“You’re about to learn some strategies that have freed many Australians from working – some within a matter of weeks, a matter of months, certainly within a year or two. There’s no reason why a person in this room can’t be replacing their income within the next 24 months, in my belief – many within 12 months, many within three or four months. Is that worth staying awake for?
“Some people say ‘Jamie, I’ve got to go to my job tomorrow, these seminars run so damned late all the time’. I’m sort of thinking, like, if you learn this stuff, you won’t have to go to a job tomorrow.”
Why do seminar presenters always exaggerate so?
The speaker quoted above is Jamie McIntyre, author of What I Didn’t Learn at School But Wish I Had, and co-founder of 21st Century Academy. He is a “success coach/life coach” and he’s in the seminar market promoting a simple strategy that he calls “renting shares”.
One of our readers asked us to take a look at the “renting shares” strategy, which we did, at the following places:
“Renting shares” turns out to be simply selling (or “writing”) covered call options in the exchange-traded options (ETOs) market, in a ‘buy-and-write’ strategy. The calls are ‘covered’ because the seller owns the shares.
A call option gives the buyer (or ‘taker’) the right to buy a specified number of shares on or before a specified date, at a predetermined price. A put option confers a similar right, to sell the underlying shares under the same conditions.
The seller (or writer’s) side of an options contract must be fulfilled if the option is exercised. This makes writing options far riskier than buying them.
The ‘buy-and-write’ strategy is often used by shareholders who want to generate extra income from their shares, but who don’t want to part with them. For example, they may not want to incur capital gains tax by selling. In this case, there is always a risk of being ‘exercised’ – the person to whom you have sold the right to ‘call’ away your shares. If you don’t want that to happen, you might have to buy the option back (not the same option but a similar one, to cancel out your transaction).
You do, however, receive option premium (the cost of the option) for selling your calls.
The first thing about buy-and-write is that you have to own the shares. The strategy doesn’t suit a small retail shareholding (because one ETO contract covers 1000 shares) but it can suit a self-managed superannuation fund very well – as long as you keep writing call options with a strike (exercise) price high enough to lock in a capital gain on the shares.
You’re capping your upside, but being paid for that today. If you expect the share price to trade sideways, or rise slightly, over the life of the option, you can gain extra income on your shareholding.
But I wish McIntyre wouldn’t talk about people not having to work again.
Writing calls is “certainly not a riskless strategy”, says Jordan Craw, research and stgelopment analyst at HUBB Financial Group. “If the market falls, you’re going to lose value on the stock, and the amount of money that you bring in by selling the call is going to be limited. So if the stock falls by more than the value you’ve brought in from selling the calls, you’ll lose money.
“Even though it is presented as generating reliable income on your shareholding, you have actually sold somebody the right to take your shares. If the stock rises really strongly, and you don’t want to sell your stock – you might have to buy that call back for more than you sold it. You might have sold the option for $1 premium income but it might cost you $2 to buy it back. If you keep doing that, and then all of a sudden the stock drops – you’ve been losing money every month and the stock also drops on you.”
For your core stockholdings, that you don’t ever want to get sold, Craw says the strategy could be risky and work to your disadvantage. “Done right, it could add a reasonable amount to your yearly returns – maybe your dividends again – but done wrong, or done on the wrong stock, it could definitely affect the performance of the portfolio. It’s not a professional-only strategy, but it’s certainly not for novices, and it’s not set-and-forget.”
Peter Gunning, chief investment officer at Russell Investment Group, says that writing covered calls is, in an option trading sense, being “short volatility”.
“If the stock goes up to a particular level, then you are prepared to sell the stock at that price; if it doesn’t, then you end up generating some income because you’ve written the calls. You could lose your stock. You want to make sure that you write calls at a strike price where you’re prepared to sell it anyway,” says Gunning.
For a professional options trader, he says, writing calls is also called “shorting volatility”. “Shorting volatility works well when volatility is falling, but if volatility kicks up, you’re on the wrong side of the trade. In practice, if all you’re doing is writing call options, you’ve taken a view on the volatility of the underlying stock – and the thing about that is that volatility of stocks goes up and down. But in writing calls, you’ve taken the view that volatility is always going to fall, when in fact it’s not. If you look at people running options trading books, they are never just going short volatility – they’ll go short volatility some of the time and long volatility at other times.”
Writing calls is also taking the view that you’re always going to pick up time decay (the ratio of the change in an option’s price to the decrease in time to its expiry), says Gunning, which doesn’t always work that way. “In fact that’s been responsible for some of the biggest disasters in proprietary options trading books. Eight times out of nine, you’ll probably make money, but there’s that one other time when volatility really kicks in; and that’s when proprietary trading books can lose as much as they’ve made over the eight successful times,” he says
So for the retail investor, is covered-call writing a nice, steady stream of income?” It might be for a while, says Gunning – but from a pure investment sense, that sort of strategy can’t work all the time. “Markets are more efficient than that. Eventually you’ll end up selling those calls at such a price that you’re not really being rewarded for the risk of shorting the volatility.”
In summary, by all means do your own research on buy-and-write, covered-call strategy, and see if you think it suits your knowledge of the stockmarket and appetite for risk.
But please – don’t quit your job.