Many people like to rent a house for investment purposes, but what about a stock or an ETF – exchange traded fund, etc.?

Selling options against share owned are called covered calls. In layman’s terms – shareholders allow someone to “rent to own” the stock, ETF, etc.

What I like to do is find a good fund that pays high monthly dividends. Then I see if options exist. If they do, then I sell the option for a couple of reasons: 1 – income and 2 – reduce my risk.

As you know, the market has taken a beating over the last couple of years and we have been hit hard in our IRA’s, 401K”s, etc.

The financial world uses terminology, such as calls, puts, covered calls, write, etc. making investment strategies harder to understand.

So here’s how a covered call works.

When you write a call (write means to sell), you sell a call option. Each option controls 100 shares, so you must have at least 100 shares or increments of 100 shares for multiple options.

For this example, I’ll keep the share price at $13 in the future. It won’t go up or down. XYZ is at $13. This fund pays a month dividend of $.11 per share.

I’ll buy 100 shares. I will sell an option at a strike price at a specific date in the future, say June 2010.

The strike price is the price that I have to sell my shares of XYZ. I can sell an a option at, above or below the price paid for the stock, i.e. $15, $17.50 or $12.50.

Selling an option at $15, I have to sell your shares at $15 and make $2 per share or $200. If you sell at $17.50, you make $4.50 per share or $450. If you sell at $12.50, you lose $.50 per share or $50. Or do you?

When selling an option, I get paid a premium for that option. If the June 12.50 calls are at $1.85, my cost is actually $13 – $1.85 = $11.15. My profit would be $12.50 – $11.15 = $1.35 or $135 plus dividends of $11 per month. In 6 months, I’ve collected $66 to add to my $135 for a total of $201. $201 / $1,115 = 18% in 6 months. Depending on the option price, dividends, etc., I might sell a $10 call to further increase my downside protection.

Here’s what could happen. If my shares get exercised (meaning I have to sell my shares) 1 month from now, I don’t collect the dividend, but I make $135 / $1,115 = 12% in one month. If my shares don’t get exercised (purchased away from me), then I keep the $1.35 per share and the option expires worthless. Then I’ll sell another option and do the process all over again.

If the option to buy my fund is going to be exercised and I am going to have to sell my shares, I can either sell the shares by letting them get exercised or “roll out” the option to an even further date and keep the shares. Rolling out is buying the option back and selling another one at a later date. I’ll keep the difference that I get paid between the two prices on the options and keep collecting dividends and premiums. Pretty cool.

Now in the real world, stock prices go up and down. The values can go up slow and down fast – or as some financial experts say – the values climb the stairs and jump out the window.

People may or may not agree with me because they say I’m giving up to much upside potential for the downside risk. I’m not here to give advice or suggest anyone else to do this, but hopefully this may open your eyes to a world that many don’t know about.

Here’s the point though – I get paid. I get income. I reduce my risk while having the potential to make a nice return on my money.

Some people like to rent property, and we’ve leased some as well. I just simply like to “rent” a stock or exchange traded fund as well.

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