July 28th, 2006 | 
Author: If you’ve been investing for a while, you probably have a substantial portfolio of stock shares. And, you probably have some shares that you’d be willing to sell immediately. if you could get the right price. If that’s the case, then you’re ready to learn how to rent your shares or write a covered call. Now, I realize that the term “covered call” makes it sound like someone is answering your phone for the afternoon but actually it is a very savvy way of selling stocks. You are essentially putting your shares “on the market” for someone who is willing to pay a premium at some time in the future to buy them.
Renting shares, or writing a call is what is known as an options strategy. You are offering an option to sell your shares for the going rate, plus a premium price per share at a later date. For example, you own 100 shares of Acme, Inc., which is selling right now at $10 per share. You write an option call with a $2 premium dated for two months from now. This means that if a buyer takes your call, you have an obligation to sell those 100 shares two months from now at $10 per share plus $2 per share (the premium).
Sound tricky? Well, it is a bit. But the point is that if you were happy with being able to sell your stock at $10 per share, you should be really happy with $12 in 60 days. On the other hand if the stock price climbs to $15 per share before your options come due, your buyer has made a really good deal. For this reason, you should be certain that the price you agree to really means a profit for you, based on your original investment in the stock not the going price when the options come due.
If you’re interested in renting shares talk to your broker. There will be some details you’ll need to be familiar with before you get started. For example, covered calls are typically done in lots of 100 shares, so if you have less than 100 shares to sell, you may not be able to rent them. Also, it’s important to consider what fee you’ll pay for this transaction. You don’t want to have your entire premium end up going to the broker in transaction fees, so you need to plan on selling options only where the premium actually makes money for you. It’s a bit of a complex process but can make good profits for you if you take the time to learn the ins and outs.
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