What happens when your stock drops 15% below your purchase price? Most investors panic, hold and hope, or sell at a loss. But option sellers using the continuous wheel strategy have a different approach—they continue generating income.
In this comprehensive analysis, we examine a real-world scenario where Marvell Technology Inc (MRVL) dropped from $44 to $38.68—a significant 12% decline—yet the position continued generating approximately $250 in weekly option premium. This demonstrates the resilience and income-producing power of the wheel strategy even during adverse market conditions.
When you sell cash-secured puts as part of the wheel strategy, you're accepting the obligation to purchase shares at the strike price if the option is exercised. This is exactly what happened with MRVL.
The stock fell significantly, triggering assignment on the cash-secured put. While this created an unrealized loss on paper, the position now held 400 total shares with accumulated premium working to offset that loss.
An unrealized loss only becomes real if you sell. As long as you continue holding shares and collecting premium, you're using the wheel strategy to systematically work toward profitability regardless of short-term price movement.
Cost basis tracking becomes critical when managing positions through adverse price movement. After the assignment, the position had two distinct cost basis measurements:
The premium collection of $2,182 significantly reduced the effective cost basis from $44.75 to $39.30—a reduction of $5.45 per share. This means the position only needed the stock to recover to $39.30 (instead of $44.75) to break even, demonstrating the power of systematic premium collection.
Understanding the difference between cost basis with and without premium helps option sellers make informed decisions about:
By collecting $2,182 in premium, the break-even point dropped from $44.75 to $39.30—only $0.62 above the current market price. This is the power of systematic income generation through options.
Even after a significant price decline, the continuous wheel strategy involves looking for new opportunities to collect premium. The first step is selling another cash-secured put.
When choosing strikes for cash-secured puts after a price decline, consider:
Strike Analysis:
Premium Details:
Extrinsic value (also called time value) represents the portion of an option's price attributed to factors other than intrinsic value. For option sellers, maximizing extrinsic value is key to premium collection efficiency.
At-the-money options typically have the highest extrinsic value because they have the greatest uncertainty about whether they'll expire in or out of the money. This uncertainty commands a premium that sellers can collect.
Selling covered calls when the stock is significantly below your cost basis presents a unique challenge. You want to collect meaningful premium without risking assignment at a loss.
The most conservative strategy is selling covered calls at or above your cost basis (without premium). In this MRVL example:
However, when the stock is this far below cost basis, premium for far out-of-the-money strikes becomes minimal. This creates a dilemma that requires analyzing different strategies.
1 Week Out: $0.04 extrinsic value per share ($4 per contract)
2 Weeks Out: $0.18 extrinsic value per share ($18 per contract)
3 Weeks Out (19 days): $0.335 extrinsic value per share ($33.50 per contract)
4 Weeks Out (26 days): $0.42 extrinsic value per share ($42 per contract)
To find the optimal expiration, calculate the premium per week for each timeframe:
The 3-week (19-day) expiration provided the best weekly return at $11.17 per contract per week. With 4 contracts (400 shares), this generated approximately $129 in total premium.
Selling options 30+ days out increases the risk of being stuck in a position if the stock price moves significantly. Options further out in time have higher vega (sensitivity to volatility), making them more expensive to buy back if you need to adjust. Staying within 30 days provides flexibility while maintaining good premium collection.
Some option sellers choose to sell covered calls below their cost basis by analyzing probability metrics. This approach requires active management but can generate significantly more premium.
The delta of an option approximates the probability of that option expiring in-the-money. A 0.30 delta suggests approximately a 30% chance of assignment.
$40.50 Strike (0.30 delta):
If you choose to sell covered calls below your cost basis (without premium) but above your cost basis with premium, active monitoring becomes essential:
For this demonstration using a paper trading account, the conservative approach of selling at cost basis was selected to maintain the hands-off weekly review strategy. However, probability-based selling is a viable approach for traders willing to monitor positions more actively.
A common question when running the wheel strategy is: "How much capital should I allocate to each position?" The MRVL position demonstrates important considerations.
To prevent over-concentration in a single ticker, establish capital limits before starting the wheel:
When you've reached your capital allocation limit or don't want additional shares, rolling cash-secured puts allows you to:
Roll puts when: You've reached capital limits, the stock has dropped significantly in a short time, or you want to avoid assignment. Accept assignment when: You have available capital, the stock is a quality company you want to own, and you can continue selling covered calls profitably.
Rolling is a powerful technique that allows you to extend time and adjust strikes while continuing to collect premium. However, it requires attention to extrinsic value to avoid early assignment.
Consider rolling when:
Current Position:
Rolling Action:
How far out should you roll? This depends on premium available:
The goal is to collect enough premium on the roll to make it worthwhile while staying within your preferred timeframe for position management.
Managing the continuous wheel strategy with multiple assignments, premium tracking, and cost basis calculations can quickly become overwhelming with spreadsheets. This is where purpose-built software makes the difference.
MyATMM automatically maintains two cost basis calculations:
This dual view helps you make informed decisions about strike selection and position management without manual calculations.
When puts are assigned, MyATMM helps you:
One of the most powerful features is seeing how potential assignments would affect your cost basis before they happen. If you sell a $38.50 put, MyATMM shows you the projected cost basis if assignment occurs, helping you decide whether to accept or roll the position.
Every dollar of premium matters when working through unrealized losses. MyATMM maintains accurate records of:
Manually tracking 400 shares of MRVL with multiple assignments, 4 covered calls, 1 cash-secured put, and $2,182 in cumulative premium would require complex spreadsheet formulas that break if you miss a single entry. MyATMM handles all calculations automatically, letting you focus on strategy instead of data entry.
Despite the stock being down 12% from the assignment price, this MRVL position was positioned to generate approximately $250 in weekly option premium.
Cash-Secured Put:
Covered Calls (4 contracts):
Combined Weekly Income:
Note: Initial projection was $250+ if managing multiple expirations concurrently
While the position showed an unrealized loss, the income generation provided a different perspective:
This demonstrates how systematic premium collection can generate substantial returns even when capital gains are temporarily negative.
Success with the continuous wheel strategy requires a fundamental shift in how you view stock ownership and portfolio performance.
Traditional buy-and-hold investors focus primarily on capital appreciation. Option sellers using the wheel strategy prioritize:
The wheel strategy works best with stocks you're comfortable owning long-term:
When stocks drop 15%+, emotional responses include:
The wheel strategy provides a systematic, unemotional approach: continue selling premium, manage cost basis, and let time work in your favor.
If you're running the wheel on dividend-paying stocks, price declines have a silver lining: higher yield. A stock paying $2 annual dividend has a 4% yield at $50 but a 5% yield at $40. You're collecting both dividend income and option premium while the stock is temporarily down.
Options trading involves risk and is not suitable for all investors. Past performance does not guarantee future results. The strategies discussed in this article are for educational purposes only and should not be considered financial advice. Stock prices can continue declining beyond initial losses, assignments can occur at inopportune times, and there is no guarantee of profitable outcomes. Premium collection does not eliminate the risk of substantial losses if stock prices decline significantly. Always consult with a qualified financial advisor before implementing any options trading strategy. Consider your risk tolerance, investment objectives, and financial situation before trading options.
Managing multiple assignments, calculating dual cost basis, and tracking premium across positions shouldn't require complex spreadsheets. MyATMM automates all calculations so you can focus on strategy.
Start Your Free Account Track up to 3 tickers free forever • No credit card required