Giving Thanks for the Rent-To-Own Stock Strategy

By TradeSmith Editorial Staff

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Giving Thanks for the Rent-To-Own Stock Strategy Why buy stocks, when you can rent to own?

Think about it. Millions of Americans lease their cars instead of buying them, and it often makes good financial sense to do so.

The same is true for TVs, furniture, and home appliances. Why buy when you can rent to own? It’s a highly profitable business model.

For proof, look at how wildly profitable Rent-A-Center (RCII) has been over the years for investors.

And the rent-to-own model is one that you and I can copy with our investments.

Renting to own stocks can boost your total return potential in a big way.

And best of all — just like at Rent-A-Center — you will only pay pennies on the dollar for a stock while enjoying all the upside benefits.

That also means less of your hard-earned cash tied up in an investment.

You and I can place these rent-to-own trades as often as we like and on some of America’s biggest blue-chip stocks. It’s not complicated, either. In fact, you’ll only need to place a small, refundable deposit with your broker.

Start by identifying a stock or exchange-traded fund (ETF) that you would like to own. As with selecting new appliances, think about the features and benefits that appeal to your preferences, as well as your risk tolerance.

The SPDR Select Sector Financial ETF (XLF) is a great example right now.

This ETF tracks an index of big banks and financial stocks. It’s one of the best-performing S&P 500 sectors year to date, up nearly 40% since January.

Our TradeSmith indicators spotted this strength early on. XLF triggered an Entry Signal last December, and it has been in the Green Zone with a solid uptrend ever since.

Plus, I expect that performance to continue. When interest rates rise, as the Federal Reserve is hinting, banks’ profit margins tend to expand, boosting their prospects.

You could just plunk down $3,990 right now and buy XLF shares outright. But why tie up so much of your cash when you can easily rent-to-own 100 shares of XLF instead?

Here’s how the strategy works; it’s really simple.

Using CoPilot by TradeSmith, our options-selection product, I see that, as of Tuesday, the XLF January 2022 $40 call option had a 5.2% projected return on investment (ROI).

Plus, it has a nearly 60% probability of profit (POP). Those are great odds of success for simply buying the call option.

But, since we want to own shares of XLF anyway, why not go one step better?

Buy the $40 call option above, and (at the same time) pay for it by selling an XLF put option at roughly the same strike price.

Buying the call option and selling the put option at the same time will pay for your entire trade. In fact, it puts money in your pocket from the start. Here’s the math (again, these prices are as of Tuesday this week)…

Buy 1 XLF January 2022 $40 call, cost = $1.15 per contract, or $115

Sell 1 XLF January 2022 $40 put, credit = $1.40 per contract, or $140

This is a combo options trade, sometimes called a synthetic stock trade or a collar. The net result of the trade is a credit paid into your brokerage account of $25 (+$140, -$115).

Best-case scenario: XLF takes off to the upside, as we’re anticipating. You participate in the unlimited upside profit potential. And the put option you sold expires worthless, which means you also get to keep the $140 in premium that you earned by selling it.

Worst-case scenario: XLF declines in price, you get put 100 shares at $40 each, and your call option expires worthless. Spoiler alert: The “worst case” works out pretty well, too, because you wanted to own XLF anyway.

In the end, you got your 100 shares of XLF. But you didn’t pay retail. You bought your shares at a slight discount to the market price.

In this scenario, you own 100 shares of XLF at a cost basis of just $39.75. Here’s the math: $40 put option strike price minus the 25-cent credit you received to enter the combo trade.

I’ve said it before: Never pay retail! Combo options trades like this are a great way to buy stocks and ETFs at a discount.

Better yet, in many cases like the XLF trade example above, you can get paid up front in these rent-to-own options. It’s money in your pocket from day one.

If you follow this simple strategy, do so only with stocks and ETFs you want to own anyway. And only when our TradeSmith indicators point to good upside potential.

These combo option trades are as easy as getting that new big-screen TV from Rent-A-Center in time for the Super Bowl, instead of paying thousands of dollars up front.