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Make Money Renting Your Stocks

By Edited Nov 13, 2013 0 0

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Most persons associate the concept of renting to real estate but not to their stock portfolio. Just as you wouldn't build an apartment complex and let it sit without renting or selling it, neither should you give up the additional income stream that can be earned from renting out stocks in your portfolio. If the price of some stocks in your portfolio has been relatively flat, they may be good candidates for renting.

To rent a stock, the stockholder can sell a call option against that stock. A call option gives the buyer of the option the right to buy the stock at a predetermined price before the expiration of the option (usually within 30 days). For the right to buy the shares, the option buyer/holder will pay a premium or so-called rental fee. Regardless of whether or not the stock price goes up or down, the option seller/stockholder will keep the premium. On the other hand, the option buyer/holder may exercise his right to buy or not to buy depending on the actual price of the shares at expiration.

By way of an example, lets say that you purchased some GE shares for $20 each but the share price has not moved much since your purchase. If you think the stock will go higher but might need some time to do so, you could consider renting the shares to generate some income in the mean time. If you sell a $22 call option with a premium of $0.50, here is what the profit or loss per share for each party will look like at the expiration of the option.

If the share price rises to $30.

The option holder has the right to buy the shares from you for $22. If he does so, he makes a profit of $7.5, after he deducts the cost of the shares and the premium he paid to you (30-22-0.5 =7.5). You on the other hand will make $2.5 from the appreciation of the stock price plus the premium (22-20+0.5 = 2.5).

If the share price remains the same at $20.

If the share price doesn't move, the option holder will not exercise his right to buy (though he could). That's because it would make little sense to buy a stock for $22 that's currently trading at $20. Remember, the option seller only agreed to sell at $22; the fact that the stock now trades at 20 doesn't change that fact. On the other hand, the option seller keeps the $0.5 premium.

If the share price closes lower at $19.

If the share price goes down, the option buyer will not exercise his option to buy and will lose his $0.5 but the option seller will keep the $0.5 premium. Because the stockholder earned $.05, his break-even price is now $19.5 (20-0.5). Put another way, he loses only $0.5 and not $1.0 as a result of the fall in price from $20 because he earned an extra $0.5 per share.

$0.50 might not seem like much but if the shares remain relatively flat and a call option is sold against them every month, using call options will make an additional 2.5% per month or 30% per year for the stockholder.

When Not To Use.

This strategy works best with stocks that have relatively flat price actions but be careful not to use the strategy if you have no intention to sell the stock in question. Remember, if the option holder decides to exercise his option to buy, you must give up the stock. You wouldn't want to sell options against stocks that are performing well or ones that you expect will rally soon. The strategy also limits the amount you can make on a given stock. Using the example above, notice that when the stock rallied the stockholder only made $2.5, even though the stock price went to $30 from the initial $20. This is because the option buyer is likely to buy the stock for the agreed $22 as it's now worth $30.

Ask your broker about Covered Call Options and start earning from renting your stocks.



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