MTO Wheel Spread: What It Is and How We Use It, Step by Step

What the MTO Wheel Spread Is

It is the most distinctive strategy at MTO Opciones. It combines two well-known ideas:

• A put credit spread built in the money, which collects a lot of premium with limited risk.
• The wheel: if we get assigned the shares, we sell calls against them until we exit the position.

The difference from the classic wheel is the order of priorities. Our goal is for the spread to work out and to close it before expiration. Assignment is not what we are looking for: it is plan B, and we decide on it from day one.

The Three Phases of the Strategy

1. We open an in-the-money put credit spread

We sell a put and buy another put at a lower strike, with one or both strikes above the current stock price. Because the spread is in the money, we collect a high premium, so the maximum loss (the difference between strikes minus the premium) is small. We explain it in detail in put credit spread in the money.

If the stock rises, the spread gets cheaper and we close it for a profit, usually well before expiration. In most trades, the strategy ends here.

2. If it goes against us: we sell the protective put and accept assignment

If the stock falls below both strikes, we don't simply accept the maximum loss. Before expiration we sell the put we had bought (collecting its value, which has risen with the drop) and let the shares be assigned to us at the strike of the short put.

All the premiums collected up to that point lower the cost basis of the shares. The result is an effective purchase price very close to the stock's current price, even if the stock has dropped quite a bit.

3. We sell calls above our average price

With the shares in our account, we sell covered calls, always with the strike above our effective price. Each premium lowers the cost basis even further. If the call is assigned, we sell the shares at a profit and the strategy ends. If the call expires worthless, we sell another one.

A Real Trade, Step by Step: PATH

This trade was made live in the MTO community with real capital. The figures are for one contract and include commissions.

Date	Action	Amount
March 23	PATH trades at around $12. We sell the 14 put ($242) and buy the 13 put ($170): a put credit spread with both legs in the money.	+$69.90
May 6	PATH drops to around $10.50 and we get assigned: we buy 100 shares at $14.	−$1,400
May 15	The 13 put expires. Before the close we sell it ($306) and sell an 11 call expiring in June ($72).	+$376.59
June 18	The 11 call expires worthless. We keep the shares.	—
June 24	We sell another call, 11.50 strike, expiring in July.	+$28.23
July 17	PATH trades at around $12 and the call is assigned: we sell the 100 shares at $11.50.	+$1,150
Result of the whole strategy		+$224.72

Note two things:

• After selling the protective put and the first call, the premiums collected added up to $446.49. That brought the effective price of the shares down to $9.53, even though we bought them at $14.
• Had we not managed the position, the trade would have ended with the spread's maximum loss: about $30. With the MTO Wheel Spread, that loss turned into a profit of $224.72.

It doesn't always work out this way. If the stock keeps falling after assignment, the shares lose value and you have to be patient; the premiums cushion the drop, but they don't eliminate it.

Advantages and Risks

Advantages

• Limited risk while the spread is open, and a clear plan if it goes against you.
• A small rally is usually enough to close the spread for a profit.
• If we get assigned, we buy at an effective price close to the market price, not the price when we opened.
• It also works for buying stocks we want to own, getting paid to wait.

Risks and Requirements

• Capital for assignment: if we get assigned, we buy 100 shares per contract. Your account has to be able to handle it.
• Choosing the right company: it only makes sense with stocks we wouldn't mind holding for a while.
• Patience: after a sharp drop, selling calls above the average price may bring in small premiums, and sometimes the best move is to wait.
• Early assignment: a deep in-the-money short put with little time value can be assigned before expiration.

MTO Wheel Spread vs. the Classic Wheel

In the classic wheel, you sell a cash-secured put with the full purchase amount set aside, and the goal is usually to get assigned. If you want to review the classic version, Mario explains it in his tutorial on The Wheel strategy (in Spanish).

The MTO Wheel Spread starts with a limited-risk, high-premium spread, aims to close early, and only moves into the wheel when the trade goes against us. It is a way to defend the position, not a way to chase shares at any price.