Renting Shares 

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What Is Share Renting And How Does It Work?

Renting shares is a very simple stock market strategy that professional investors have been using for years to create an ongoing income from shares.  It is not unlike leasing out your property for rent.

Renting Shares is the single most powerful wealth creation tool for the everyday investor

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Renting out shares is a relatively straight forward process, lets have a look at it step by step.

The first thing you need to do is 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.  The reason you need to buy them in lots of 100/1000 is because when you rent them out you are going to be selling 'call options' and options and you can't buy an option for 1 share.

Let's say that you bought 100 ABC shares at $10 each (an overall cost of 1000).

The next step is to sell a one month call option, one strike price out of the money.  In order to understand this process we need to fully understand what a call option is.  After all the technical name for 'Share Renting' is selling 'Covered Calls'

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 instance if somebody bought a one month call option at the predetermined price of $10.50 for 100 ABC shares they would be locking in the right to buy those shares at any time in the next month for $10.50.  This person would obviously have to pay a premium for this right so why would they do this?  Because if the share price was to rise to $11.00 or even higher they would get to buy the shares at $10.50.  The next question is why wouldn't they just buy the shares?  There are a few answers but the main reason is leverage.  So what does this have to do with share renting?

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So we have bought 100 ABC shares at $10 each and now it is time to start renting out our shares.  We are going to sell a call option at the price of $10.50.  This means that for the next month we have agreed to sell our shares for this price.  In return for doing this we receive a premium of 50cents. 

At first you might not want to do this because what if the share price rises to $11 or even $13?  We will have missed out on all of that profit?  Yes and no, when share renting we are more concerned about creating income from our shares rather than the capital gains.  If you look at our percentage return it was 5% for the month.  If you multiply that by 12 months you are looking at an annual return of roughly 60%.  Not bad by anybodies standard!  By choosing to rent out shares you are effectively trading in the potential blue sky profits for a very healthy regular income.

Lets now have a look at the possible outcomes of this strategy and then decide is renting out shares is a great idea or not.

After renting your shares the stock market can go three different ways UP, DOWN or SIDEWAYS. 

THE PRICE MOVES UP?

Lets see what would happen if the share price moved up from $10 to $10.50, $11 or $13

If the share price was to rise to $10.50 this would be the best possible outcome for anyone who was renting shares.  Why?  Because the person who bought the call option at $10.50 isn't going to buy our shares because he wouldn't be receiving a discount.  Our monthly income has gone from 50 cents per share to $1 because we not only get the premium but the shares have risen in value.  That is a monthly percentage return of 10% and a yearly return of 120%.

If the share price was to rise to $11 it would appear like a bad thing for people who are renting shares but it is actually great.  The person who bought the call option would exercise his right to buy our shares for $10.50 and in doing so receive a 50 cents discount.  So have we lost 50 cents?  Not at all because we were paid 50 cents premium so we haven't actually lost a cent.  Once again that is a monthly percentage return of 5% and a yearly return of 60%.

If the share price was to rise to $13 then we would start to be worse off than if we had just bought the stock BUT remember that we can still rent out the shares for the rest of the year so we are more than likely to still end up much better off.  The person who bought the call option would exercise his right to buy our shares for $10.50 and in doing so receive a $2.50 discount.  So we very forced to sell our hares for a profit and in doing so earnt a monthly percentage return of 5% and a yearly return of 60% by renting out our shares.

THE PRICE MOVES SIDEWAYS?

If the share price was to remain at $10 then we would simply keep our premium and do the same thing again next month. The person who bought the call option at $10.50 isn't going to buy our shares because they could buy them in the open market for $10.  This is a monthly percentage return of 5% and a yearly return of 60%.

THE PRICE MOVES DOWN?

Lets see what would happen if the share price moved down from $10 to $9.50, $9 or $7 

If the share price was to fall to $9.50 then we would get to keep our shares and use the 50 cents premium would cover our 50 cents unrealized 'paper loss'. The person who bought the call option at $10.50 isn't going to buy our shares because they could buy them in the open market for $9.50. .  This is a monthly percentage return of 5% (with a -5% paper loss) and a yearly return of 60%.  As you can see Share Renting can be used as a risk reducing strategy.  Not bad considering the great returns share renting produces.

If the share price was to fall to $9 then we would get to keep our shares and use the 50 cents premium would cover part of our $1 unrealized 'paper loss'. The person who bought the call option at $10.50 isn't going to buy our shares because they could buy them in the open market for $9. .  This is a monthly percentage return of 5% (with a -10% paper loss) and a yearly return of 60%.  Once again renting out shares has actually reduced our risk.

If the share price was to fall to $7 then we would get to keep our shares and use the 50 cents premium would cover part of our $3 unrealized 'paper loss'. The person who bought the call option at $10.50 isn't going to buy our shares because they could buy them in the open market for $7. .  This is a monthly percentage return of 5% (with a -30% paper loss) and a yearly return of 60%.  The following month we would rent our shares out again and in the process help recover some more of our paper loss.

Renting Shares Overview

In short the concept behind renting out shares is to create a source of income from your shares.  Every month you will repeat the process of renting shares and see the passive income flow into your bank account.  As you can see from the above figures the annual returns that you can create from share renting is outstanding.

So where to from here?  If you would like to learn more about Renting shares then I would highly recommend that you order Jamie McIntyre & 21st Century Academy's FREE DVD

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