What Is Called Away?
When an option is "called away," it refers to the scenario where the writer of a call option is obligated to sell the underlying asset at the predetermined strike price to the option holder. This event typically occurs when the call option is in-the-money (ITM) at or before its expiration date, meaning the market price of the underlying asset has risen above the strike price. Being called away is a fundamental aspect of options trading and represents the fulfillment of the option writer's contractual obligation. For the option writer, being called away means they must deliver the shares, often resulting in selling them for less than the current market value.
History and Origin
The concept of options, and by extension, the obligation to deliver an asset, has roots dating back to ancient times, with early forms mentioned in the writings of Aristotle. However, modern standardized options contract trading, which formalized the "called away" process, began in the United States with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. Prior to this, options were traded over-the-counter with varying terms. The CBOE's innovation was to standardize contract sizes, strike prices, and expiration dates, making options more accessible and liquid for investors10,9,8. This standardization, coupled with the introduction of the Black-Scholes-Merton option pricing model, provided a framework for more transparent and efficient markets where the "called away" mechanism became a predictable outcome of successful call option exercise7. The CBOE, founded by the Chicago Board of Trade, became the first exchange to list standardized, exchange-traded stock options. The CBOE's founding president, Joe Sullivan, played a pivotal role in this transformation, with his memoir detailing the creation of the exchange available via the SEC Historical Society6.
Key Takeaways
- "Called away" signifies the mandatory sale of an underlying asset by a call option writer to the option holder.
- This obligation occurs when a call option is exercised, typically because the underlying asset's market price is above the strike price.
- For the call option writer, being called away often means selling the asset at a price lower than its current market value.
- The call option writer receives an option premium for taking on this obligation, which can offset some of the potential opportunity cost.
- The process is fundamental to how options markets function, ensuring contract fulfillment.
Formula and Calculation
The "called away" event itself doesn't involve a complex formula, but it is the consequence of the profit calculation for the option holder and the loss/opportunity cost calculation for the option writer.
For the Option Holder (Buyer) exercising an in-the-money (ITM) call:
Profit for Holder = (Market Price of Underlying Asset - Strike Price) x Number of Shares per Contract - Option Premium Paid
For the Option Writer (Seller) being called away:
Net Proceeds for Writer = (Strike Price x Number of Shares per Contract) + Option Premium Received
Opportunity Cost/Loss for Writer = (Current Market Price - Strike Price) x Number of Shares per Contract - Option Premium Received (if this is a covered call and the market price is significantly higher than the strike)
The calculation highlights that the writer is selling at the strike price, regardless of how high the market price of the underlying asset has risen.
Interpreting the Called Away Event
Being "called away" is a binary outcome: either the shares are called away, or they are not. For an option writer, being called away indicates that the strategy, particularly a short call option position, resulted in the buyer exercising their right. This typically means the stock has risen significantly.
If an investor sold a covered call, being called away means they successfully generated option premium while holding the stock, but capped their upside profit on the shares. If the shares were held specifically for this purpose (e.g., as part of an income strategy), being called away can be seen as a successful completion of the trade. However, if the stock's price surges far beyond the strike price, the writer might feel they missed out on further gains.
For a naked call writer, being called away leads to potentially unlimited losses, as they would have to purchase the shares in the open market at a higher price to fulfill their obligation. Understanding the implications of being called away is crucial for effective risk management in options trading.
Hypothetical Example
Consider an investor, Sarah, who owns 100 shares of Company XYZ, currently trading at $50 per share. To generate income, Sarah decides to sell a covered call on her XYZ shares with a strike price of $55 and an expiration date one month away. She receives an option premium of $2 per share, or $200 for one options contract (representing 100 shares).
A few weeks later, Company XYZ announces surprisingly strong earnings, and its stock price jumps to $60 per share. The call option Sarah sold is now deep in-the-money (ITM). The option holder exercises their right to buy XYZ shares at $55.
Sarah's shares are "called away." This means she is obligated to sell her 100 shares of XYZ to the option holder at the strike price of $55, even though the market price is now $60.
Sarah's total proceeds from this scenario:
- Sale of shares: $55 x 100 = $5,500
- Option premium received: $200
- Total: $5,700
If Sarah had simply held the shares and not sold the call, her shares would be worth $60 x 100 = $6,000. In this case, by being called away, Sarah realized a profit up to the strike price plus the premium, but forgave the additional $5 per share ($500) upside beyond the strike price.
