Renting Shares - Is it Possible to Rent Out Stocks?

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.

This is where we come in.

People that rent out their shares get paid by the people who buy call options. So let's say we buy 100 ABC shares at $100. The next thing we would do is sell a covered call (it is called covered because we actually own the shares) at $105. We always want to sell a call option that is out of the money (above the actual price of the share). Why because that way if we are forced to sell our shares we will at least be forced to take a profit. For selling a one month call at $105 we are likely to receive about 3-6% of the shares price. So in this case let's assume that we receive $5 per share.

I'm sure you don't need any help with step 3 but you might be wondering why we can simply forget about our shares rather than monitoring them each day. The answer is simply because we aren't too concerned whether they share price goes up or down. Why? Well lets now have a look at what would happen should the share price go up, down or sideways.

Share price goes up above $105 to $108.

We will be forced to sell our shares for $105 despite their actual price being $108. This sounds like a very bad out come but if you have a closer look it is actually a great outcome. We bought our shares for $100, sold them for $105 and also got paid $5 for the month. Therefore we actually made a $10 profit whereas if we had of just bought the shares instead of renting them out we would have only made $8.

Share price goes sideways and remains at $100.

We will get to keep our shares because no one is going to pay $105 for shares that could be bought for $100 on the open market. So in this case we have made a profit of $5 whereas if we hadn't rented our shares we wouldn't have made one cent.

Share price goes down to $95

Once again we will keep our shares. Had we not rented out our shares we would have lost $5 but because we received the $5 premium we actually don't loose a cent.

So as you can see renting shares is actually quite a safe wealth creation strategy. Effectively what you are doing is trading of your potential to make a massive gain in one month for a regular monthly income. Which one is better? Well if you average out your percentage returns from share renting over the year you may be surprised at how effective it can be. Share renting returns generally fluctuate from 20-80% per annum. With a modest average of about 40% - better than bank interest I'm sure you will agree.