21st Century Academy

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.

Written by Clint Maher - 21st Century Academy
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