Renting Out Your Stock
There are many ways to make money in the stock market. You can make money on stocks going up by purchasing and waiting for pice increases, you can also make money on stocks going down by short selling stocks. There is also the options market, where you can purchase and sell stock options. So how do you go about renting out stocks you already own? Read on to open your eyes to the whole concept of something known as covered call option writing.
When you purchase a stock, you usually expect it to go up over time so that at some point you can sell and make a profit or capital gains. But what if your stock is slow to go up, or trends sideways for a number of months. Your original investment is stagnant, in essence not growing and making you money. These types of stocks are ideal to sell covered calls on to make incremental income from month to month. So what is a covered call? A covered call is basically selling an option contract against a stock you already own. When you sell an option contract, the buyer pays you (The seller) a premium. In turn, they have the right to buy your stock at any point in time up to the option expiration date for the price of the option they paid you the premium for. Let’s take an example.
- You own 100 shares of XYZ corporation, and decide you want to “rent” out your stock for some additional income.
- You decide to sell a covered call option. The current stock price is $50/share and you own 100 shares of company XYZ.
- The covered call option for XYZ is currently offering a premium of 0.62 for a March 17th expiration at $55/share.
- You sell 1 option contract on XYZ corporation (1 contract is equal to 100 shares of the stock). The buyer pays you (0.62 * 100 shares = $62.00). You gain $62 on your $5000 investment (100 shares of XYZ), which is 1.24%. Now if you are selling options each month, that return is a 14.88% return by selling each month.
- As long as your stock price does not exceed $55/share (which is what you sold the option contract price at), you retain the shares of XYZ Corporation and also keep the option premium of $62.00.
- If the stock price goes above $55/share, the purchaser of your option will exercise the option forcing you to sell the stock at $55. This case is also beneficial to you as you gain $5/share on the stock (or $500 total) plus the $62.00 option premium. The downside is that if the stock continues to go up, you are forced to sell at the lower $55 price on March 17th, or the day the option expires.
As you can see, selling covered call options is a way to make incremental income or “rental income” on stocks you already own. Of all the option strategies, covered call writing is the lowest risk.