Many investors still think options are complicated, or overly risky. But one of the simplest and most powerful income-generating strategies is actually one that legendary value investor Warren Buffett has openly endorsed for decades.
Warren Buffett, best known as the CEO and chairman of Berkshire Hathaway (BRK.A) (BRK.B), has famously sold puts on companies he wants to own and sold calls when he wants to reduce exposure or collect additional income. The “wheel” options strategy places that same logic into a simple, repeatable framework.
The wheel combines two foundational, defined-risk options trades with traditional stock ownership:
When combined in a strategic pattern, the wheel becomes a repeatable income engine that lets investors collect options premium; acquire shares of the underlying at a discount if assigned; and generate ongoing yield via the sale of calls — all while sticking to tried-and-true, high-quality, long-term stocks.
In a popular Barchart video, Gavin McMaster breaks down exactly how the strategy works and why so many investors rely on it. This article explains the logic behind the wheel, the risks, and the tools you can use to sharpen your edge inside Barchart’s platform.
The wheel has three steps:
You sell an out-of-the-money put on a stock you’d like to buy, selecting a strike price that aligns with your target entry price. Then, set aside enough cash in your margin account to buy 100 shares per contract if assigned at the strike price.
There are two possible outcomes:
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If the put expires worthless, you can keep 100% of the premium as your maximum profit, and repeat this step again.
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If you get assigned, you buy shares of a stock you’d like to own at your preferred entry price, with the premium collected on the sale of the puts lowering your effective entry price.
Strike prices that are closer to the money offer higher premiums, with a higher probability of assignment. Deeper out-of-the-money puts will provide lower profit potential, along with lower assignment risk.
Once assigned, Step 2 is next.
Now that you own at least 100 shares, you can sell an out-of-the-money call against the stock. This is known as a covered call, since your risk on the short call is “covered” by your stock holdings.
Covered calls generate steady income while you hold the stock — plus, as a shareholder, you still receive any dividends you’re owed if the stock pays them. This is why many investors refer to the wheel as a “triple income” strategy.
If the stock stays at or below the strike price and the call expires worthless, you keep both the shares and the premium collected on the sale of the option.
Then, it’s back to repeat Step 2 until you achieve Step 3…
In this final phase, your shares rally above the strike price of the covered call and are called away. This closes the loop on your winning trade as you lock in gains on the stock, with the premium collected on the option increasing your exit price.
Once those shares are called away, you can return to Step 1 and begin again.
That’s why it’s called the “wheel” — the cycle keeps spinning.
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You earn premium by selling the put.
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You earn premium by selling the call.
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You may earn dividends while holding the stock.
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You can repeat this indefinitely.
Not only do you choose the underlying stock, strike price, and expiration date that you prefer, you only get assigned if the market comes to you.
The wheel works best on liquid stocks with a variety of strike prices and expiration dates to choose from – think Nasdaq-100 names, blue-chips, leading ETFs, and of course, Buffett stocks.
Barchart gives traders an advantage through:
Find high-probability put trades filtered by:
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Strike
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Days to expiration
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Probability of profit
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Return %
Locate call strikes that:
See if the underlying stock is expected to test your strike price ahead of upcoming expirations.
Visualize breakeven, assignment price, IV stats, and maximum gain.
Check 50-day and 200-day moving averages directly on the chart for trend direction.
Unlike high-risk trading strategies, the Wheel is grounded in simple rules:
It’s the closest thing to “getting paid to invest.” So if you’re looking for steady income, disciplined entries, and a strategy used by pros and long-term investors alike, the wheel is a powerful place to start.
On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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