What Is a Call Over?
A call over refers to the act of exercising an option by the buyer of that option.
- A call over refers to the act of exercising an option by the buyer of that option.
- The holder of American style options can call over at any point before the contract's expiration date, whereas the holder of a European style option can only call over at expiry.
- A call holder of an American option will, typically, call over if the option is deeply in the money, with a delta at or very close to 100 and the underlying stock about to trade ex-dividend.
Understanding a Call Over
In options trading, the buyer of a call option can exercise their 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 date. For European options, calls can only executed upon expiry.
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, their contracts upon expiration if it is in-the-money (ITM), otherwise they allow then to expire for zero value. A call holder of an American option will exercise it early, typically under specific circumstances; 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 in the underlying stock, a trader will prefer to own the shares outright 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 $65 per share, you will call over the shares of stock once the stock price exceeds $65 plus the premium cost prior to, or at, expiry.
Say the settlement price for XYZ stock is $80 at expiration, the owner of the option will call over, or exercise, the right to buy those 100 shares at $65 where they can then immediately turn around and sell those shares at the market price and receive the difference between the market price ($80) and the strike plus premium ($65 + Premium) profit per share.
Say XYZ is trading at $80 and it is still two months from expiration, with a delta of 99. 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.