Practical Applications
The "called away" phenomenon is central to several options strategies, particularly those employed by option writers aiming to generate income or enhance yield on existing holdings.
One common application is the covered call strategy. Investors sell call options against shares they already own. Their goal is to collect the option premium and are willing to have their shares "called away" at the strike price if the stock rises above that level. This strategy is often used in sideways or moderately rising markets to provide a small return on a stock while potentially sacrificing significant upside. The market's expectation of future interest rates, influenced by actions of bodies like the Federal Reserve Bank of San Francisco, can impact option premiums and thus the attractiveness of such strategies5,4.
Another application, though with significantly higher risk, involves selling "naked" call options, where the writer does not own the underlying asset. If the option is called away, the writer must purchase the shares in the open market at the prevailing price to fulfill the delivery obligation, regardless of how high that price has climbed. This exposes the writer to theoretically unlimited losses.
In risk management, understanding when and why an option might be called away is crucial for setting appropriate strike prices and expiration dates, and for properly hedging positions.
Limitations and Criticisms
While being "called away" is an intended outcome for many option writers, especially those employing a covered call strategy, it presents certain limitations and criticisms. The primary drawback is the capping of potential upside profit. When shares are called away, the writer sells them at the strike price, effectively missing out on any further appreciation of the underlying asset beyond that price. This opportunity cost can be substantial in a strong bull market, where a stock might surge far past the strike price.
For example, academic research indicates that while covered call writing aims to reduce risk, it may also limit returns, particularly in strongly rising markets where the premiums received are not enough to compensate for the foregone upside3. Some studies even suggest that, according to efficient market hypothesis and option pricing theory, covered call writing may not enhance performance in a mean-variance framework, as the option premium merely reflects the upside potential given up2.
Another criticism, particularly relevant for naked calls, is the unlimited risk. If the underlying asset's price skyrockets unexpectedly, the writer faces potentially enormous losses as they must buy the asset at the elevated market price to deliver it at the lower strike price. This highlights the importance of rigorous risk management and a thorough understanding of the strategy's implications before selling unprotected call options. While covered calls offer a degree of protection, they still involve the risk of losing ownership of the shares at a predetermined price, which might conflict with long-term investment goals if the intention was to hold the stock indefinitely1.
Called Away vs. Assignment
The terms "called away" and "assignment" are often used interchangeably in options trading, and while closely related, they describe slightly different perspectives of the same event.
Called away refers to the seller's (writer's) experience when a call option they sold is exercised by the buyer. It describes the obligation of the option writer to deliver the underlying asset at the predetermined strike price. From the writer's perspective, their shares or other assets are "called away" from their possession.
Assignment, on the other hand, is the broader term referring to the fulfillment of the option contract by the writer. When an option holder decides to exercise their option, the Options Clearing Corporation (OCC) assigns this obligation to an option writer of the same options contract on a random basis (or sometimes a "first-in, first-out" basis at some brokerage firms). An assignment simply means that an option writer has been chosen to honor the terms of the exercised contract.
In essence, if you are a call option writer and your option is assigned, your shares are "called away." The term "assignment" is the formal process initiated by the clearinghouse, while "called away" is the common market phrase describing the outcome for the call option seller. Similarly, for a put option writer, being assigned means they are obligated to buy the underlying asset, which is sometimes referred to as being "put to" or "put upon."
FAQs
Q1: Does being "called away" always mean I lost money?
Not necessarily. If you sold a covered call, you received an option premium upfront. While you sell your shares at the strike price, you still profit from the original purchase price up to the strike, plus the premium. You might have missed out on further upside if the stock kept rising, but it doesn't mean an absolute loss. If you sold a naked call, however, being called away almost certainly means a loss, potentially a significant one, as you would have to buy the shares at a higher market price to fulfill your obligation.
Q2: How can I avoid having my shares "called away"?
If you are a call option writer and wish to avoid having your shares "called away," you can buy back the call option (close your short position) before it is exercised or expires in-the-money (ITM). This action is called "buying to close." You would typically do this if the underlying asset's price rises sharply and you want to maintain ownership of your shares, or if you want to realize a profit on the option before it becomes too deep in-the-money.
Q3: What happens immediately after my shares are "called away"?
After your shares are "called away" (meaning your short call option was assigned), your brokerage account will reflect the sale of the underlying asset at the strike price. The cash proceeds from this sale, along with the option premium you initially received, will be in your account. If it was a naked call, your account would be debited for the cost of buying the shares on the open market to deliver them.