By Aussie Rob
I’m excited that you’re taking the time to read this as the information that I am about to share with you has enabled many people to change their lives.
I need you to sit back, relax, open your mind and accept what I am teaching here, even though you might initially be thinking, ‘WOW, is this for real?’
This definitely is for real. In actual fact, I have taught hundreds, no thousands of people around the world how to do this. There is no rocket science here, just simple maths.
My motivation in sharing this two-part article with you is to sort out the ‘Gunna’s’ from the ‘Do’ers’. So many people over the years have told me that they want to change their lives and get out of the rat race but never do anything about it. I have devoted my life to helping people who really do want to help themselves.
My mission is success! My team and I are 200% dedicated to helping people become successful.
All the information in the world is useless without action. Take the first step and read this article, then if you really are a ‘Do’er’ and serious about achieving financial success, let’s make it happen. The best way to start learning about renting out shares is to think of real estate… If you owned real estate, would you rent it out or would you leave it vacant? No doubt you said that you’d rent it!
Why on earth would you leave it vacant? Why would you want to miss out on that rental income each month?
So what about shares? If you own some shares, are you renting? If not, why not? Think of the income that you are missing out on each month! Imagine if you could earn 5% per month from renting out shares. That would equate to a whopping 60% per annum, without compounding.
Mate, this is found money. This is money that could, no ‘should’ be added to your trading account each month.
Imagine the difference after a few years.
Why don’t you grab a calculator and do your maths and see what kind of difference this could make to your long-term investments.
Imagine the difference it could make to your Superannuation Fund (Aussie Retirement Fund) or your IRA (Yankee Retirement Fund) or your RRSP (Knuck Retirement Fund).
Imagine the difference it could make to you right now? If you’re retired, what could the possibility of an extra 5% make to your quality of life? If you are still working, could an extra 5% per month help towards a mortgage payment?
Think about the reasons why you want to learn this, as it will put you in the right mindset to take action and do something about it. Again, are you a ‘Gunna’ or are you a ‘Do’er’?
The concept of renting shares is to earn a monthly income from selling someone the right to buy your shares from you. The strategy is known as writing covered calls, which is an option trading strategy.
Before we get into writing covered calls, there are a few option basics that you need to understand first.
There are only two options: 1. Calls 2. Puts
I won’t be discussing Puts as the strategy that I’m going to teach you relate to Calls.
NB: As an example one option contract controls 100 US shares. Therefore, if you buy 1 Call, you are buying the rights to buy 100 shares.
Likewise, if you sell (write) Calls, you are selling someone else the rights to buy 100 shares. Note: We do this in the US market, as the profit potential is far greater than any other market.
Option contracts expire on the third Friday of the month in the US. Therefore, if it is currently August and you buy an August Call, you are buying the rights to buy 100 shares by the third Friday of August. Likewise, if you sell (write) an August Call, you are selling someone else the rights to buy 100 shares by the third Friday of August.
You can choose which price you buy or sell (write) Calls as per the following guidelines:
1. Shares priced between $5 and $25 You Can buy or sell (write) Calls in $2.50 increments. Therefore you can buy or sell (write) $5 Calls, $7.50 Calls, $10 Calls etc.
2. Shares priced between $25 and $200 You can buy or sell (write) Calls in $5.00 increments. Therefore you can buy or sell (write) $25 Calls, $30 Calls, $35 calls etc.
3. Shares priced $200 and more You can buy or sell (write) Calls in $10 increments. Therefore you can buy or sell (write) $200 Calls, $210 Calls, $220 Calls etc.
These are general guidelines as there are some cases different to this but most follow these guidelines.
The price that you choose to buy or sell (write) Calls is known as the strike price.
For example, let’s assume that you own 1,000 shares of Microflop that you bought for $23 and they’re now trading at $24. The July $25 Calls are now going for $1.15. You could sell 10 Calls and bring in $1,150. (One Call controls 100 shares, so 10 Calls control 1,000 shares, therefore, 1,000 shares x $1.15)
Why would someone pay you $1 per share for the rights to buy Microflop from you for $25 per share? They are hoping that Microflop goes up prior to the option expiring. If it went up to say, $28 per share, they could exercise their option and buy Microflop from you for $25.
