generating cashflow through shares

I was interested to hear from anyone that has been generating funds through either managed funds or the strategy wherby you "rent out" your shares. Basically my understanding of how this works is that say you buy 1000 shares for lets say $16.00 and someone in the market place will pay you X amount of $ for the option of buying your shares if they hit say $17.00. This allows you to generate instant cashflow each month.

Basically my question is have you been utilising this strategy and generating regular income, please specify what % returns are possible? Also for those doing this successfully what are the "key things" a newbie would need to learn to implement this successfully and how/where do we get this information.

Also interested to hear from those generating cashflow through managed funds, what % returns etc.

Trying to look at using lazy equity to generate cashflow with relatively low risk.

karina said:

I was interested to hear from anyone that has been generating funds through either managed funds or the strategy wherby you "rent out" your shares. Basically my understanding of how this works is that say you buy 1000 shares for lets say $16.00 and someone in the market place will pay you X amount of $ for the option of buying your shares if they hit say $17.00. This allows you to generate instant cashflow each month.

.

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Hi Karina,

What you are talking about here is a "Buy Write" startegy
http://www.asx.com.au/investor/pdf/buy_write.pdf

It is interesting that 2 people asked almost the same question at the same time!
http://www.somersoft.com/forums/showthread.php?t=32386

Cheers,

The Y-man

Must be an indication that there is a stock market boom imminent.

I'll just have to wait for the taxi drivers to start giving you tips to know its time to exit stage left.

Cheers

karina said:

I was interested to hear from anyone that has been generating funds through either managed funds or the strategy wherby you "rent out" your shares. Basically my understanding of how this works is that say you buy 1000 shares for lets say $16.00 and someone in the market place will pay you X amount of $ for the option of buying your shares if they hit say $17.00. This allows you to generate instant cashflow each month.

.

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If they hit $17 and you sell though you lose that share plus any growth beyond $17, my question is what then..

Options are interesting, looking fwd to the responses as much as you are Karina

handyandy said:

I'll just have to wait for the taxi drivers to start giving you tips to know its time to exit stage left.

Cheers

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I use the "workplace index".

The majority of my colleagues still believe shares a re risky - i.e. the market still has a way to go.

When they believe it's time to go into the share market, time to take profits

Cheers,

The Y-man

redwing said:

If they hit $17 and you sell though you lose that share plus any growth beyond $17, my question is what then..

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I believe the theory is buy back and write again.... although in practice you would try to "roll up and out" - i.e. buy back the sold calls, and write another call at a higher price (roll up), with a later expiry (roll out). Otherwise your commissions and fees can kill you.

Cheers,

The Y-man

Not into shares, but we like to write covered calls on real estate!
There is far less risk for the return!

Hahahaha...
i can see you have just had encounter with jamie macintyre. i watched his dvd a few weeks ago.

i am in process of trading shares. my stratergy is buy sell quickly. so lets say.. buy 1000$ shares valued at 8cents... they vary between 8-9 cents each day... thats a 12.5% jump, so buy 1000 end up with 1125 when sell. you wouldnt do with such little figure because of brokerage fees. but add an extra 0 on the end and see what happens...

it is and interesting business.

Nathan yes I watched the Jamie McIntyre free 3 hour video, nothing new really as I had seen these strategies discussed at a Peter Spann seminar years ago, I guess what I am asking is anyone actually making money on this strategy and how are they doing it? what bluechip shares are best to do it with, a recent example of how many shares , which share , what the profit was etc would be good as well as what the brokerage costs involved were.

Karina

Shoot me a PM. I will go through thr process for you.

Cheers

Oscar

Hi Karina,

If it all sounds a bit daunting and you would like someone else to do it for you, there are managed funds that do it for you too.

http://www.macquarie.com.au/emg/mq/mq_specialist_funds/mq_buy_write_fund.htm#

Cheers,

The Y-man

Thanks Y-MAN, from what I can see of that fund its made about 11-14.5% over the last few years (per annum) not bad , Jamie McIntyre makes it sound SOOOOOOOO easy on the DVD , and the returns he quotes on doing it yourself are somewhere around $500+per month on a $15,000/$20,000 investment

Hi Karina

I thought it would be best for me to put a real life example for everyone to see here.

