| Renting shares is fast becoming one of the most | | | | sell a call option that is out of the money (above the |
| talked about Stock Market Investment strategies. More | | | | actual price of the share). Why because that way if |
| and more investors are looking at creating income | | | | we are forced to sell our shares we will at least be |
| from their shares and capital growth from property. | | | | forced to take a profit. For selling a one month call at |
| But what is share renting? Is it legal and can anybody | | | | $105 we are likely to receive about 3-6% of the |
| do it? Let's have a look at the basic concept of renting | | | | shares price. So in this case let's assume that we |
| shares and see if this investment strategy is | | | | receive $5 per share. |
| something that everybody should have a look at. | | | | I'm sure you don't need any help with step 3 but you |
| Renting out shares is very similar to leasing out your | | | | might be wondering why we can simply forget about |
| property for rent. The basic share renting strategy is | | | | our shares rather than monitoring them each day. The |
| as follows. | | | | answer is simply because we aren't too concerned |
| Step 1/ Buy a parcel of shares. If you are in Australia | | | | whether they share price goes up or down. Why? |
| you will need to buy in lots of 1000 whereas in the US | | | | Well lets now have a look at what would happen |
| you can buy in lots of 100. | | | | should the share price go up, down or sideways. |
| Step 2/ Sell a one month call option, one strike price | | | | Share price goes up above $105 to $108. |
| out of the money. | | | | We will be forced to sell our shares for $105 despite |
| Step 3/ Enjoy yourself for the month e.g. Go to the | | | | their actual price being $108. This sounds like a very |
| beach, watch the footy etc. | | | | bad out come but if you have a closer look it is |
| Step 4/ This will depend on where the share price is at | | | | actually a great outcome. We bought our shares for |
| the end of the month. Read below for more details on | | | | $100, sold them for $105 and also got paid $5 for the |
| renting shares. | | | | month. Therefore we actually made a $10 profit |
| Now if this doesn't make much sense I will now try to | | | | whereas if we had of just bought the shares instead |
| explain it in some more detail. | | | | of renting them out we would have only made $8. |
| The reason why you need to buy your shares in | | | | Share price goes sideways and remains at $100. |
| groups of 100 (1000 in Australia) relates to step 2. Call | | | | We will get to keep our shares because no one is |
| options are sold in lots of 100 shares e.g. If you buy 1 | | | | going to pay $105 for shares that could be bought for |
| call option you are actually buying a call option for 100 | | | | $100 on the open market. So in this case we have |
| shares. | | | | made a profit of $5 whereas if we hadn't rented our |
| What is a call option? | | | | shares we wouldn't have made one cent. |
| A call option gives the buyer the right but not the | | | | Share price goes down to $95 |
| obligation to buy a set number of shares, on or before | | | | Once again we will keep our shares. Had we not |
| a set date, at a predetermined price. | | | | rented out our shares we would have lost $5 but |
| For example Lets say the stock ABC was trading at | | | | because we received the $5 premium we actually |
| $100 and somebody bought a call option at $105 that | | | | don't loose a cent. |
| lasted for one month. This would give them the right to | | | | So as you can see renting shares is actually quite a |
| buy ABC at $105 no matter what the actual price of | | | | safe wealth creation strategy. Effectively what you |
| ABC was at anytime during the next month. In order to | | | | are doing is trading of your potential to make a |
| get this right, the person buying the call will need to pay | | | | massive gain in one month for a regular monthly |
| the seller a premium. | | | | income. Which one is better? Well if you average out |
| This is where we come in. | | | | your percentage returns from share renting over the |
| People that rent out their shares get paid by the | | | | year you may be surprised at how effective it can be. |
| people who buy call options. So let's say we buy 100 | | | | Share renting returns generally fluctuate from 20-80% |
| ABC shares at $100. The next thing we would do is | | | | per annum. With a modest average of about 40% - |
| sell a covered call (it is called covered because we | | | | better than bank interest I'm sure you will agree. |
| actually own the shares) at $105. We always want to | | | | |