There are two major areas we commonly look to in order to achieve capital growth when investing for wealth creation.
Contents at a Glance
- The Stock Market and Real Estate
- But what most people don't realize is that you can actually rent out shares as an income strategy
The Stock Market and Real Estate
Most people feel more secure when Real Estate Investing even though you can begin investing in the Stock Market with a lot less money.
Maybe that's because Real Estate Investing offers a major advantage in the form of extra income. In other words the rent you receive from a tenant.
Maybe that's because Real Estate Investing offers a major advantage in the form of extra income. In other words the rent you receive from a tenant.
But what most people don't realize is that you can actually rent out shares as an income strategy
We are using the term 'rent' because everybody understands the concept when talking about real estate investing. You buy a house and rent it out to a tenant who pays you money in the way of rent for the term of the lease.
Well you can do EXACTLY the same thing with stocks or shares that you own.
You can rent out your shares to someone at an agreed price for an agreed period of time to receive an income.
In this case the agreed rent is called the Strike Price, the rent you receive is called the Premium, and the term of the lease is the time leading up until the Expiry date.
Of course I am talking about an income strategy using Stock Options.
In this case the agreed rent is called the Strike Price, the rent you receive is called the Premium, and the term of the lease is the time leading up until the Expiry date.
Of course I am talking about an income strategy using Stock Options.
A Stock Option is a contract that relates to a particular stock or security.
When you buy a Call Option you have the right (but not the obligation) to buy the underlying stock at any time up until and including the expiry date of the option contract.The value of a Call Option increases with a rise in stock price.
A Stock Option contract involves two parties:
The person who initially sells an option is called a Writer.
The person who buys an option is called a Taker.
Options Trading involves many different strategies, mostly for the purpose of generating an income.
THE COVERED CALL STRATEGY
When we use a Covered Call we are not trading options (buying and selling options for profit), we are selling, or writing them to make money as extra income over shares we own.If we had to sell those shares to the option taker, then we would be covered, hence the name 'Covered' Call.
A consideration with this strategy is that the taker is not obligated to buy the shares, but as the writer, we ARE obligated to sell our shares if the option contract should be exercised.
However, we get to keep the premium we were paid as rent when we sold the Call Option, whether the taker decides to exercise their right to buy our shares or not.
And even if we were exercised and had to sell our shares, it means they would have gone up in value so not only would we get to keep the premium as income, but the sale of our shares would convert to cash, earning us capital growth as well.
Let us look at an example of a Covered Call in action:
Let's say we bought some XYZ shares last month for $ 10.00 and today they are trading at $ 10.30 so we decide to write some Call Options over them.
If we chose to write a Call Option with one month until expiry with a strike price of $ 10.50 we might receive 50c in premium.
Remember we get to keep that 50c per share no matter what happens.
If we chose to write a Call Option with one month until expiry with a strike price of $ 10.50 we might receive 50c in premium.
Remember we get to keep that 50c per share no matter what happens.
There are two possible outcomes:
1) In one month's time if the share price is below $ 10.50 then the call option would expire worthless and we get to keep our shares.
The 50c premium is our income and we still have our shares to write another Covered Call Option for the next month.
BUT we would still get to keep our 50c in premium PLUS the 50c capital growth we would have made on the initial share purchase
So we would have sold our shares but gained $ 1.00 in profit. If we wanted to we could buy the shares again to do another Covered Call.
"Think of it as a way to make money while you sleep..."
Options Trading Related Links
- Options Trading Education
- Homestudy DVD's and Live Sessions available.
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