Some may know this is how I create an income to cover my living expenses. Below is what I will be conducting tomorrow but i will keep it brief for now (i.e. why this particular share etc) and sticking with the numbers:

Zinifex is currently trading at $17.61. You would purchase the shares say at this price and simultaneously sell an option. In this case I will be selling an $18.00 June option (May has less than 3 weeks to expiry so not worth it).

For this trade you would receive a premium of $0.715.

That equates to a 4% return for a 1.5 months. Typically you do this on a month by month basis.

Now, if you couple this with 50% leverage, you will achieve 8%.

Obviously, you will choose a share which isn't sinking in price and one that is on a steady rise. That way if you do get exercised (which is what you really want) you will get the difference between $18.00 and $17.61 = $0.39 . This will also increase your monthly return.

As an addition you can buy a PUT option say for a year at roughly the price you paid for the share to insure your original investment.

This is a great and simply approach to cover you negatively geared properties. And if you do it right you would still have your original investment $'s intact.

Cheers

Oscar

karina said:

Thanks Y-MAN, from what I can see of that fund its made about 11-14.5% over the last few years (per annum) not bad , Jamie McIntyre makes it sound SOOOOOOOO easy on the DVD , and the returns he quotes on doing it yourself are somewhere around $500+per month on a $15,000/$20,000 investment

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You do realise that anyone who can make 30-40% consistently per year would be in the top leagues of fund managers. Why isn't he sitting in the Caymans charging 2/20?

What happens if the market falls? I think those returns assume your shares appreciate AND you get the extra kick from the premium. It doesn't necessarily protect you from a falling market.
Alex

oc1 said:

As an addition you can buy a PUT option say for a year at roughly the price you paid for the share to insure your original investment.

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Hi Oscar,

Thanks for sharing your strategy.

How much does the bought PUT cost ? You said roughly the price of the original share - is this right ? Wouldn't insuring your position (to reduce risk) halve the return ?

Does this strategy come from one of the many seminars ?

alexlee said:

What happens if the market falls? I think those returns assume your shares appreciate AND you get the extra kick from the premium. It doesn't necessarily protect you from a falling market.

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Hi Alex,

I think your posts crossed.... As Oscar said if the market falls then the bought PUT becomes in the money. I'd strongly recommend you read a book by Lawrence McMillan - Options as a Strategic Investment. It good to know that these strategies exist even if you have no intention of using them in the short term.

Cheers Keith

keithj said:

How much does the bought PUT cost ? You said roughly the price of the original share - is this right ? Wouldn't insuring your position (to reduce risk) halve the return ?

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I should have been clearer. You buy the Put as near as the price you paid for the share, in this case it would be a $17.50 put. The cost will vary day by day.

Cheers

Oscar

Xenia said:

Not into shares, but we like to write covered calls on real estate!
There is far less risk for the return!

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I disagree. I can insure the investment of shares whereas I cant insure the value of a property.

Oscar

oc1 said:

I should have been clearer. You buy the Put as near as the price you paid for the share, in this case it would be a $17.50 put. The cost will vary day by day.

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Hi Oscar,

I've never looked at long expiry PUT premiums for volatile shares (such as ZFX) - roughly what %age of share price is the premium for next OTM strike price ?

I've seen Spann, McIntyre etc advertising options courses to generate c/f - is this one of their strategies ?

Cheers Keith

keithj said:

Hi Oscar,

I've never looked at long expiry PUT premiums for volatile shares (such as ZFX) - roughly what %age of share price is the premium for next OTM strike price ?Cheers Keith

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Not quite sure what you're asking Keith. All the info is on the ASX website.

www.asx.com.au

Cheers

Oscar

Karina,

I have been using this strategy for about 2 years now (buy shares, write or sell options one -two strike prices above the share price, one month out).

Averaging approx 15% per annum, net costs ex tax (from the premium alone), tho premiums have ranged between 1% and 4% per month.

I was writing call options on LHG, NWS and recently BHP.

With a buy write strategy you must be comfortable owning the shares because the 2% premium can be wiped out in a fall in the share price. Ideally you want a share which will be trending slightly up over time.

This way you receive the premium from the option and not get exercised (or assigned) and the underlying stock goes up in value as well.

Don't choose a share to write covered calls on purely based on the amount of premium you may receive!! I learnt this the hard way...Consider the overall trend, recent volatility and outlook for the company in general.

I have been exercised twice, due to a considerable increase in the share price (10% plus) - but was still exercised at a profit to the price i purchased for the share.


Happy to help field some of your questions

OSS