Investing Calls

An investing call gives you the right to control shares of stock at a fraction of the full price. Investing calls can be used for both speculation and income generation, but there are certain things to consider before using this strategy.

Options, like stocks, are financial securities that can be traded on the exchanges. In addition to giving you the opportunity to trade options, the exchanges also provide a variety of tools to help with your research and analysis. One of those tools is the investing call, which grants you the right but not the obligation to purchase a specific stock at a set price, or strike, by a specified date, called the expiration date. If you’re bullish about a stock, buying calls instead of directly purchasing the shares allows you to gain leverage in hopes of increased percentage gains.

To purchase a call, investors must first pay the option premium to the seller. Then, if the price of the underlying stock rises above the strike price by the expiration date, the investor may choose to exercise their right to buy the shares and create an “assignment.” The amount of profit the investor makes is unlimited; however, if the underlying stock prices declines below the strike price, the option will expire worthless.

When deciding to sell a call, the investor must calculate the fair value of the shares they own. They then compare that fair value to the strike price of the upcoming option they’re selling. The lower the strike price, the more likely the option will be assigned. In addition, the investor must consider how much time they’re willing and able to dedicate to writing options and match their intention with the mathematical probability of being assigned. Generally speaking, a call seller will want to sell options with 60 days or less to expiration because longer term options tend to require more of an investment in time.

The popular misconception that 90% of all options expire worthless misleads some investors into believing that investing in call options is dangerous. The truth is, the majority of options are not exercised and the vast majority of those that are exercised result in profits for the buyer. However, it’s important for any investor to understand how these options work so that they can make informed decisions about which ones to purchase and which to avoid.

Investing calls can be an excellent tool in the hands of a knowledgeable investor under the right conditions, but it is not a good idea to use them when the market is extremely overvalued or undervalued. During those times, it’s usually better to find undervalued investments in which to place your capital.

Learn more about investing calls and the many other ways JPMorgan Self-Directed Investing can empower you to take charge of your investments. Open your account today to start enjoying the freedom and flexibility of an innovative trading experience.