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Here is a quick and basic idea of what Renting Shares (Covered Calls) and Selling Insurance (Writing Puts) means. Don’t get tied down with the names and convention the gurus have decided to call the strategy… its not important.

What’s in a name? That which we call a rose by any other name would smell as sweet. - (Romeo & Juliet quote Act II, Scene II)

The same applies here! This is a sweet strategy, I like to call this the premium cycle. Remember you DO NOT care about capital gains or capital loss! All you care about is the premium you receive and absolutely nothing else. All you are effectively doing is selling TIME! If your head is not screwed on right, it will fall off and you will cry! If you care about capital gain and capital loss go buy some property, shares, CFD or options etc.

Okay, this is how it works! The Premium Cycle

Firstly, you can only be in ONE of TWO places at any point in time, its not called a state diagram for no reason:

• You Don’t Have Shares
• You Have Shares

Obviously if you don’t have shares, you will sell insurance until somebody makes a claim on you and forces you to buy the shares at a price which you have agreed to buy it for (Remember, you wanted to buy these shares anyways!). On the other side, if you already have some shares, all you can do is rent your shares out until somebody takes you up on your lay-by offer and buy your shares from you at a price which you have agreed to sell it for (Again, remember you wanted to sell these shares anyways!).

Sounds crazy doesn’t it? People paying you money for doing what you wanted to do anyways!

This is how the numbers work out, you can usually expect on average 1-3% a month on the Australian Market. If you do it on the US Market you can get a more. Remember sometimes you get more, sometimes you get less. Do you care? Of course not! Don’t be so greedy, they are paying you to do what you wanted to do anyways. If you want to double your returns, get a margin loan!

Anyways, this is what I’ll be doing with my 50% cash buffer to generate an extra 1-3% per month. The reason why I’m not going to double my returns using margin loan is because I need the margin as my cash buffer for my selling protected insurance strategy (spread trading).

Its exciting, isn’t it?