Share 'renting'?

[silence]

I watched one of those 'get rich quick' videos of a seminar. The guy talks convincingly about 'renting out' your blue chip shares. Anyone got any idea what the proper name for this is? i.e futures, warrants, options? He talked so vaguely about this concept that he didn't even say what it was called. But he gave the impression that once you had 50000 bucks to invest, you could replace your income.

[JetDollars]

The actual name for share renting is writing a covered call against your existing shares. By doing so you will get a monthly premium depend on what shares you are holding. This will generate an income between 3%-5% monthly or more...

[still_in_school]

Hi Jetdollars,

if you do write a cover call against your shares, can you still trade them, or you can not, as you are in position, to have the person, who is renting your shares, to do what they want with your shares, with what options they write, only allowing you to let your shares just sit there, and hopefully grow... while the share renter.... writes the options against them...

... or am i some what half off the track...

Cheers,
sis

[JetDollars]

StillInSchool,

As a covered call writer you can't sell your shares until the expiry date of the contract.

It's similar to Property. If you rent the property to the tenant then you get the rent, but when you sale the property then you don't get the rent which is equivalent to the premium of shares renting.

If you write out-of-the-money call options then if your options exercise you will still benefit from it but limited to the exercise price.

The best book to learn and understand this strategy that I found is 'The Secret of Writing Options' by Louise Bedford.

[still_in_school]

Thanks for the info :)

Cheers,
sis

[JetDollars]

SIS,

Not a problem.

I suggested you buy 'The Secret of Writing Options' by Louise Bedford if you want to know more about writing options

[Aceyducey]

Yes they are termed Covered Calls.

Contracts must be sold on the ASX for a minimum of 1,000 shares per contract. Only certain brokers let you write covered calls & there is a brokerage fee that applies!

You have to be careful about which shares you buy to write the calls because you need enough liquidity in the options market.

You CAN sell the shares before the covered calls you've written expire.

In this situation you are left with what is known as a Naked Call.

The usual practice when writing covered calls is if you sell the shares you buy back the call options at the same time so you're out. This is much safer.

Note that it is easily possible to get burnt with covered calls.

Firstly if you have 100 shares of a stock at $10 and write a 1 month covered call at $11.50 (getting paid 40c for the call or $400)....if the share goes above the $11.50 mark it may (not always) be exercised. At this time you get the extra $1.50 per share - sounds great right...you can't lose.

BUT if the share keeps rising you have to dig into your personal cash to buy another 1,000 shares of the stock and are in the position where it can cost you more to buy back in than you receive in 'rent' from covered calls for a number of months.....

ALSO if the stock is fundamentally unsound, it can keep falling to the point where you are not making enough on the covered calls in a year to cover the capital you've lost in the share price.....Davnet is one stock where I know this happened to people.

Covered calls are best used on sideways & falling stocks with solid but not flashy fundamentals & good resistance lines.

That way you don't run the risk of being forced to use your own cash if the stock is too successful or losing your original investment if the stock is too unsuccessful.

Cheers,

Aceyducey

[JetDollars]

Aceducey,

Thank you for a very details replied.

Like you mentioned, covered calls is great if the stock is moving sideway or falling, then you would use naked calls but it's a very dangerous for in-experience trader (like myself).

So the best place to start writing calls is to only write calls against your existing shares that you are holding and it's a good company.

The prefer stock for writing covered calls: NCP, NAB, CBA, TLS, BHP, LLC, RIO...just to name a few.

You can buy insurance for your covered calls writing options by taking a long term put options against the shares that you are writing. But for the first 1 or 2 months you won't make much money because by taking long term put will be much more premium than your first 1 or 2 calls. But in long term you will generate income from it since you already have insurance against that share therefore you just keep writing covered calls against it.

Eg.
1. Purchase NCP shares $12.45 for 5000 shares = $62,250.
2. Write a covered calls options 5 contract at $12.50 expiry date 29/07/04 for $0.345 per share = $1,725 for that month on premium.

If the share price go about $12.50 then you might get exercise in that case your total return will be $2140 for July Month and keep doing that every month.

