21st Century Academy

Renting Shares Made Easy Part 4

In our last few posts, we have looked at the great and simple Covered Call Strategy. Today we will continue the series, and look at what you would say to your Stock Broker when you go to place a trade.

Stock Broker Terminology

• Renting Shares - Covered Call
• Strike or Exercise Price - The price you are willing to sell the share
• Monthly Income - Premium
• Sell Insurance - Sell a Put

So you have selected the Shares that you own that you want to do a Covered Call on. Let’s say at the moment, your XYZ stock are trading at $23.40. You would be happy to rent them out for the rest of the month (four weeks) for a Strike Price of $25.00. You own 1000 shares, so you can do one Call Contract.

Now you can call your Stock Broker, and after quoting your account number the conversation might go something like this:

“I would like to sell one covered call on XYZ to expire at the end of this month, at a Strike Price of $25.00. What sort of premium do you think you could get me?” The Broker will refer to their computer for a moment and may come back and say, “At the moment I can get you 65c, would you like me to go ahead with the order?”. Before you rang your Broker, you would have had a fair idea of what premium you could get by checking some online data, or even a newspaper. If you are happy with the premium that is offered, you can ask them to fill the order. If you are not happy, or are a little confused, say to them that you will call them back.

Once you have decided on a premium that you are happy with, repeat the order back to your Broker, and then they will repeat the order back to you. Only then, should you confirm the Broker to fill the Trade for you.

With that out of the way, the premium for selling the Covered Call will be in your CMA Account the following day.

Renting Shares Made Easy Part 3

In the last couple of posts, we have looked at the Renting Shares Strategy. Today, let’s go over just how easy it is to do, and how a trade will actually look.

Let us assume that you already own a parcel of 1000 Blue Chip Australian Shares, and that you wanted to rent them out for the month. Depending on how much premium you are aiming for, you would want to select an exercise price that is nearly ‘at the money’, or slightly ‘out of the money’. To put it simply, at the money means a strike price at or near the current Stock price, where as an out of the money Covered Call is a Strike Price that is above the current Share Price.  The closer you are to ‘the money’, the more your rent or premium will be.

Let’s say you own 1000 of XYZ Shares. Current Share price is $9.00. It’s the 3rd of November and you want to rent them out until November expiry, which is the 27th of November. You select a strike price of $10, and for this you will receive a premium of 27 cents, or 3%. Since there is a parcel of 1000 shares, you will receive a premium, or rent, of $270. That might not sound like much, however if you are doing this with $100,000

That $270 is yours to keep, regardless of what the share price does from here. If the share prices gets to the end of the month and the share price is below $10, then you simply repeat the process the next month. If the share price is above $10, then you will have to sell your Stock at that price. So now on top of the $270, you now have an extra profit of $1000, or $1270 in total. If you had ten Covered Call contracts, then you would have a total profit of $12,700. Not bad for a two minute phone call to your Stockbroker.

Stock prices can always go down, however since we have already rented the shares out, we now have what is called downside protection. The stock will have to fall below $8.73 before you are in negative territory. That loss is on paper only though, and not realised.

That’s all for today. Next time we will look at what you would say to your Stockbroker when you want to rent shares out for the month.

Renting Shares Made Easy Part 2

Today we will continue looking at the renting shares strategy that is becoming very popular lately. As mentioned in my last post, Share Renting is known in Stockbroker talk as Writing a Covered Call. Many people suggest that the financial institutions purposely keep their terminology difficult, to keep the average small investor away from the market.

That may be the case, however we won’t get in to that argument, rather, we will learn what has to be learnt in order to effectively carry out trades. Trading can be done through a 21st Century Academy accredited Stockbroker, or you can of course choose your own Broker, provided that they are Options Trading accredited.

What makes Renting Shares so easy, is that there are only a dozen or so Stocks that the strategy works well on. These Stocks are well known Companies, that are common house hold names in Australia. If you were to Rent Shares on the US Market, then there is a larger range that you could successfully rent out.

That brings me to another point, and that is do you stick with the local Australian Stock Market, or do you branch out and trade the more lucrative US Market? The Australian Market is seen as a good entry point for many local Traders, as they are familiar with the company’s, and their business models. Your local Stockbroker, will also have a much better understanding of the Share as well, when assisting you in your trading.

The US Stock Market, does offer a lot more choice, and the market is a lot more liquid, so there is massive opportunities in getting in and out of a trade. It is also more affordable to trade the US Market, as contracts of shares are in lots of one hundred, and not one thousand that is most common in the Australian Market. Another big difference is the range between strike prices. In most US Options, there are price increments of $2.50. What this means to the Share Renter, is that there are bigger returns when renting your shares out.

That’s all for today’s post. Next time we will continue looking at Renting Shares.