The Wheel Strategy on SPY — TheIntrinsicInvestor

Abstract

This report backtests the Wheel Strategy on SPY across 20 combinations of delta (10Δ–50Δ) and DTE (15–60 days) from January 2018 to December 2025 using OptionMetrics end-of-day data. All positions use mid-price fills and a 50% profit target. Results show the strategy significantly underperforms buy-and-hold SPY on total return (17–40% vs 140%), but delivers materially lower drawdowns and more stable equity curves. The optimal risk-adjusted combination is 10Δ / 60 DTE (Sharpe 0.65, Max Drawdown −11.6%). The strategy is best understood as a defensive income tool rather than a growth vehicle, with a clear advantage in sideways and bear market environments.

1. Introduction

The Wheel Strategy is one of the most popular systematic options strategies among retail traders — and for good reason. The concept is intuitive: sell a cash-secured put, collect premium, get assigned if the stock falls, then sell covered calls until the shares get called away. Repeat indefinitely.

The appeal is obvious. High win rates, consistent premium income, and a mechanical process that removes emotional decision-making. But the real question — the one most traders never rigorously answer — is whether the premium income actually compensates for the opportunity cost of not simply owning the underlying.

This report attempts to answer that question systematically. Using eight years of professional options data on SPY, I built a full backtest engine simulating both phases of the wheel cycle across every major delta and DTE combination, comparing each result against a passive buy-and-hold SPY baseline.

📌

Why SPY? SPY is the most liquid ETF in the world, with deep options markets across all strikes and expirations. This minimises the impact of illiquidity on our backtest and makes the results the most directly actionable for any retail trader.

2. Strategy Mechanics

The Wheel operates in two distinct phases. Understanding the precise logic of each phase is critical for interpreting the backtest results.

Phase 1

Short Cash-Secured Put

Sell a put at target delta & DTE
Collect premium upfront
Monitor daily for 50% profit target
If 50% hit → close early, repeat Phase 1
If expires OTM → keep full premium, repeat Phase 1
If expires ITM → assigned 100 shares, enter Phase 2

Phase 2

Covered Call

Hold 100 SPY shares at cost basis (put strike)
Sell a call at same target delta & DTE
Monitor daily for 50% profit target
If 50% hit → close, sell new call (stay Phase 2)
If expires OTM → keep premium, sell new call
If expires ITM → shares called away, return to Phase 1

Parameter Space Tested

Delta Targets

10Δ · 20Δ · 30Δ · 40Δ · 50Δ

DTE Windows

15 · 30 · 45 · 60 days

Total Combinations

Exit Rule

50% Profit Target

Period

Jan 2018 – Dec 2025

Starting Capital

$50,000

3. Data & Methodology

All options data is sourced from OptionMetrics (Ivy DB US) accessed via the WRDS research platform — the same institutional-grade data used by academic researchers and professional quants. Daily option price records are drawn from the opprcd{year} tables, with underlying SPY closing prices from secprd{year}.

Options are priced at the bid-ask midpoint on each trading day. On entry days, the engine selects the option with the closest signed delta to the target within a ±10 DTE window, with a minimum mid-price of $0.05 to filter illiquid deep OTM contracts.

⚠️

Key Assumptions Mid-price execution (no spread cost), no commissions or slippage, no early assignment (expiration only), no dividends captured during share holding, one contract throughout, and cash earns no interest between trades. These assumptions favour the strategy — see Section 8 for a full discussion.

4. Results

4.1 Headline Performance vs Buy & Hold SPY

The most striking finding is the magnitude of the total return gap against passive SPY ownership.

SPY Total Return

140.0%

Jan 2018 – Dec 2025

SPY Ann. Return

11.56%

Annualised

SPY Max Drawdown

−34.1%

COVID crash 2020

Best Wheel Return

40.3%

10Δ / 45 DTE

Best Sharpe

0.65

10Δ / 60 DTE

Lowest Drawdown

−11.0%

20Δ / 60 DTE

💡

Why does a 100% win rate still underperform buy-and-hold? Win rate measures frequency, not magnitude. The 10Δ / 60 DTE combination wins every single trade, but each win is a small premium credit — maybe $1–3 per share. Meanwhile SPY gains $40+ per share in a strong bull year. You win often but leave the large directional move entirely on the table. This is the structural trade-off of all short premium strategies.

4.2 Full Parameter Grid — Total PnL (%)

Total PnL (%) — All 20 Combinations Ranked (2018–2025) vs SPY 140%

4.3 Complete Performance Table

Combination	Total PnL (%)	Ann. Return (%)	Sharpe	Max DD (%)	Win Rate (%)

4.4 Key Patterns from the Grid

Lower delta consistently outperforms higher delta. The 10Δ combinations dominate the top of the rankings. Higher delta options collect more premium per trade, but also carry greater assignment probability. Once assigned, covered call cycles can trap capital in depreciating shares for extended periods — compounding losses.

