What it means
The phrase covers two situations with the same underlying mechanic: somebody else holds an option, and when they use it you must deliver. A bond is called away when the issuer exercises its right to redeem early at the call price.
Shares are called away when an investor who sold a call option is assigned, meaning the buyer of that option has chosen to purchase the shares at the strike price. It matters because it caps gains and forces a decision about what to do with the money.
The holder of a high-paying bond loses it exactly when rates have fallen and replacements yield less, and the writer of a covered call gives up the shares exactly when the price has risen above the strike. The technical term for the first problem is reinvestment risk, and both cases involve the same discomfort of losing an asset at the wrong moment.
For a covered call writer the sum is easy to set out. The total return if the shares are called away is the option premium received, plus the difference between the strike price and the original purchase price, plus any dividends collected along the way.
That total is the best possible outcome of the strategy, no matter how far the share price runs. Timing is the part that surprises people.
American-style options can be exercised at any time before expiry, not only on the final day, and early assignment often happens just before a dividend is paid because the option holder wants the dividend. An investor expecting to keep shares until the end of the month can find them gone a fortnight early.
There are ways to manage the risk rather than simply accepting it. An option writer can buy back the option before assignment, or roll it to a later date and higher strike, usually at a cost; a bond investor can pay attention to call protection, meaning the period during which the issuer cannot redeem.
The one thing that does not work is hoping the other party will decline to use a right that is worth money to them.
In practice
Real-world examples.
Example
A retired investor holds 2,000 shares in a food retailer and writes monthly call options for extra income. After a takeover approach lifts the share price well above the strike, the shares are called away and she keeps the premium but misses most of the bid premium.
Example
A charity holds a 9% bond bought years ago when rates were high. The issuer exercises its call right, the bond is called away at face value plus a small premium, and the treasurer has to rebuild the income budget around replacement bonds yielding far less.
Example
A company treasurer writes call options over a holding in a listed supplier to generate income while waiting to sell. The shares are called away a week before a dividend record date, so the expected dividend never arrives and the cash forecast has to be corrected.
Formula
Calculation
Return if shares are called away = option premium + (strike price - purchase price) + dividends received, all multiplied by the number of shares
An investor buys 1,000 shares at $48, a total of $48,000, and sells a call option over them with a strike price of $55 for a premium of $2.10 a share, which is 1,000 x 2.10 = $2,100. The share price rises to $62 and the shares are called away at the strike, producing proceeds of 1,000 x 55 = $55,000. The gain on the shares is 55,000 - 48,000 = $7,000, and adding the premium gives a total return of 7,000 + 2,100 = $9,100, which is 9,100 / 48,000 = 18.96% on the original outlay. Simply holding the shares would have left a position worth 1,000 x 62 = $62,000, a gain of $14,000, so the forgone upside is 14,000 - 9,100 = $4,900, and that trade-off is the whole decision behind writing covered calls.Case study
Seen in the real world.
Brackenfield Family Office is an illustrative, fictional investment office running a $12,000,000 share portfolio with an instruction from the family to generate cash income. It wrote covered calls on about a third of the portfolio, collecting roughly $180,000 of premium over a year.
In the same year one holding, bought at $40, was called away at a strike of $46 after an unexpected contract win pushed the price to $71. The position produced a gain of $6 a share plus the premium, while a buy and hold investor would have made $31 a share.
The illustrative conclusion was not that the strategy had failed, since the premiums had comfortably met the family's income target. It was that writing calls over holdings with genuine takeover or breakthrough potential costs more than the premium suggests, so the office excluded its highest-growth positions from the programme.
Watch out
Common mistakes.
- Believing a call option can only be exercised at expiry, when American-style options can be exercised at any time, often just before a dividend.
- Writing covered calls over the holdings most likely to be bid for or re-rated, which is where the forgone upside is largest.
- Treating a called bond as a windfall because a premium was paid, without checking what yield the money can realistically earn next.
Questions
People also ask.
Can an investor stop shares being called away?
Not once the option holder decides to exercise, although buying the option back or rolling it to a later date and higher strike beforehand usually prevents assignment.
What happens if the shares are not actually held?
The position becomes a short sale, which is why writing calls without owning the shares is treated as a far riskier strategy and attracts a margin requirement.
Does having shares called away create a tax event?
In most systems yes, because the shares are sold at the strike price, so the usual rules on capital gains and the holding period apply.
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