[silence]

BUT if the share keeps rising you have to dig into your personal cash to buy another 1,000 shares of the stock and are in the position where it can cost you more to buy back in than you receive in 'rent' from covered calls for a number of months.....



Are you saying that you only HAVE to buy the shares again if you particularly want to hold shares in that company? I'd just change companies if that happened, because then the price has gone up, why buy again. Thanks though, now I can research it before I get that much money (I am a student, and my yearly income is under $10000, so I won't be writing covered calls for many years yet.). ::) :P

[JetDollars]

Silence,

If you still want to hold on you postion with the same shares then you have to buy back the shares.

Like you said, you can just change the company and do the same thing again.

Naked calls is not a good way to stay trading if you are a novice trader. Once you get more experience that you can start using naked calls strategy because with naked calls you loss will be unlimited where as you profit will be limited.

[profithunter]

I watched one of those 'get rich quick' videos of a seminar. The guy talks convincingly about 'renting out' your blue chip shares. Anyone got any idea what the proper name for this is? i.e futures, warrants, options? He talked so vaguely about this concept that he didn't even say what it was called. But he gave the impression that once you had 50000 bucks to invest, you could replace your income.

Was this a Jamie McIntyre video by any chance??

[Jett_Star]

Thanks JettDollars and AceyDucey!

Your choice of analogies and examples made it really clear.

:)

[JetDollars]

Was this a Jamie McIntyre video by any chance??

It must be him because I haven't heard anyone talking about share renting except JM. I watched his 3 hours video last night, he take covered calls strategy so simple, but never explain the down side if the share heading south.

Let take NAB as an example, whoever bought NAB at the begin of this month and write a covered calls against their shares would be crying at the moment.

But if this person smart enough then they would buy a 12 months put options at the same time which cover them from this down side.

The other option is to buy back your covered calls which will cost you very small amount of money but you can't sale your shares because the lost is quite huge comparing to the price at the beginning of this month.

[profithunter]

Hey Jet,
I just finished watching JM's video too.

I was surprised at the amount of assumptions he was making, and made out writing covered calls to be childs play.

There are quite a few downsides as you pointed out.

[JetDollars]

ProfitHunter,

If you take a close look at the audience, most of them are very old. That why JM introduce those term to them so that they get fire up and buy his product ie. HomeStuday Video and Seminar.

[stefan]

Ah, another one of those videos... Guys, get serious. You will never learn something useful from these gigs. They are always talking about fantastic ways to get rich but they will never tell you how to do it. As you just said, he talks about ways but doesn't give you the background you need to succeed.

There is only one way to get successful in trading shares. And that's learning it step by step just as you would with any other job. If you want to become a teacher, chef, mechanic or electrician then you can't just buy a video. People still belive that the stockmarket is different. Well, it's not. No tape in the world is going to make you rich. Nor does it contain any useful hints on how to become more successful. It does however add more money to the fortune of its creator.

At least it's good to see that you guys realise the questionable methods used in these tapes.

Happy trading

Stefan

[JetDollars]

Stefan,

The video tape was given to me for free from the investment expo and yes it is just and adverting to sale their homestudy programs and seminars.

Since it is for free so it's worth watching.

I agreed with you that to be successful in shares trading you need study yourself, Video tape does not teach you that skills but sometime can point you into the right direction.

[BradK]

Jamie McIntyre makes out you can get up to a 5% return every second month... about 30% per year. If it sounds too good....

I used to write covered calls on Oxiana, Oil Search, Lihir, and did well from it - around15% per year cash on cash return consistently over the year.

Then, I went to calandar bull spreads and it gives a better return. Careful to novices though. You could get really burned!

Brad

[Ageo]

Covered calls are a useful strategy in a market like now where you can offset your losses. You see the only real risk is the profit potential you might lose if they exercise you. Otherwise if your strike price stays out of the money your premium you collect will offset any falls in the share price. The time i wouldnt recommend such a strategy is in a bull market. This strategy shouldnt be used alone, i.e if a company is moving forward than just accept the capital growth its giving you (along with its dividends), but when its growth is stagnate or falling (in todays case for most) you can write covered calls to collect some "rent" (premium) which will offset the loss and keep you a happy customer. Short term covered calls are always good since you never know when the market will bounce back.