Their net cost would have been $26 ($25 for the shares + $1 for the option), therefore giving them a nice profit of $2 per share. Remember, they only paid $1 per share for the option so if they sold the stock immediately, they effectively made a $2 per share profit on a $1 per share investment or a pretty cool 200% return on their investment!
Let’s now get into the actual mechanics of the strategy...
To write a covered call means: 1. Write: Means to sell 2. Covered: Means that you own the shares
To write a covered call simply means to sell a Call option against the shares that you already own. For example, let’s assume that you own 1,000 shares of Microflop, which you bought for $8.00 and they’re now trading at $9.00. The July $10 Calls are going for $1.15. You could sell 10 Calls and bring in an extra $1,150. (1,000 shares x $1.15)
Why could you sell 10 Calls? Because one option contract controls 100 shares so if you owned 1,000 shares, you could write 10 contracts. Simple maths, eh! ;-)
You are selling someone the right to buy your Microflop shares from you by the third Friday of August for $10 and they have paid you $1.15 for the right.
The exciting benefit with this strategy is that you get to keep the $1,150 whether your shares go up, stay the same price or go down. If the shares are higher than $25 at expiration (third Friday of August), then it is highly likely that they will be bought from you at $25. If so, that adds an additional $1,000 profit to the trade (because your shares had to have gone up from $24 to $25). This is called being ‘called out’.
Now let’s compare the two different scenarios here:
1. Buy the shares and sell the shares
Buy 1,000 shares of Microflop for $23.00 and then sell them for $25.00
Return on Investment (ROI): 8.7%
(Cash in: $2,000 divided by Cash Out: $8,000 x 100)
Now you can boost that return up a bit if you take advantage of a broker with buying your shares on ‘margin’.
Margin is a very simple strategy that I am surprised most people don’t know about. You can ask your broker to pay half of your initial purchase. For example, if Microflop shares were trading at $23.00, you could get your broker to fund 50% of your purchase so you would only have to pay $11.50 per share. Pretty cool, eh?
Now of course your broker won’t lend you 50% of your share purchase for free. He’ll probably charge you around eight or 9% per annum.
So there’s a little tip that nearly doubled your return! (You owe me a beer for that one when we next meet.)
Return on Investment (ROI) if on Margin: 17%
(Cash in: $2,000 divided by cash out: $11,500 x 100)
Of course you’ll have to deduct the 8% to 9% pa from your profit to cover your broker’s margin interest. If you were only in the trade for a month, you’d only have to pay him one month’s interest. So therefore, I’m sorry but your return would only be about 16% instead of 17%, but I’m sure you could live with that.
Oh, and of course your broker has to eat so he’ll charge you commission for buying the shares and commission to write the call. Commissions vary from broker to broker so I won’t be factoring in commission with any of these examples. Just remember that you’ll have to adjust the returns a tad to cover commission.
2. Write a Covered Call and get Called Out
Buy 1000 shares of Microflop for $23.00
Sell $25 Calls for $1.15 (Brings in $1,150 cash into your account)
Get Called Out for $25.00 (Called Out means getting your shares bought from you.)
Profit: $3,150 ($1,150 for selling the Calls & $2,000 profit on the shares)
ROI: 13% (Cash in: $3,150 divided by Cash Out: $23,000 x 100)
ROI if on Margin: 26% (Cash in: $3,150 divided by Cash Out: $4,000 x 100)
You would only do this if you really wanted to sell the shares at $25.00. If you didn’t, you could sell the next strike price out (27.50) which would bring in less premium (amount for writing the Call) but you would have a better chance of keeping the shares.
Tips for not getting Called Out
1. If you want to keep the shares and not get Called Out, you should always sell the Call at a Strike Price that you don’t think that the stock will get to prior to expiration.
2. If it looks as though the shares are going to be higher than the Call’s Strike Price, buy back the Calls and then sell the next higher Strike Price. For example, buy back the 25 Calls and sell the 27.50 Calls.
3. If the share price goes higher than the Call’s Strike Price, don’t panic, sit tight and wait until most of the Time Value has gone from the Premium and then buy it back. You would then be just buying Intrinsic Value.
If you’d like to learn more about Renting Shares, then go to www. lifestyletrader.com.au/sharerenting to order a FREE copy of my Share Renting DVD and Special Report valued at $97.
Aussie Rob has just released a brand new Covered Call training DVD called Aussie Rob’s Share Renting DVD that teaches step-by-step how to write Covered Calls. www.lifestyletrader.com.au/products