30 DTE is the weakest DTE across almost every delta level. 30 DTE appears to sit in a difficult middle ground — long enough to collect meaningful premium, but not long enough for the 50% profit target to trigger efficiently before adverse moves develop.

60 DTE dominates on risk-adjusted metrics. Longer-dated options give theta decay more time to work in your favour, allow the 50% target to trigger more reliably, and reduce the frequency of assignments in volatile periods.

4.5 The Dashboard Charts

Figure 1 — Parameter Optimisation Grid: Equity Curves, Sharpe, Drawdown & Win Rate Heatmaps

Wheel Strategy Dashboard — Equity Curves and Heatmaps

Panels A–D show cumulative return curves by DTE with buy-and-hold SPY (dashed grey). Panels E–H show heatmaps for annualised return, Sharpe ratio, max drawdown, and win rate across the full 5×4 parameter grid.

Figure 2 — 3D PnL Surface: Total Return across Delta × DTE Parameter Space

Interactive — click and drag to rotate, scroll to zoom. Surface interpolated across 20 observations. Green = higher return · Red = lower return.

5. Year-by-Year Performance

The annual breakdown is the most analytically rich part of this report — it shows precisely when the Wheel works and when it doesn't.

Annual Return (%) — Best Sharpe Wheel (10Δ / 60 DTE) vs SPY Buy & Hold

Where the Wheel Held Up

2018 — Volatile, range-bound ↓

SPY ended down ~−4.6% after a brutal Q4 sell-off. Most wheel puts expired worthless, delivering positive premium income while passive holders suffered losses. The strategy's structural advantage in choppy markets on full display.

2022 — Bear market ↓

SPY fell ~−18.2%. Low-delta puts (10Δ, 20Δ) required SPY to fall 8–12% before going ITM, meaning most expired worthless even as the market declined. The wheel's cushion significantly outperformed passive holding on a relative basis.

Where the Wheel Underperformed

2019 — Strong bull +31.5% ↑

SPY surged throughout the year. All puts expired worthless at high rates — which sounds good, but means premium collected was a fraction of the directional gain available from just owning shares. The opportunity cost is glaring.

2023 — Recovery rally +26.3% ↑

Post-bear market recovery saw SPY surge. The equity curves show the buy-and-hold gap widening sharply through 2023. 100% win rates with single-digit wheel returns versus 26%+ for passive holders tells the full story.

2024–2025 — AI bull market ↑↑

The strongest sustained period of the backtest for SPY. Wheel strategies continued grinding small premiums while SPY compounded aggressively, extending the cumulative return gap to its maximum.

2020 — COVID crash ↓↑

A swift −34% crash followed by a V-shaped recovery. The speed of the crash forced some assignments near market lows, but the subsequent recovery helped recover covered call losses. The drawdown was far smaller than buy-and-hold.

Market Regime Summary

Market Regime	SPY	Wheel Strategy	Winner
Strong bull market (2019, 2023, 2024)	High gains	Capped at premium income	SPY
Moderate bull	Solid gains	Underperforms but positive	SPY
Sideways / choppy (2018)	Flat / negative	Positive premium income	Wheel
Bear market (2022)	Large losses	Smaller losses	Wheel
Sharp crash (2020 COVID)	−34% drawdown	Significantly smaller drawdown	Wheel

6. The Optimal Combination

Two combinations emerge as clear leaders depending on what you prioritise.

📊

Best Total Return: 10Δ / 45 DTE — 40.3% total, 4.52% annualised, Sharpe 0.53, Max DD −16.9%. A marginal improvement in absolute return over the 60 DTE variant at the cost of a slightly higher drawdown. For those focused purely on maximising income, this is the narrow winner on raw numbers.

What to Avoid

🚫

50Δ / 30 DTE — Worst Combination — 17.2% total return over 8 years (2.1% annualised), Sharpe 0.21. Selling at-the-money options with 30 days to expiry creates frequent assignment risk, traps capital in depreciating shares through covered call cycles, and compounds losses in trending markets. The higher per-trade premium does not compensate for the increased adverse assignment frequency.

7. When the Strategy Breaks Down

This is perhaps the most important section for anyone considering deploying capital in a wheel strategy. Understanding the failure modes is as important as understanding the wins.