Hope this helps ;)

[mazzatelli1000]

Covered calls are a useful strategy in a market like now where you can offset your losses. You see the only real risk is the profit potential you might lose if they exercise you. Otherwise if your strike price stays out of the money your premium you collect will offset any falls in the share price. The time i wouldnt recommend such a strategy is in a bull market. This strategy shouldnt be used alone, i.e if a company is moving forward than just accept the capital growth its giving you (along with its dividends), but when its growth is stagnate or falling (in todays case for most) you can write covered calls to collect some "rent" (premium) which will offset the loss and keep you a happy customer. Short term covered calls are always good since you never know when the market will bounce back.

Hope this helps ;)

I would like to add that you can pursue the covered call strategy if you dont mind the stock being called away.

[cutz]

I dunno if these are the ideal conditions for covered calls unless you’re certain you want to take a loss on your losers as the likelihood of your stocks being called away are pretty high, especially if there’s a massive rally this month.

[cutz]

Sorry mazzatelli1000,

You beat me to it.:)

[jackson8]

hi all
i write covered calls on stocks i purchase just for doing so , i do it on a revolving basis always selling dtm option to start with so that i have some downside protection but still receive a premium

if the underlying price rises i leg in to buy another lot then write again over these . over a period of a month may leg in three to four times . i receive my premium and if the stock is called away i have still made profit then start all over again. maybe the same stock maybe another

i do not become emotionally involved with the stock they are purely an income producing stream and i treat it as a business and have a tight plan that i stick to just as if i was running a real business of any other kind

only downside is the capital required thats why usually write deep in money so that at end of month have cash back in bank in case need for something else

thru comsec i beleive it takes 24 hours to have stock released from colateral before they can be sold on market again

[cutz]

hi all
i write covered calls on stocks i purchase just for doing so , i do it on a revolving basis always selling dtm option to start with so that i have some downside protection but still receive a premium

if the underlying price rises i leg in to buy another lot then write again over these . over a period of a month may leg in three to four times . i receive my premium and if the stock is called away i have still made profit then start all over again. maybe the same stock maybe another

i do not become emotionally involved with the stock they are purely an income producing stream and i treat it as a business and have a tight plan that i stick to just as if i was running a real business of any other kind

only downside is the capital required thats why usually write deep in money so that at end of month have cash back in bank in case need for something else

thru comsec i beleive it takes 24 hours to have stock released from colateral before they can be sold on market again

Just a thought, why don’t you write a short put instead of buy/write covered call, therefore tying up less capital, not a recommendation just wondering why one and not the other.

cutz.

[Mofra]

thru comsec i beleive it takes 24 hours to have stock released from colateral before they can be sold on market again
They can do it over the phone and place the order for you straight away. If you're nice, they still only charge the online rates. Have done so a number of times myself.

[jackson8]

Just a thought, why don’t you write a short put instead of buy/write covered call, therefore tying up less capital, not a recommendation just wondering why one and not the other.

cutz.
will have to apply for level 3 or 4 options trading to do so

i balance my trades between otm , atm , itm to cover all contingentcies i like picking up the extra cash when a otm call is crossed and excercised therefore receiving extra on the share itself

[Ageo]

I dunno if these are the ideal conditions for covered calls unless you’re certain you want to take a loss on your losers as the likelihood of your stocks being called away are pretty high, especially if there’s a massive rally this month.

cuts the only time you are gonna get exercised is if your option goes ATM (which is rare) or ITM (they will make a profit). It would be stupid for the individual to exercise and option to lose money (although it can happen from time to time).

