The options income wheel, in plain English

The wheel is a simple, repeatable way to own good companies at prices you choose and get paid while you wait. If you can pick a stock you'd like to own and name a price you'd pay, you can run it.

The three steps

1. Sell a cash-secured put. Choose a company you'd be glad to own and a price below today's that you'd happily pay (the strike). Set aside enough cash to buy 100 shares at that price. A buyer pays you a premium up front for the right to sell you those shares at the strike before the expiration date.
2. If the stock stays above your price, the put expires. You keep the premium and the cash is freed up. Sell another put.
3. If the stock falls below your price, you're assigned and buy the 100 shares at the strike, the price you already said you'd pay. Your real cost is lower, because you keep the premium. Now you sell covered calls: you get paid for agreeing to sell the shares at a higher price you'd be happy with. Meanwhile you collect any dividends. If the shares are called away, you take the profit and go back to step 1.

Why everyday investors should look at it

• It's simple. Two kinds of trades, one rule: only wheel stocks you want to own, at prices you'd be glad to pay.
• Returns are steadier. Most of the return comes from premium you collect every month, not from guessing where the price goes next.
• You choose your entry price. Instead of buying at today's price, you get paid to wait for a lower one.
• Your cash keeps working. Cash you'd hold anyway earns premium (and usually money-market interest too) while it secures the put.

The risks, honestly

• You still own stock risk. If the company drops 40%, you own shares worth far less than you paid. The premium only cushions the fall.
• Your upside is capped. If the stock rallies hard, your covered call sells your shares at the strike and you miss the rest of the gain.
• Assignment can be early. Especially around ex-dividend dates.
• Taxes and fees. Premiums are usually taxed as short-term gains in taxable accounts. Many people run the wheel in an IRA.

Next: Free guide: The Wheel, From Put to Payday · How the wheel compares with buy-and-hold and margin · How to calculate your real returns