Contents
- Best Stocks for the Wheel Strategy
- Best ETFs for the Wheel
- Key Considerations for the Wheel Trade
- Final Thoughts
- Bonus Resources
- FAQ
- Conclusion
Last time, we explained how the wheel strategy works with some examples. Today, we will give you the best stocks for wheel strategy trades.
Blue chips companies, high dividend stocks, REITs, and low beta ETFs work well when employing the wheel strategy.
Best Stocks for the Wheel Strategy
1. Coca-Cola (KO)
- Beta: ~0.6
- Dividend Yield: ~3.0%
KO is a defensive stock with global brand recognition, steady earnings, and a long history of dividend payments. Low volatility and strong demand make it ideal for the Wheel strategy.
2. Bristol-Myers Squibb (BMY)
- Beta: ~0.4
- Dividend Yield: ~4.5%
A stable pharmaceutical giant with reliable cash flow and a strong dividend. BMY’s low beta ensures price stability, reducing assignment risk.
3. ExxonMobil (XOM)
- Beta: ~1.0
- Dividend Yield: ~3.6%
As one of the largest energy companies, XOM benefits from high oil prices while maintaining strong dividends. The stock’s cyclical nature makes it attractive for put selling when undervalued.
4. Pfizer (PFE)
- Beta: ~0.7
- Dividend Yield: ~5.0%
A defensive healthcare stock with steady demand and a strong dividend yield. PFE’s stability makes it an excellent candidate for consistent Wheel trades.
5. Realty Income (O)
- Beta: ~0.5
- Dividend Yield: ~5.8%
Known as “The Monthly Dividend Company,” O is a REIT that provides reliable passive income. Low volatility and high options liquidity make it perfect for the Wheel.
6. Iron Mountain (IRM)
- Beta: ~0.8
- Dividend Yield: ~4.2%
A data storage and real estate company with strong recurring revenue. IRM’s high dividend and defensive nature make it a solid Wheel stock.
7. AbbVie (ABBV)
- Beta: ~0.6
- Dividend Yield: ~3.8%
A pharmaceutical leader with strong cash flow and a history of consistent dividend growth. ABBV’s steady revenue makes it a great choice for selling options.
8. Gilead Sciences (GILD)
- Beta: ~0.5
- Dividend Yield: ~4.0%
A biotech company with high margins and stable revenue streams. Its low volatility profile makes it a reliable candidate for the Wheel trade.
9. Johnson & Johnson (JNJ)
- Beta: ~0.6
- Dividend Yield: ~3.0%
- JNJ is a highly diversified healthcare company with a AAA-rated balance sheet, ensuring stability. Its defensive nature makes it one of the best stocks for put selling.
10. Merck & Co. (MRK)
- Beta: ~0.6
- Dividend Yield: ~3.2%
Another blue-chip pharma stock with a long history of paying dividends. MRK’s low beta and strong cash flow make it a safe choice for conservative option traders.
11. Newmont Corporation (NEM)
- Beta: ~0.4
- Dividend Yield: ~4.2%
As one of the world’s largest gold mining companies, NEM provides stability during market downturns. Its strong cash flow and reliable dividend make it an attractive pick for the Wheel strategy.
12. BHP Group (BHP)
- Beta: ~0.7
- Dividend Yield: ~5.5%
A global leader in mining and commodities, BHP benefits from strong demand for raw materials. Its high dividend yield and relatively stable price action make it an excellent Wheel candidate.
Best ETFs for the Wheel
In addition to individual stocks, ETFs can be excellent vehicles for the Wheel Strategy. ETFs provide diversification and lower risk while still offering strong premium income from option selling.
1. Utilities Select Sector SPDR Fund (XLU)
Utility stocks are defensive, low-beta, and highly stable, making XLU an excellent candidate for selling options.
2. iShares 20+ Year Treasury Bond ETF (TLT)
Bonds tend to be inversely correlated to equities, and TLT allows traders to generate premium while maintaining a defensive position.
3. Health Care Select Sector SPDR Fund (XLV)
Healthcare stocks provide recession resistance and stable dividends, making XLV a low-risk ETF for Wheel trading.
4. Consumer Staples Select Sector SPDR Fund (XLP)
Consumer staples stocks are defensive and exhibit low volatility, making XLP an ideal ETF for put writing.
5. iShares U.S. Real Estate ETF (IYR)
Provides diversified exposure to real estate, offering high dividend yields and strong option premiums.
6. Vanguard Real Estate ETF (VNQ)
One of the largest real estate ETFs, VNQ provides broad exposure to REITs, making it a solid Wheel trade candidate for income generation.
7. iShares MSCI Australia ETF (EWA)
Invests in Australian blue-chip stocks, benefiting from a resource-rich economy and stable dividends.
