Share renting? Buying insurances? -Jamie McIntyre

Well, I just finished watching part of a free DVD by Jamie McIntyre.
( Jamie McIntyre | Wealth Creation | 21st Century Academy )

He was describing a strategy which he has apparently used very successfully. I also heard Pater Spann talk about this strategy on another free DVD I received.

Let me know if this sounds about right, as I'm sure you're all more familiar with the process than I am.
Basically, you buy a bunch of shares (Jamie recommended at least 1000 shares of a good blue chip company) when they are trading at a low price, and then sell the right to buy the shares (if they increase in value to a pre-determined amount, by a pre-determined date) to a third party. They basically pay you an upfront figure for each share, which you get to keep.
Then if the share reaches the set amount, you have to sell the shares to the third party. If they don't reach the pre-determined amount, you keep the shares and can rent them out again.

Jamie then went on to talking about buying insurance?? Or something along those lines. Basically you sign a contract with a company saying you will buy X amount of shares if they fall to $X. The company pays you $X upfront for each share you agree to buy, then if the shares do drop to $X you are obliged to buy them. In which case Jamie said you can simply rent them back out again.
Does that sound about right? I may have missed something along the way.




Anyway. The way this was presented made the whole strategy seem almost flawless. It basically sounded far to good to be true, which usually means it is.
So, I am skeptical.

Does anyone here use this strategy effectively?

Any comments, criticisms etc... would be great to hear.

I just don't believe it's that straight forward (Peter also made it sound too good to be true).

Cheers.

 

Hi...

Sounds easy doesn't it...


Google the below and you will find heaps on it.

Renting shares = 'Covered Calls'

Buying Insurance = 'Buying a PUT'

Whole strategy = 'Protected buy write'


Have a look at the ASX website they have a bit on this strategy

ASX Options strategy library - Australian Securities Exchange
&
ASX - Protected Covered Write

I would not even START this sort of trading until you are very familiar with the way it works and how you can get burned!... Because you will.


Have Fun

DaveJ

P.S - Here is an example from the ASX website on ZFX - Zinifex Buy Write

 

"I would not even START this sort of trading until you are very familiar with the way it works and how you can get burned!... Because you will."

 

Thanks for the info. Dave.

 

When you start investing you chase up all these opportunities, thats how these presenters make their money - by selling the idea that making big money is quick and easy.

We have all been there.

you are on this website and you will notice that nearly all of us are doing it almost the same way. Property. Direct share ownership. Managed Funds. Mortgages. Margin Loans.

Why not save yourself a heap of time and effort and just duplicate what we are doing. I would give my left nut to go back to my early 20's and have this resource to get myself started bigger and faster. But back in the mid 80's there was no internet, magazines, books or TV shows about money. Investing was for people from a different social circle than us. You youngsters have it all but sometimes I think you have too much info that stops you from getting the ball rolling.

Making Money Made Simple by Noel Whittaker got me started with my first property buy and I am forever grateful to Noel.

Get yourself started and stop trying to find the easy way.

 

Australian Securities and Investments Commission - 05-167 Another wealth creation spruiker caught out

Draw your own conclusions. The annoying thing is that:

a) there's no secret magic about what he's proposing - he's trading on people's lack of familiarity with these products. For example "he recommends buying 1000 good blue chip shares" well d'uh that's because options are available over shares in lots of 1000 and its only selected blue chips typically over which options can be traded...
b) the risk profile is higher than is suggested.

Take care.

N.

 

....you are buing AND he is selling. Typical

 

I wasn't actually considering trying to use this strategy. I just found it interesting that both presenters spoke so highly about it, and yet I hadn't heard much about it on these forums.
So I assumed it probably wasn't all they talked it up to be and just wanted to know why.

 

A couple of brief examples.

1) Buy 1000 XYZ at $10 for $10k. Sell calls at $12. XYZ hits $12, you sell. No big problem you say? You've made a profit. Where do you go from here? It now costs you $12k to buy the same parcel of shares again (minus brokerage and the CGT you paid on the last lot you sold), so that you can 'rent' them out again. Hmm, something doesn't stack up.

2) GHI trading at $20. You sell puts at $18. Stock hits $15. You now pay $18k for stock worth $15k. 'Wonderful!' says Jamie, just 'rent' them out. They have already cost you $3 too much so you now have to sell calls above this figure, say $20 for a $15 stock. Because of the higher call price a lower premium is generally paid so less income. Could take a while to make back your money, especially if the stock keeps tumbling.

Both methods certainly can work, but as DaveJ said, if you don't know what you're doing, you will get burnt.

Take Simon's advice, it's very good.

BR

 

Me too

Still have that book as well as More Money by Noel (then later Golden Rules of Wealth etc), that led me to Think and Grow Rich and The Richest Man in Babylon, I still get Noel's newsletters

I looked at Options (Covered Calls, Puts and Protected Buy Write), but decided they were not for me

Have a look at Aussie Stock Forums and do a search on these strategies and Feedback from members if you get a chance, WayneL and some others have some great input

 

"Making Money Made Simple"
I have this book, along with 4-5 others by Noel. It's sitting in my bookshelf waiting to be read. Perhaps I should bump it up the list.

