Called Away

What Is Called Away?

Called away describes an event in which a financial contract is eliminated or terminated because delivery or redemption is required. Called away situations usually happen with options contracts and callable bonds. In an investing case, this often refers to the forced sale of securities in which the investor does not have a say on the specific security being called away.

Key Takeaways

  • Called away refers to when a financial contract, primarily an options contract or a callable bond, is terminated.
  • The termination is a result of an early delivery before maturity for a bond or a requirement on a short call option.
  • When a call option is exercised, the investor's shares must be sold to the option holder.
  • When a callable bond is terminated, the issuer returns the buyer's principal and ceases making interest payments on the bond.
  • The main drawback of a callable bond is the lack of control and predictability of the investment.
  • As a conservative approach, investors should only plan on receiving the yield to worst amount as their return on a callable bond.

Understanding Called Away

Calling away a financial contract due to the obligation of delivery means the elimination of the contract. This action may occur on option exercising when the stocks that an investor holds are sold because of a short call option or a long put option. This also applies to when the issuer of a bond decides to call back the bonds they issued before maturity. Both transactions can impact an investor as the decision to call away is out of their hands, except for a long put option, therefore possibly impacting their returns negatively.

For example, if an investor has written a short position call option and the holder of the option exercises it, then the option has been called away, and the writer has to complete their obligation to the contract. To fulfill their responsibility, they must provide the underlying asset.

This happens when an investor holds shares of an entity and sells a call option against those shares, collecting the options premium. If the share price of the stock closes above the strike price of the option, then the investor's shares will be called away and sold to the individual that bought and exercised the option.

Called away also applies to callable bonds when an issuer calls a redeemable bond before maturity. A callable bond is one in which the issuing bank or institution reserves the right to call away, or buy back from the holder, the bond before the maturity date. In this case, the issuer returns the buyer’s principal before the maturity date and stops paying interest as of that point.

Calling back bonds is known as "yield to call" as opposed to yield to maturity (YTM). Some bond issues may be called away at any time, while others can only be called away at or after specific dates.

Called Away and Investor Instability

The main drawback of callable securities for investors is the lack of control and predictability. When securities are called away, it is not the choice of the investor, but one that impacts them financially. The interest income the investor planned for is no longer available. Now, they must go to the open market to reinvest their principal and may not receive terms that are as favorable.

It can be challenging to plan the exact return available on a callable investment. There is no way to know, with certainty, if a callable issue will be called away on the call date listed. Calling can result in an investor missing out on potential gains in the underlying asset.

When investing in callable securities, a safe, conservative approach is to plan only on receiving the lower of the call-to-yield or call-to-maturity amounts. This amount is referred to as the yield to worst (YTW) amount.

With called away options, the investor is aware that the option may be called depending on the movement of the share price, as they wrote the options, so they can plan accordingly if this situation were to arise.

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