But when you get assigned at $20, the price of the underlying could be at $18 or even lower at $16 or $14. Yes you earned about 50 cents to $1+ on premiums but you just lost $2, $4 even $6 on the underlying which is what you are ultimately aiming to profit from. I might not get filled at $20 but when I do, I know I got filled at the best price at the time. I didn't lose anything. If I don't get filled I don't get filled but when I do get filled, I get the best price available so I am better positioned when I tp or even when I make a loss. Same thing when I tp, I tp at the best price available if I get filled. If I don't get filled, I just wait. But when you tp, you tp at your strike that again could several dollars or even 10's of 20 dollars away while earning several tens of cents to $1+ in premiums. The ultimate goal of the wheel strategy is not really to profit from option selling; it is really to still profit from the underlying, is it not? I mean if you are into profiting from option selling then there are lot more profitable, lot more price efficient option strategies out there than the wheel. But if you were going to profit from the stock, then why not just invest in the underlying so you get the full profit or with call options if you want to save on cost.
let look at a real example in which i get assign and on nio stock at 58 and selling premium on it
I aim for 1% premium for put and call every week and that is 4% a month. And when you sell 1% premium on nio you can sell it a few dollar away of course I can never have the 200 - 500% gain selling a call options
but if you have had a limit buy at 58 and you are filled now you would be sitting on a loss (sure no big deal) and waiting to sell it at $200 which may or may not ever occur but I would be busy selling put and call
it is just a different way of trading i certainly would not want to be holding a stock and not generating income from it (apart from dividend)
Looking at this real example of NIO. On Jan. 15, you got assigned for the 58 strike put. The price of NIO closed at $56. 27 with low on that day of $55.67. You could've got in at least as low as $56.27 if not as low as $55.67 but you had to buy the stock at $58, a difference of (56.27-58) = $1.73 at close and up to $2.33 if you were lucky to get it at absolutely the lowest, all higher than what you got compensated for with the premium. And while you were holding the underlying covering for the short call, you exposed even bigger opportunity cost with the wheel strategy that some of the other posters might have mentioned in that you had to forgo the opportunity to sell it at profit and instead held it until it was making a loss. After having the stock, the price of the stock actually reached as high as $64.52 on Jan. 25, 2021 or at least at $61.95 at close of Jan. 22, 2021 so even with the price assigned to you at $58, and taking the closing price on Jan. 22, you could've made a profit of (61.95-58) = $3.95 and if you had bought the stock outright at assuming $56.27 the previous closing price, you would've made an even higher profit of (61.95-56.27) = $5.68. Instead you just made (0.88+0.58) = $1.46 even including the premium on Jan. 25, 2021 while forgoing a profit of at least $3.95, with a price from option assignment for a difference of (3.95-1.46) = $2.49 If it was from buying the stock outright, the opportunity cost or the profit difference would've been even bigger at (5.68-1.46) = $4.22. And even if you didn't want to wait out until Jan. 22 or Jan. 25, there were plenty of chances when the price was higher than even the assignment price of $58 allowing you to make +ve profit before Jan. 22 but you had to forgo them all just to hold the stock to cover the short call that provided you the income. And then finally the stock went into a loss. So now you not only forwent actual profit, you are incurring real losses on your underlying. The price after Jan. 25 dropped to as low as $54.37 or $56.67 which would've allowed you to make a tiny profit if you had bought the stock outright at $56.27 but since you bought the stock at $58, via option assignment, now you are making a loss of $1.33 using the closing price on Feb. 25, barely being covered by the option premiums of (1.46+0.59) = $2.05. If we had taken the lowest price during the week ending Feb. 5 and if the week really ended on that price of $54.37, the loss of (54.37 - 58) = $3.63 wouldn't be covered at all by the option premiums. And then the price went up higher again to $62+ the week after but the same story repeats itself again, you had to forgo the profit potential for the sake of protecting the short call that generated you income. And then the price of the stock went into even bigger loss in the weeks after until now, the price of the stock is at $50.68. So with the stock that is still in your possession bought at $58.00 (that you could've bought at $56.27 or as low as $55.67), you are currently incurring a loss of (50.68-58.00) of $7.32, with income of $7.77 from options, a net income of $0.45 while incurring an opportunity cost of $1.73 when buying the stock outright and at least $3+ profit that you could've earned along the way while covering for the "income generating" calls.
So yes on the surface, you are generating income from option selling but only at the expense of the underlying stock that is actually capable of making lot higher income via profit even after being eclipsed by the assignment from option selling while at the same time still have to endure the losses that will eventually overtake the income generated by the option selling but could've actually be mitigated by hedging with options. Another way to look at the wheel strategy is that it's forcing both the underlying and the option to forgo its strongest mechanism to generate income in the most inefficient way. The strongest part of the underlying is its delta of 1 that could've generated income via profit dollar for dollar and yet it's forced to stay in the background to cover for the option that only has a delta of <1 to generate only partial income. The strongest part of an option is actually its leveraged cost because of its <1 delta so it's forced to only provide limited protection to the underlying when it's suffering dollar for dollar losses.