For people that are simply buying and holding (longer term) simple option strategies like covered calls can offset losses as mentioned earlier and also protective puts (downside hedge). Short term trading is a little different

[mazzatelli1000]

will have to apply for level 3 or 4 options trading to do so

i balance my trades between otm , atm , itm to cover all contingentcies i like picking up the extra cash when a otm call is crossed and excercised therefore receiving extra on the share itself

Do you also vary your expiration dates?
Furthermore have you considered purchasing a deep in the money call instead of stock - creating a diagonal spread

This would help reduce your margin requirements

[jackson8]

Do you also vary your expiration dates?
Furthermore have you considered purchasing a deep in the money call instead of stock - creating a diagonal spread

This would help reduce your margin requirements

i normally go month to month . the annual return is higher and the short time span gives me more control over my money

[mazzatelli1000]

i normally go month to month . the annual return is higher and the short time span gives me more control over my money

So your risk is concentrated on one particular month each time. Diversification comes in the form of different strikes for different levels of downside protection

[jackson8]

Do you also vary your expiration dates?
Furthermore have you considered purchasing a deep in the money call instead of stock - creating a diagonal spread

This would help reduce your margin requirements

are you refering to what i know as a call bull spread

if so requires me to upgrade options tradeing account to level 3 or 4 comsec not to helpfull with this even though have been tradeing shares with them for 8 years now

are you aware of other tradeing accounts which are less restrictive , would be happy to use a strategy with less risk. but have been with comsec 9 years and havent really bothered to look around for others.

regards

[mazzatelli1000]

are you refering to what i know as a call bull spread

if so requires me to upgrade options tradeing account to level 3 or 4 comsec not to helpfull with this even though have been tradeing shares with them for 8 years now

are you aware of other tradeing accounts which are less restrictive , would be happy to use a strategy with less risk. but have been with comsec 9 years and havent really bothered to look around for others.

regards

Apologies, I should have been clearer - the deep ITM call would have been longer term (basically substituing the stock itself as its delta would be very close to 1)than your short calls - making it a diagonal spread, whereas the call bull spread means both options expire at the same time.

I would suggest Interactive brokers, and maybe optionsXpress as they are less restrictive and commissions are much lower than that of Commsec.

There is also the option of entering covered calls and various other spreads as one order, instead of legging in like you would at Commsec, which could mean poor execution.

[jackson8]

Apologies, I should have been clearer - the deep ITM call would have been longer term (basically substituing the stock itself as its delta would be very close to 1)than your short calls - making it a diagonal spread, whereas the call bull spread means both options expire at the same time.

I would suggest Interactive brokers, and maybe optionsXpress as they are less restrictive and commissions are much lower than that of Commsec.

There is also the option of entering covered calls and various other spreads as one order, instead of legging in like you would at Commsec, which could mean poor execution.

thanks for that
i will check out optionsxpress and look at your recommendations as above, anything that may give us an upper hand should not be discounted.

[mazzatelli1000]

http://www.universalwealthcreation.com/forum/viewtopic.php?f=3&t=598&start=15

hehehe
Just an example of the spruiking that is STILL going on despite the tough market conditions
There are alot of "successful" option traders in that thread. :rolleyes:

[sails]

http://www.universalwealthcreation.com/forum/viewtopic.php?f=3&t=598&start=15

hehehe
Just an example of the spruiking that is STILL going on despite the tough market conditions
There are alot of "successful" option traders in that thread. :rolleyes:

Interesting how the posts thinned out in 2008 :D

[wayneL]

Funny how the posts thinned out in 2008 :D

:):):rolleyes:

[sails]

Haha, now it's obvious I edited my original post and changed "funny" to "interesting". In reality, it would've been pretty disheartning for newbie option traders with $$ signs in their eyes aiming to retire by writing bull put spreads last year.

Saw an ad on TV the other day for Safety in the Market. Made me think that spruikers will now be back in force to replenish their ranks by telling new people who have lost money, "Now, if you had followed our system ... " :rolleyes:

[mazzatelli1000]

"Now, if you had followed our system ... " :rolleyes:

...you would write bear call spreads!!!
40-50% returns per month!!!!

Some say it isn't possible, but isn't it always those who can't do it that say that??
Snap out of your rut and start believing in yourself!!!
YOU CAN DO IT!!!

HALLELUJAH!~~~~!!!!:engel: