Have you ever wished you could get paid while patiently waiting for your limit buy order to fill? That’s essentially what selling a cash-secured put accomplishes. You set aside enough cash to purchase 100 shares of a stock or ETF at a predetermined strike price. If the market falls below that price before the option expires, you’re obligated to buy the shares at the strike. In return for taking on that obligation, you collect an option premium upfront.
I only sell cash-secured puts on securities I’d be perfectly happy owning for the long term. And once you own those shares, there’s no reason you can’t turn around and sell covered calls against them. Now you’re getting paid to effectively place a limit sell order. If the shares rise above the strike price before expiration, they’re called away, you keep the option premium, and you pocket whatever capital appreciation occurred up to the strike.
That combination of repeatedly selling cash-secured puts and then covered calls after assignment is known as the “wheel” strategy. Spend enough time browsing Reddit’s r/ThetaGang community and you’ll quickly discover it’s one of their favorite options strategies. Like many investing techniques, though, the wheel has now been packaged into an ETF.
The Peerless Options Wheel Income ETF (WEEL) is the first ETF built around this approach and could be particularly interesting during a volatile, range-bound market where repeatedly harvesting option premiums can be more effective than chasing capital appreciation. Here’s how the strategy works.
How Does WEEL work?
WEEL is an actively managed fund of funds that implements the wheel strategy using sector ETFs with liquid listed options. The strategy begins by selling cash-secured puts, typically with out-of-the-money strike prices. That gives the ETF some downside cushion before assignment occurs.
Most of the time, if the underlying ETF stays above the strike through expiration, the puts simply expire worthless. WEEL keeps the premium and immediately sells another round of puts. If the market declines enough for assignment to occur, the strategy moves into its second phase.
WEEL purchases the underlying shares at the strike price and immediately begins selling covered calls against those newly acquired positions. Once again, if the calls expire worthless, the ETF keeps the premiums and repeats the process. If the shares rally above the call strike, they’re called away, allowing the ETF to realize gains up to the strike price while collecting the option premium.
The portfolio itself is highly dynamic. At the moment, much of WEEL’s largest holdings consist of Treasury bills serving as collateral for the cash-secured puts. The options exposure currently spans sectors and themes including gold miners, software, emerging markets, oil services, silver miners, biotechnology, and even short-term VIX futures.
Investors shouldn’t expect substantial capital appreciation from this strategy. Instead, the primary objective is generating consistent option income. Based on its most recent monthly distribution, WEEL currently pays an 11.86% distribution rate.
Why Use an ETF Instead?
The wheel strategy is relatively straightforward in theory, but implementing it yourself can be surprisingly demanding. Selling options, managing assignments, rolling contracts, and continuously opening new positions generates significant trading activity. For individual investors, that can be tiresome.
The primary drawback is cost. WEEL carries a 1.24% gross expense ratio, comprised of 1.09% in management fees and 0.15% in acquired fund fees and expenses. After a 0.25% expense waiver, investors currently pay a 0.99% net expense ratio. That’s certainly expensive compared to a traditional index ETF.
On the other hand, actively implementing the wheel yourself can involve substantial trading costs, bid-ask spreads, time commitment, and execution risk. For investors who like the strategy but don’t want to manage options positions themselves, outsourcing the process to a professionally managed ETF can be a reasonable trade-off.
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