Banjo Smyth

Renting shares is fast becoming one of the most talked about Stock Market Investment strategies. More and more investors are looking at creating income from their shares and capital growth from property. But what is share renting? Is it legal and can anybody do it? Let’s have a look at the basic concept of renting shares and see if this investment strategy is something that everybody should have a look at.

Renting out shares is very similar to leasing out your property for rent. The basic share renting strategy is as follows.

Step 1/ Buy a parcel of shares. If you are in Australia you will need to buy in lots of 1000 whereas in the US you can buy in lots of 100.

Step 2/ Sell a one month call option, one strike price out of the money.

Step 3/ Enjoy yourself for the month e.g. Go to the beach, watch the footy etc.

Step 4/ This will depend on where the share price is at the end of the month. Read below for more details on renting shares.

Now if this doesn’t make much sense I will now try to explain it in some more detail.

The reason why you need to buy your shares in groups of 100 (1000 in Australia) relates to step 2. Call options are sold in lots of 100 shares e.g. If you buy 1 call option you are actually buying a call option for 100 shares.

What is a call option?

A call option gives the buyer the right but not the obligation to buy a set number of shares, on or before a set date, at a predetermined price.

For example Lets say the stock ABC was trading at $100 and somebody bought a call option at $105 that lasted for one month. This would give them the right to buy ABC at $105 no matter what the actual price of ABC was at anytime during the next month. In order to get this right, the person buying the call will need to pay the seller a premium.

The next step is where we come in.

Come back and see part 2 in a few days.

This entry was posted on Sunday, October 5th, 2008 at 2:56 pm and is filed under Renting Shares. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.