🐂 Sustained Bull Markets

The Wheel is structurally capped on the upside. In multi-year bull markets (2019–2021, 2023–2025), premium income compounds slowly while SPY compounds aggressively. The opportunity cost is not just one year — it accumulates. After 8 years, the gap in this backtest is ~100 percentage points.

⚡ Sharp, Fast Crashes

A gap-down crash (2020 COVID, −34% in ~5 weeks) assigns shares immediately at a strike that is underwater. Covered calls then cap your recovery. The faster and deeper the crash, the longer the recovery cycle takes. Higher delta combinations suffered most severely in this scenario.

📈 Volatility Spikes at Entry

A VIX spike creates an illusion of attractiveness — higher IV means more premium. But entering short puts into a vol spike means entering into a fast-moving, potentially directional market. If the trend continues after the spike, assignment follows immediately into the worst possible conditions.

📉 Prolonged Bear Markets

A slow grinding bear (2022 is the closest example here) forces repeated assignments. Each put assignment means buying shares that continue falling. Each covered call caps the recovery. Capital becomes trapped cycling through assignments and call sales while the underlying trends lower.

⚠️

The 2020 lesson for the Wheel — This backtest uses a 10Δ put which requires roughly a 10% SPY decline to go ITM. In February–March 2020, SPY fell 34% peak-to-trough in under 5 weeks. Even a 10Δ put was assigned deep ITM. This is the tail risk that win rates don't capture — rare but severe.

8. Risks & Limitations

All backtests make assumptions. The more transparent those assumptions, the more useful the results. Here are the key limitations of this study.

Assumption	Impact on Results	Direction
Mid-price execution	Real fills are at the bid (selling options). Actual premiums collected will be lower than modelled by the bid-ask spread, which on SPY options is typically $0.05–$0.25.	Favours strategy
No commissions	With 94–161 trades per year across some combinations, commission costs of $0.65–$1.00 per contract leg meaningfully erode returns, particularly on low-delta small-premium trades.	Favours strategy
No early assignment	In practice, deep ITM puts or calls can be exercised early, particularly around ex-dividend dates. This is rare on SPY (cash-settled ETF, no dividends on options), but possible.	Minor impact
No dividends	SPY pays quarterly dividends (~1.3% annually). During Phase 2 (share holding), dividends are not captured in this model. This understates the wheel's Phase 2 income slightly.	Slightly conservative
No interest on cash	Idle cash earns nothing in this model. In reality, a cash-secured put requires collateral which could earn Treasury bill rates (~4–5% in 2023–2025). This meaningfully understates the strategy's total return in a high-rate environment.	Conservative
Single contract	No position sizing, scaling, or compounding. Real-world implementation would need to account for margin requirements, portfolio allocation, and trade sizing.	Neutral
No stop losses	The strategy uses only a 50% profit target, no stop loss. Adding stops would reduce the severity of the worst losing trades.	Mixed impact

⚠️

Net effect of assumptions — The combination of mid-price fills and no commissions likely overstates real-world returns by 15–30% in absolute terms, depending on trade frequency and broker costs. The 10Δ / 60 DTE combination (fewest trades per year) would be least affected. High-frequency short-dated combinations (10Δ / 15 DTE) would see the most meaningful erosion.

9. Conclusion

The Wheel Strategy on SPY is not a way to beat the market. This backtest makes that clear — across 8 years and 20 parameter combinations, no version of the wheel came close to matching buy-and-hold SPY's 140% total return.

But that framing misses what the strategy is actually for. The Wheel is a volatility harvesting income strategy that trades away upside participation for premium income and downside protection. The 2018 and 2022 results — both years where SPY was negative — show the strategy doing exactly what it is designed to do.

1️⃣

Lower delta, longer DTE is the dominant strategy. The 10Δ / 60 DTE combination produced the best Sharpe ratio (0.65), second-lowest drawdown (−11.6%), and 100% win rate. Selling deep OTM with plenty of time to decay is the optimal parameter region across almost every risk-adjusted metric.

2️⃣

Win rate is a misleading metric. The average win rate across all 20 combinations was 94.7%. The worst total return combination (50Δ / 30 DTE) had an 89% win rate. High win rate is a structural feature of short premium strategies — not evidence of a superior strategy.

3️⃣

The strategy shines when markets don't. The Wheel's relative advantage is most pronounced in bear markets and high-volatility sideways environments. In sustained bull markets — which characterised most of 2018–2025 — the opportunity cost of not owning SPY compounds relentlessly.

For someone who wants lower volatility, smaller drawdowns, and consistent premium income — and who accepts a significantly lower ceiling on returns — the Wheel Strategy on SPY is a legitimate, systematic approach. For someone trying to grow wealth aggressively over a long time horizon in a bull market, it is not the right tool.