DEFINITION of Call Over
A call over is when the buyer of a call option exercises the option. In options trading, the buyer of a call option can exercise his or her right to purchase the underlying asset (such as a stock) at the exercise price or strike price. For American style options, the holder of a long option can exercise these rights early, at any point before the contract's expiration. For European options, calls can only executed upon expiry.
BREAKING DOWN Call Over
Buyers of options can either exercise their right to buy the underlying security or they can let the option expire worthless. A call over can take place throughout the life of the option if it is American style, until the exercise cut-off time that falls on the last trading day prior to the option contract's expiration.
The holder of a long options position will call over, or exercise, his contracts upon expiration if it is in the money, otherwise they will expire for zero value. A call holder of an American option will exercise it early typically under specific circumstance, for instance if the option is deeply in the money with a delta at or very close to 100 and the underlying stock is about to trade ex-dividend. Since 100 delta calls behave almost identically to being long the underlying stock, a trader will prefer to own the shares them self via a call over in order to receive the cash dividend payment, which will not be paid out to options holders.
Example of a Call Over
A call option gives its owner the right, but not the obligation, to buy an asset at a pre-specified price (the strike price) on or before the expiration date. If you own a call option representing 100 shares of Company XYZ stock with a strike price of $25 per share, you will call over the shares of stock once the stock price exceeds $25 upon expiration.
Say the settlement price for XYZ stock is $40 at expiration, the owner of the option will call over, or exercise, the right to buy those 100 shares at $25 where he or she can then immediately turn around and sell those shares at the market price and receive a $15 profit per share, or $1,500.
Say XYZ is trading at $40 and it is still two months from expiration, with a delta of 99.4%. The stock is scheduled to trade ex-dividend tomorrow, paying $1.00 per share. If you keep the call options, you will not receive the dividends, and since the options are deep in the money, there is virtually no intrinsic value left and the option's value changes in step with changes in XYZ shares. Therefore, to call over the options would result in 100 shares receiving $1.00 each, or an excess return of $100 total.