Did you Know You Can Rent Your Stocks?

We’ve talked about the inflation-trouncing power of dividends and the simplicity of using exchange-traded funds (ETFs) to invest in the stock market. Let’s end our trio of blogs by looking at how using options contracts can enhance your stock investing. One of the most commonly used strategies is the covered call. 

To understand it, you first must grasp how call options work. A call is a contract that can be either bought or sold. When you purchase it, you acquire the right to buy 100 shares of stock at a specific price for a set time. When you sell it, you obligate yourself to sell 100 shares of stock at a specific price for a set time. 

And why would you obligate yourself to sell the stock?

Because you get paid! That means you could sell calls against a stock you own to generate monthly cash flow. 

The basic structure of the covered call is to purchase 100 shares and sell one call option. 

The Real Estate Analogy

One of the best analogies to explain the strategy involves real estate. Selling covered calls is to stock ownership as renting is to house ownership. Say you buy a residential property for $100,000. You can profit from it in one of two ways: price appreciation and rental income. If the house value climbs to $110,000 over the next year, then you’ll rack up a gain of $10k. Housing would rise year after year in an ideal world, adding consistent growth to your net worth.

Of course, you could also rent out the house along the way to pick up additional income. Generating $500 in positive cash flow each month would add another $6k to your $10k profit, for a total of $16k.

The covered call behaves similarly.

Instead of acquiring a home for $100k, suppose you purchased 1,000 shares of a $100 stock. If over the next year it rises to $110, then you would be sitting on a $10k gain.

Like the house example, what if you could rent out your stock?

You can. This is where the covered call comes in. 

Suppose I sold covered calls against my stock position each month and captured $500 in premiums. That would add another $6k to my bottom line by the end of the year.

The real estate analogy emphasizes the passive, cash flow generating power of the covered call. It also correctly positions the strategy as a complement to stock ownership, not a substitute. If you want to rent out a house, you must first buy the house. If you’re selling covered calls, you must first purchase the stock.

Intelligent investors have used covered calls to enhance returns and better control the risk profile of their equity positions for decades. If you’re not yet using this unique strategy to your advantage, we can teach you at our free training on April 26th. Click Here to register

Coach Tyler Craig

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