Thanks for the other replies too.

 

I use the strategy all the time. Once you know what to look for and understand your risk tolerance its pretty easy to implement. The premium pays for my day-to-day expenses and frees up my time to churn out property deals. PM me if you want more specific info. Anyway, soccerroos are on now so gotta go.

Cheers

Oscar

 

I think you are confused with the strategy... The way it would work is you buy the shares for $10 then sell CALL option one or two months out for a premium of 1-3% (depends on volatility). So in your example you would sell the $12.00 call for say $0.20. This would give you 1000 * $0.20 = $200.00 EXTRA. This CALL will expire in one month. In your example the shares increase to $12.00 (or greater) and you get exercised and have to sell the shares.

Threrefore the differences are:

Just purchasing Shares =
$12.00 - $10.00 - brokerage x 2 (2x$30) = $2.00-$60

Covered CALL =
$12.00 - $10.00 - brokerage x 2 (2x$30) = $2.00-$60
+
$0.20 CALL option - 1xoption_Brokerage ($40-80) = $200 - 50

You will have the $200 in premium extra (or 0.02% - looks good annualised) more profit then if you just purchased the shares. Also if the shares do not rise to the $12.00 strike price you keep the 2% premium. The issue is you won't get any of the profit above $12.00.
The idea if you get exercised is to just purchase the shares again for the next month or six until you get exercised again. It is an additional strategy to just purchasing and holding shares...

Writing PUTs is a very advanced strategy as the leverage may not be too apparent until it goes wrong! If you are disciplined then it works well. The problem is when a 'godzilla' turns up (911, Asian selloff, Oct1987 etc). There are many examples of investors (and a HUGE hedge funds) blowing up by writing PUTs. Although the same can be said for just purchasing shares/managed funds too. imagine the losses if you ramped up your purchases around Feb2000??
The difference between Covered Calls Vs Written PUTS is more a psychological thing as the payoff diagrams are the same. (this was discussed at length and with great 'enthusiasm' by a few people on the SS website - Search for 'covered CALL writing PUT')

For example - Peter Spann's new book title - Somersoft Property Investment Forums
generating cashflow through shares - Somersoft Property Investment Forums

It can be a useful tool in your investing toolbox and works well in certain market environments (eg stable rising market)... it should not be considered a sole strategy though.

DaveJ

 

Sorry if I was misunderstood. What I meant when I said 'sell calls at $12' was a strike price of $12. What you have said is what I meant, I just didn't explain it with any skill. What I was trying to get across was that although you get the 'income' from the call, if it is exercised and you have to sell, yes you make a profit but how do you continue on with making 'income' as Jamie McIntyre spruiks? You have to buy them back again so that you can 'rent' them again. Works great, as long as they are not exercised.

BR

 

Covered call options experience

This Buy-Write scenario is a basic strategy which works well in a Positive / Neutral market. It has a high cost of entry (lots of 1000 shares in Blue chips are not cheap) but works very well albeit with a higher risk profile. I having been doing this for the last 8 months and chalked up around a gross annualised 38% return. You can use ASX/200 Put Options as a floor. I would recommend you use a full service broker for this style of investment.

I have found that not many people understand this strategy or comfortable with this (financial advisors and brokers etc). It is not hard, but there is alot of noise about it and nonsense. You will need a spreadsheet to track these options and alot of 3rd parties are selling this, using this as a part of their training program. It is hard to find good information with all the get rich style seminars out there spruking this of late. Alot of the hardcore trading crowd dislike this investment approach given the mass marketing of this type of scheme.

This was popular in the 80's and is now re-emerging. Alot of people were burned in the 80's because they were over-leveraged.

 

If you want to sell puts and you are worried about the risk, just buy a put under the one you sold. Simple. Lot less margin required too.

 

The way i see it 'renting out' your shares actually lowers your risk. BUT it can also lower your potential profit if the share price rises dreamatically.

 

what are you talking about? According to th ASX, writing covered calls is a low risk stratergie. Its actually a lower risk than buying the stock naked as it gives you some downside protection from the call premium.

I have been using this stratergie for years on LGL, making up to 5% premium each month.

LGL is very volatile, so you need to be able to stomach lots of volatility, but you can get in with only $3000 ($3 x 1000).

its certainly not a be all end all stratergie, but its a good cash flow stratergie which can complement a existing portfolio.

As for selling puts, again this is a more advanced stratergie and I recommend only do it once you understand it 100%. You can limit your risk by selling a put at one strike, and buying one back one strike below, then you loss is capped to say 50c per share.

Options are less risky than CFD's or direct share ownership, as you can limit your losses right from the start of the trade.. with shares, you have all the down side of the stock falling and falling and falling! does CER ring a bell?

puts are also good to buy to insure your stock you hold. As you always will know what you will get for your stock should crap hit the fan.

 

ASX Options Strategy - Writing calls for income