What it is:
How it works (Example):
There are three common situations in which an asset may be called away:
Callable bonds give the company issuing the bonds the option to redeem them (or buy them back from you) before the designated maturity date. When the company decides to exercise its right to buy back the bonds, they are called away from the buyer and sold back to the company at a predetermined price.
[Click here to read more about how callable bonds work: Callable Bond: Definition and Valuation]
or is Exercised
Let’s say you bought 100 shares of Company ABC at $40 per share. You know you want to sell the stock when it hits $50, so you decide to write a covered call option with a strike price of $50. If ABC stock rises above the $50 strike price before the expiration date, the buyer of your option is "in the money" and will call away your 100 shares for $50 per share under the terms of the option contract.
[Click here to read more about using covered calls: Options: When to Sell, Not Buy]
Delivery Required on a
Let’s say you believe the share price of Company XYZ will fall in the near future. You enter into a short sale agreement with your broker. Under the terms of the short sale, you borrow 100 shares of Company XYZ from their personal holdings, and sell them to another person. You have the sales proceeds in hand, but now you owe your broker 100 shares of XYZ. Your intention is to buy them back when the price bottoms out and return the borrowed shares to your broker, keeping the difference as your profit. Problem is, the decline is taking longer than you expected to reach the bottom, and your broker has requested its 100 shares be returned. The underlying security has thus been called away. You are now forced to "cover" your short position by purchasing 100 shares at the current price, regardless of whether it’s the price you want.
[Click here to learn more about Shorting Stocks: How to Find the Perfect Candidate for Profits]
Why it Matters:
Options, futures, callable bonds and short selling agreements are all contractual obligations. If you are required to sell your assets under the terms of the contract, there is always a risk that the security will be called away, and you may lose out on additional profit opportunities or even incur substantial losses.