Called Away

Called away describes an event in which an options contract is eliminated or terminated because delivery or redemption is required. Called away situations usually happen in options contracts and with callable bonds.

In an investing case, this often refers to the forced sale of securities. The called away or forced sale us usually prompted by a third party.

Calling away an options contract due to the obligation of delivery means the elimination of the contract. This action may occur on option exercising, when an issuer calls a redeemable bond before maturity, or when a short position options contract requires delivery of the underlying asset. 

For example, if an investor has written a 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.

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 bonds 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 of 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.

The main drawback of callable securities for investors is the lack of control and predictability. When securities are called away, it is not by 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 have as favorable of terms.

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.