Can you monetize your shares without selling them?

Guide To Fundamental Research | Published on 29th June 2018 | 468

Over the last 10 years you have painstakingly created a solid equity portfolio consisting of a mix of blue chip stocks and quality mid cap stocks. Your portfolio value has multiplied and you realize that you have made big gains over the years. Your friends advise you to just take the profits and walk out, but you have a bigger question in mind. What do I do with the money after selling these shares? If you have some great opportunities to invest, then it is a different ball game altogether. Here you are already invested in blue chip companies and you are quite confident of the prospects of all these companies.

That brings us to another question altogether! If you are holding on to a quality portfolio of shares, is there any other way to monetize these shares. Is there a way you can make some profit out of these share holdings even as your shares stay in your demat account and continue to earn dividends for you. Actually there are four ways to monetize your shares without selling them.

You can actually borrow against your shares

Let us say you are holding on to a blue-chip FMCG stock (HUVR or ITC) for the last 8 years and it has done extremely well for you. You spot another opportunity for short term profits and your broker has suggested selling some of your FMCG shares and buying a mid cap stock. However, you are not entirely convinced. There is a better way out for you. You can opt for Loan against Shares (LAS). In the LAS facility you can just pledge the share with a bank and get funding up to 50-60% of the value of the shares. If you are holding on to shares worth Rs.50 lakhs, then you can easily get a LAS up to Rs.25 lakhs. That is called a 50% haircut in case of equities which the bank keeps as a security. From your perspective, you just give lien on shares to the financier. The shares will remain in your demat account and dividends will continue to accrue to you. Once your trade is over, you can pay back the LAS with interest and release the pledge. If you broker is also a bank then the entire process of pledging of shares and getting the bank credit becomes totally seamless. Remember, LAS can be offered on all rolling settlement stocks. However, the LAS financers normally employ their internal RMS systems to remove volatile stocks from the list.

You can create cash-futures arbitrage against your holdings

This is possible in stocks which are available for trading on F&O. A lot of large institutions use this strategy to make money out of their cash market holdings. Let us assume you are holding the following stocks in certain quantities in your demat account. Then here is how you can create futures arbitrage…

Details of Stock

Quantity Held

Buy Price

Futures Price

Arbitrage Spread

Reliance Industries

1000

Rs.940

Rs.1008

Rs.68 (7.20%)

Larsen & Toubro

750

Rs.1200

Rs.1330

Rs.130 (10.83%)

Bajaj Finance

500

Rs.1900

Rs.2285

Rs.385 (20.26%)

The only thing you need to ensure that your hold quantities that match with the lot sizes so that you can create a perfect arbitrage. The arbitrage spread gets locked in the above stocks. Since you are short on futures, each month the short roll over profit also keeps coming into your pocket. The advantage is that you are indifferent to price movements. Whether the price of the stock goes up or down; you will make your spread because the spot and futures price will converge on expiry day.

Covered calls against stocks that have corrected

This is another way of monetizing stocks that have corrected in price after you have purchased the same. When you buy a stock and it corrects sharply after the purchase, then you are sitting on MTM losses. While you may still be convinced about the long term prospects of the stock, the question is whether you can monetize these idle stocks in your portfolio. That is where covered calls come in. In a covered call, you write (sell) higher calls of the stock that has corrected. On the upside the calls will be written in such a way that they will expire worthless and the option premium comes to you. What if the price of SBI moves up sharply and you are staring at losses on the options position? You have protection since you are holding the stock and that will nullify your options loss. Take the case of SBI which you bought at Rs.280, but the stock came down to Rs.250. Here is how you can salvage your situation and bring down your notional losses.

Details

Jan

Feb

Mar

Apr

May

Jun

SBI CMP

Rs.250

Rs.255

Rs.260

Rs.248

Rs.253

Rs.247

Call Strike

Rs.270

Rs.270

Rs.270

Rs.270

Rs.270

Rs.270

Prem Earned

Rs.4.50

Rs5.80

Rs.7.50

Rs.3.25

Rs.5.85

Rs.3.50

Closed at

0.00

0.00

Rs.2.50

Rs.5.15

Rs.6.15

Rs.1.25

Profit/Loss

+4.50

+5.80

+5.00

-1.90

-0.30

+2.25

 

 

Total Profit in 6 months = Rs.15.35

 

 

In the above case, you have earned Rs.15.35 in the last 6 months by just writing higher calls on the stock. At the end of 6 months, your stock is intact in your portfolio and you have earned Rs.15.35. On a purchase price of Rs.280, that works out to a return of 5.48% in 6 months, which is quite attractive. You can look at it differently. You can also say that you reduced the cost of purchase of SBI from Rs.280 to Rs.Rs.264.65; either ways, you have surely gained by this strategy.

You can also lend your shares to a borrower

You have heard of borrowing money, but why should someone borrow shares. There are two reasons. Traders may want to borrow the stock and sell because they are expecting a fall in price. Alternatively, they may be having short delivery. The exchange provides a safe and secure mechanism for lending your shares and earning interest on the same. The facility is still to take off in a big way in India, but it is an option nevertheless!