8. iShares MSCI United Kingdom ETF (EWU)
Provides access to UK-based multinational corporations with strong dividend histories.
9. iShares MSCI Brazil ETF (EWZ)
Tracks Brazilian companies that offer high volatility and premium collection opportunities.
10. iShares MSCI Emerging Markets ETF (EEM)
Diversified emerging market exposure with attractive growth potential and high option premiums.
11. iShares China Large-Cap ETF (FXI)
Focuses on large-cap Chinese companies, offering global diversification.
12. United States Oil Fund (USO)
Tracks oil prices, making it useful for hedging energy sector exposure and collecting premiums in a volatile market.
13. Technology Select Sector SPDR Fund (XLK)
Invests in leading technology firms, allowing for strong growth potential with option premium generation.
Key Considerations for the Wheel Trade
Liquidity Matters: Always check open interest and bid-ask spreads for smoother trade execution.
Earnings and Dividend Dates: Avoid short-term options trades around earnings to reduce assignment risk.
Strike Price Selection: Selling puts at support levels increases the chance of profitable assignments.
Portfolio Diversification: Using ETFs alongside individual stocks enhances stability.
Final Thoughts
The Wheel Strategy works best when applied to low-volatility, dividend-paying blue-chip stocks and ETFs.
The stocks and funds listed above provide consistent premiums, steady cash flow, and reduced downside risk—key components for a successful long-term options income strategy.
By focusing on defensive sectors like healthcare, utilities, and real estate, traders can use the Wheel to generate passive income while maintaining strong downside protection.
Selecting high-quality, low-beta stocks ensures that assigned shares are worth holding, even if the market experiences short-term volatility.
Bonus Resources
Free eBooks:
How to Fix Losing Option Trades
Ultimate Guide to Option Greeks
Excel Templates:
FAQ
What is the Wheel Strategy?
The Wheel Strategy is an options trading strategy that involves selling cash-secured puts and covered calls on a stock to generate income and potentially acquire shares of the stock at a lower cost basis.
What are the best stocks for the Wheel Strategy?
The best stocks for the Wheel Strategy are typically stable, blue-chip companies with consistent dividends and strong fundamentals.
Some examples include Apple, Microsoft, and Johnson & Johnson
How do I select stocks for the Wheel Strategy?
When selecting stocks for the Wheel Strategy, it’s important to consider factors such as the stock’s volatility, dividend yield, and overall financial health. It’s also a good idea to diversify your portfolio by investing in stocks from different sectors.
What are the risks of the Wheel Strategy?
The risks of the Wheel Strategy include potential losses if the stock price falls significantly, as well as the possibility of missing out on gains if the stock price rises above the strike price of your covered call.
It’s important to manage risk by selecting appropriate strike prices and maintaining a diversified portfolio.
Can the Wheel Strategy be used for other types of securities besides stocks?
Yes, the Wheel Strategy can be used for other types of securities such as ETFs and indices.
However, it’s important to be familiar with the characteristics and risks of the security you’re trading before implementing the strategy.
Conclusion
You may be wondering why AAPL, MSFT, and TSLA are not on this list.
Today, our focus was to look for other stocks and ETFs that have high dividends and low beta.
While both AAPL and MSFT have dividends, they are not in the 3% levels like the ones that we have found for you.
TSLA is fine if you can accept the volatility of a beta of 1.4.
In truth, if these are companies that you like to own, then certainly using the wheel strategy on them would be fine.
Each investor will have their own favorite stock to use.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Gavin-
I have benefited from your trading guides. Personally I prefer trading strangles, yet I am refining my strategy to trade the short put closer to the strike price on stocks suitable for this stratagy. What metrics do you suggest in choosing the short put, delta, premium to BPR ratio?
In choosing the underlying you suggest low beta, but that also means low IVR and lower premium. What IVR and premium to BPR ratio would you suggest?
Kind regards (and happy trading)
Brian
Hi Brian, glad our guides have helped you. Each to their own really. Low beta stocks are going to move a lot slower, so it depends on your risk tolerance. High beta stocks are ok if you are prepared for the big fluctuations in P&L.
I don’t have any strict rules around premium to BPR ratio.
Thanks for these Gavin. I have been using the Wheel strategy for almost a year and like it quite a bit. I have been using F, AXP and MMM quite a bit. One factor I don’t see you address is account size. If you are going to use LMT or MSFT or particularly TSLA you need a decent chunk of capital if you end up being assigned even 200 shares.
Yes, that’s very true. Good comment. I should have mentioned that.
Insightful article, with excellent background logic. I would add that you do want to diversify across several sectors to avoid a sector winter.
Biggest win is to avoid a big losses with a significant position. You can trade through any small to midsize losses.
Security selection is an excellent skill for this and it trumps fat premiums.
100% agree.