I expected — not just the financial kind, but the emotional kind. The ability to sit with unrealized losses. The ability to feel okay when shares get called away. The ability to not chase a stock that just ran past your strike.

None of that came from reading about options. It came from doing it, feeling the discomfort, and deciding to stay in the game anyway.

I'll keep documenting all of this publicly — the wins, the grinds, and the trades I'd take back. If you want to follow along and track your own trades, Premium Tracker is free and built exactly for this kind of journaling. The grading system will hold you accountable on the same things I'm still learning to get right.

Next article: I'll show you what a real week of trade selection looks like — the options chain, the strike I chose, and why.