Called Away

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Called Away Meaning

Called Away refers to a situation where a financial contract, typically a short call option, is terminated or exercised. It is specifically seen in options trading, where the seller (writer) of a call option has an obligation to deliver the underlying asset when it is "called away".

When monetary obligations, such as options or callable bonds, are called away, investors and analysts can gain an insight into the overall market direction. This is particularly true if there is significant activity due to call options being exercised. A high volume of call option exercises may suggest a bullish sentiment, as buyers are willing to purchase the underlying asset at the strike price.

Called Away Meaning

Called Away is a term used in options trading to describe a situation where an option seller (also known as the option writer) is obligated to sell the underlying asset to the option buyer (also known as the option holder) at the predetermined price called the strike price.
This happens when the option buyer decides to exercise their right to buy the asset before the option's expiration date.
If a call option is “called away”, it means the option seller must deliver the underlying asset to the option buyer and receive the strike price in return.

Called Away Explained

Called away is an action that enforces the delivery obligation and results in contract elimination or termination. It can be employed in various financial scenarios, including options exercising and callable bonds. It can have significant implications for investors. Here's how it works in options trading:

Option seller writes a call option: The option seller writes (sells) a call option contract to the option buyer. By doing so, the option seller collects a premium from the buyer.
Option buyer exercises the call option: At any time before the option's expiration date, if the price of the underlying asset rises above the option's strike price and the option buyer decides to exercise their right to buy the asset, they can call away the option.
Obligation to sell the underlying asset: When the call option is exercised, the option seller is obligated to sell the underlying asset to the option buyer at the strike price, regardless of the current market price of the asset. The option seller must deliver the asset to the option buyer and receive the strike price payment in return.

The practice of calling away an option is more common in American-style options, where the option buyer can exercise their rights at any time before the option's expiration date. In European-style options, the buyer can only exercise the option at expiration (on the expiration date).

Situations

Called away can be exercised in the following situations:

Options Exercising: In options trading, when the holder of a call option (the buyer) decides to exercise their right to buy the underlying asset, the option seller (writer) is obligated to deliver the asset at the agreed-upon strike price. This process eliminates the call option contract, and the seller must sell the asset to the buyer. If the seller had not anticipated or planned for this outcome, it can result in unexpected losses or missed opportunities, especially if the asset's market price has significantly increased. To avoid losses due to options called away before expiration, an investor can close their options position early or consider rolling the options to new ones with different expiration dates or strike prices. However, if the options expire worthless or remain out of the money, the shares will not be called away. It is crucial to understand the risks and consult a financial advisor when an investor lacks the clarity required to manage options positions.
Long Put Option: In the case of a long put option, the holder (buyer) of the put option has the right to sell the underlying asset at the strike price. The decision to exercise a long put option is entirely in the hands of the holder, and they may choose to do so if the market price of the asset falls below the strike price. When a long put option is exercised, it can lead to the elimination of the contract. In this case, the seller (writer) of the put option must buy the asset from the holder at the strike price. This can impact the seller's returns negatively if the market price of the asset is significantly lower than the strike price.
Callable Bonds: In the context of bonds, callable bonds give the issuer the right to call back or call away the bonds before their maturity date. When interest rates decline, issuers may choose to call away existing bonds and issue new bonds at a lower interest rate. As a bondholder, having your bonds called away means that your investment is terminated prematurely, and you may have to reinvest at potentially lower rates. This may impact your overall returns.

Examples

Let us look at some called away examples to understand the concept better.

Example #1

John, an options trader, sells a short call option on XYZ Corporation's stock. The option has a strike price of $80, and John receives a premium of $4 for writing the call option. As the option's expiration date approaches, the market price of XYZ stock rises unexpectedly to $90, making the call option “in the money”.

The option buyer exercises their right to buy the stock at the strike price, and the deal is called away. He must sell the XYZ stock to the option buyer at the agreed-upon strike price of $80, even though it is worth $90 in the current market. As a result, John bears a loss of $6 per share, which is the difference between the market price and the strike price minus the premium received.

Example #2

Let us consider a situation where an investor holds callable bonds issued by a company. The bonds have a 10-year maturity and a 5% coupon rate. However, after 5 years, prevailing interest rates in the market have dropped significantly. The company decides to take advantage of the lower rates and decides to call away the bonds before their scheduled maturity.

The company issues a call notice to all bondholders, informing them of the decision to redeem the bonds early. As a result, the bondholders must surrender their bonds to the company and receive the call price, which is usually higher than the bond's face value. The bonds are effectively eliminated. The bondholders' investment in these bonds is terminated prematurely due to the company's decision to exercise their right to call away the bonds.

Frequently Asked Questions (FAQs)

1. Why are options called away before expiration?

Options can be “called away” before their expiration date if the option seller (also known as the option writer) is assigned early by the option buyer. This situation typically happens with “American-style” options, which can be exercised at any time before or on the expiration date. In contrast, “European-style” options can only be exercised on the expiration date.

2. What does call away mean in options?

In options trading, the term “call away” refers to a specific event that may occur and prompt an option seller (option writer) who has written (sold) call options to take action. When a call option is “called away”, it means the option buyer (option holder) has exercised their right to buy the underlying asset from the option seller at the predetermined strike price.

3. Will my shares get called away?

Whether your shares will get called away depends on whether you have sold call options and the market conditions. If you have sold call options, you may be at risk of your shares being called away if the option buyers decide to exercise their right to buy the underlying stock at the strike price before the options expire. If the stock price rises above the option's strike price, it becomes “in the money”, increasing the likelihood of exercise.