Renting stocks is another name for a covered call, and it represents a way to make money owning stocks without resorting to selling them. You can purchase the stock and then write -- or sell -- a call option on the stock. An investor buys the call option from you. Because you sold the option, the money the buyer pays you, which is known as the option premium, is deposited into your trading account. However, you cannot withdraw or invest the premium income until the option expires or the option buyer purchases the stock.
Writing Covered Calls
You can rent your stocks if the stock has options that are listed and traded on a stock exchange. Because one option controls 100 shares of stock, you can only rent your stocks out in 100 share lots. If you own 200 shares of stock, you can write two covered calls. There are two outcomes when you write covered calls. The option can expire worthless, in which case you keep your stock shares and the option premium. If the option is exercised, you sell the stock to the option buyer and keep any profit as well as the option premium.
Option Strike Price
The option strike price is the price at which you would be willing to sell the stock to a buyer. The closer the strike price is to the stock price, the more chance you have of the stock price reaching the strike price. However, you receive more premium income by selling an option closer to the stock price. The buyer can purchase your stock shares as soon as the stock price touches the strike price, which is known as an assignment. Although it lowers your premium income, you can decrease the chance of assignment by selling an option with a strike price further away from the stock price.
Option Expiration Date
Selecting an option expiration date has a direct effect on your premium income and the odds of a stock assignment. The longer the expiration period, the more premium income you receive. However, it also gives the stock more time to reach the option strike price, which results in your stock being assigned. A shorter expiration period provides less premium income but also lowers the possibility of an assignment. You can select a stock option that expires on a monthly or weekly basis.
Renting Stocks -- A Hypothetical
Say you own 100 shares of XYZ stock that's trading at $30 a share. You rent your shares by selling an option with a $40 strike price and earn $100 of premium income. If the stock price remains below $40 a share, the option expires and you keep the $100 premium and your stock shares. Say the stock price hits $47 a share and your shares are assigned. Your profit is limited to the option’s $40 strike price, not the stock’s $47 actual selling price. Your profit is $40 a share minus $30 multiplied by 100 shares, or $1,000, plus the $100 premium you initially received.
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