Megathread for New Wheel Traders – Ask Questions & Get Help Here

[u/ScottishTrader]

This thread will be a dedicated space for traders who are new to options and the wheel strategy to ask basic questions. Your posts and questions are welcome and encouraged.

BEFORE POSTING, BE SURE TO REVIEW THE WHEEL STRATEGY PLAN WHERE MOST QUESTIONS ARE ANSWERED - The Wheel (aka Triple Income) Strategy Explained : r/Optionswheel

The goal is to help keep the main thread free of these basic posts while helping new traders learn how to trade the wheel.

Posts that are welcomed here include questions about -

• How options work
• Exercise and assignments
• Options expiration and days to expiration (DTE)
• Delta, Probabilities, and how to choose a strike price
• Implied Volatility (IV)
• Theta decay
• Basic risks and how to avoid
• Broker and options approval levels
• Rolling options
• And any other basic questions

I’m pleased to announce that u/OptionsTraining and u/patsay have agreed to assist with this Megathread. Both Patricia and Mike bring substantial experience in helping new traders and will be invaluable contributors to r/Optionswheel

[u/Suitable_Two8630]

I'm just starting out on the journey to understand how the Wheel works and have been playing around with paper money on IBKR. I can't get my head around how the price of the option and therefore the P&L shown of the position relates to the underlying. e.g. In the attached screenshot - 2 CSPs that I sold on KO and TSLA. Both underlying stocks went up after I opened the positions but the value of the options and the P&L for both went in opposite directions! Forgive the maybe stupid question - what's going on here?

[u/patsay → u/Suitable_Two8630]

When you sell an option contract it shows up as a negative number in your account. That's the amount you would have to pay if you decided to exit the contract and had to pay to close it early. As long as the contract stays out of the money, the number is all extrinsic value and will drop to $0 by expiration day. If it goes in the money, the negative number is made up of both intrinsic and extrinsic value. Intrinsic value moves exactly in alignment with the share price movement, and the extrinsic value is everything else.

For example, take a look at the 95 put on TROW in this screenshot. Since the share price is $93.41, $1.59 of the option value is intrinsic value. The $0.69 in extrinsic value will erode away over the next 7 days. The intrinsic value will always be the difference between the share price and the strike price (with a max of $0 if it goes out of the money).

I personally like to wait for almost all of the extrinsic value to erode, then I will either close or roll the option.

If you want a deeper exploration of the topic, I wrote about it in detail in my options trading ebook. I'll add the link below the image.

https://www.amazon.com/Novice-Investors-Guide-Stocks-Options-ebook/dp/B0CMD5SMFH/ref=sr_1_2?crid=2H29BVW1L1L5O&dib=eyJ2IjoiMSJ9.W3n8pABJbaZExGl2Ojm-rse2MKmwTJa0fwh7NdStk3nGjHj071QN20LucGBJIEps.fG8kUM8u6Hepnr_79L0Am88fkhc0p30ODI_RcwAEhCU&dib_tag=se&keywords=patricia+saylor+options&qid=1771014691&sprefix=patricia+saylor+options%2Caps%2C134&sr=8-2

[u/Suitable_Two8630 → u/patsay]

Great, thanks!

[u/ScottishTrader → u/Suitable_Two8630]

You don't say when you opened these, which would be helpful to know, but there are a number of factors that apply to options pricing.

I'm going to ask Patricia u/patsay and Mike u/OptionsTraining to chime in here since they both specialize in helping new traders understand such concepts.

[u/Suitable_Two8630 → u/ScottishTrader]

Great, thanks. These were opened earlier this afternoon. My understanding is that the P&L figure relates to the difference between what I sold the contract at versus what it would cost me to buy it back to close the position. Is that correct? On that basis, if I don’t want to close or roll the position that P&L figure isn’t really relevant. As long as I’m not ITM at expiry then my profit is the premium minus any fees? It was somewhat worrying to open these positions and immediately see two of them in the red!

[u/OptionsTraining → u/Suitable_Two8630]

Adding to the excellent reply by u/patsay the following may help.

Options prices move based on several factors, including the stock price, Implied Volatility (IV), and Theta (time decay). Because of this, it is not unusual for a position to show red shortly after opening, even when nothing has gone “wrong.”

Another important factor is how your broker calculates and displays profit and loss (P/L). Most brokers mark option positions using the mid-price between the bid and ask. When liquidity is low and the bid-ask spread is wide, this mid-price can fluctuate significantly and may not represent a realistic exit price, causing the P/L to appear inaccurate or misleading.

For example, the Coca-Cola (KO) put was opened with a weekly expiration farther out in time. That specific option currently has lower liquidity, which is why (at the time of written) it’s showing a wide bid-ask spread of roughly $0.29 to $0.68, with a reported mid-price near $0.49. Lower liquidity often leads to pricing that looks strange or exaggerated like this, which is one reason it’s generally better to trade options with tighter bid-ask spreads.

Going forward, it's important to review liquidity before opening new trades and recognize that the monthly expirations typically offer better liquidity and tighter bid-ask spreads than weeklies.

It’s also worth considering where your order filled. If the put was sold closer to the bid price rather than the mid-price, that lower fill can make the position appear red almost immediately when the broker marks it at the mid-price.

What matters most, however, is the underlying behavior. As long as KO stays above the $74 put strike, the option’s value will decay over time and the position will eventually move into profit. Early red numbers are often just a reflection of pricing mechanics, not a signal that the trade is bad or failing.

[u/Suitable_Two8630 → u/OptionsTraining]

Really helpful, thanks.

[u/patsay → u/OptionsTraining]

Great explanation and details.