Stock Market – “Renting” Shares For Income
When we think of investing, there are two major areas we are familiar with in which to achieve capital growth and ultimate wealth creation.
REAL ESTATE and the STOCK MARKET
Most people feel more safe when Real Estate Investing, even though you can begin Investing in Shares with a lot less money. Besides being able to drive by and look at your investment property a major advantage is the rent you can receive as extra income.
But not too many people realize that you can also rent out your shares as an income strategy!
I’m using the term renting shares because most everyone understands the concept when talking about real estate. You buy a house and rent it out to a tenant who pays you money (rent) for the term of the lease.
Well you can do EXACTLY the same thing with shares you own.
You can rent your shares out to someone at an agreed price (rent) for an agreed time (lease) for extra income.
In this case the agreed rent is called the strike price, the rent received is called the premium, and the term of the lease is the time leading up till the expiry date.
I am of course talking about an income strategy using STOCK OPTIONS
How do Stock options work?
THE COVERED CALL
A Call Option is a contract that relates to a particular stock.
Call Options give the holder the right to buy the underlying shares at any time up until and including the expiry date of the option contract.
There are two parties involved in any option contract:
The Writer (person who sells the option)
The Taker (person who buys the option).
Options Traders are generally Takers. That is they buy Stock Options only to sell them for a profit.
When using the Covered Call strategy we are not trading options, we are selling, or writing them.
If we were to write Call options over a stock we would be covered if we had to sell our shares. Hence the name covered call.
The taker is not obligated to buy the shares, but as the writer, we ARE obligated to sell our shares if the option contract is exercised.
However, regardless of whether the taker decides to exercise their right to buy the stock or not, the premium we are initially paid as rent is ours to keep.
And if we do have to sell our shares to the taker, it means they would have gone up in value, so not only do we get to keep the premium as income, but the sale of our shares converts to cash, earning us capital growth as well.
So let’s look at an example of how this works:
Let’s say we own some XYZ shares that we paid $ 11.00 for and they are currently trading at $ 11.30
We write some Covered Calls with one month until expiry with a strike price of $ 11.50 and the premium received is 50c.
Remember we get to keep the 50c per share regardless of what happens. Money made while you sleep!
As long as the share price stays below $ 11.50 then the option will expire worthless in one month’s time and we would still own the shares to do the covered call strategy again and again.
And if the share price was above $ 11.50 then we would have to sell our shares to the option holder.
BUT we still keep our 50c PLUS the 50c capital growth we have made on our initial purchase of $ 11.00.
So we have sold our shares but have made a profit of $ 1.00 and we can just buy the shares back again if we wish to do so!
Ready to do another Covered Call.
MONEY MADE WHILE YOU SLEEP, without the possibility of your tenant trashing your house or getting behind in the rent.
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