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What are Callable Bonds & Options?

Callable bonds fall under the options, and it is important first to understand what options are before you get to understand what callable options are. Options are quite complex trading assets, and many people tend to shy away from them, but in the real sense, they are quite lucrative of they are traded in a proper manner.

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That is just the thing that keeps people away from them; they are actually one of the most utilized hedging instruments, and they help to mitigate losses acquired from holding the position of the underlying asset.

Many fund managers have options as their stop loss or risk management measures since you can make money trading options whichever way the market moves as long as your options are it a call or a put is in the money then you will always have consistency on your side.


What are Callable Bonds & Options?


Options by definition are the contracts agreed on by the owner or the buyer of the contract and the seller of the contract to purchase or sell the contract at given a price or the strike price as it is known at a future date that is agreed upon beforehand.



The seller of the contract has an obligation to take the opposite side of the contract when the owner decides to use the right to buy or sell the contract.

So trading options are simply based on agreements that are reached upon before the trade is even made thus there is always the cost of business that is incurred before the contract becomes binding.

The amount paid for is called the premium, and that is the only amount of money that the owner of the contract stands to lose if the contract closes out of the money which means the contract time elapses before the price hits the strike price.

Since the risk is already known from the onset, many option traders tends to maximize on their trades by buying several contracts or keep adding to the already existing ones, and they end up making more than they had anticipated if the contracts close in their favor, if the opposite happens they end up losing the premium alone.


callable option risk


This is quite an interesting investment to have knowledge on since you are going to make more than enough given you know how to trade the options over a long period of time. There are two kinds of options that one can purchase, the call option which can either be buying calls or buying puts it is either of the two.

When you buy a call option, you have the right and not the obligation to buy a specific asset at a specified price within a given period of time. When you sell the option, you are obligated to sell the asset at a given predetermine price within a specified period of time.

When selling the call options, you should know that the buyer holds all the pieces since he or she can decide not to buy until the price is right for them. That is why many call options buyers tend to have the best price or the strike price where many buyers would want to have the call option at.


Definition of a callable option and how it works?


Then there is the callable option which is a long call or a long put, which is held by the owner but it is subject to a short call which is the seller of the long option.



The option gives leeway to the seller or the writer of the option to impose the embedded call feature in order to limit the profits of the long option owner and at the same time curb their losses, and when the short call is enforced the long option is immediately terminated.


callable option


This puts the owner of the long call or puts at a disadvantage since a very profitable long option could be easily written off if the writer feels they are accumulating a massive loss.

As an options trader, you should be keen not to buy a callable option it may be a winner from the beginning, but the wrier or seller may be backed into a corner and enforce their callability right.

That is obviously not the kind of contract you want to be in given you are profitable, and the other party feels that it has accumulated enough and it is your time to count your profits and bank them.


Mistakes to avoid when trading options


As a beginner you should start out with the simple stuff, so avoid buying out if the money calls options in the sense that they will rebind and go in your favor rather buy the call options that are easy pickings and those that will ultimately go in your favor. 



Many traders who have an edge think it is proper to use it during all market conditions, and so they tend to use it even in the most unlikely of market conditions, and there is a fair chance they will not make a profit.

So it is important to have a strategy that suits different market conditions that way you are going to expose yourself to opportunities and have the best tools for the job to cover.

Traders also have a weakness, they have a good plan for entry risk management, but they forget to incorporate an exit plan which is just as bad, and that is one of the most dangerous things to have since without an exit plan there is greed that creeps in and in essence as you continue holding, and the market retraces against you may give up all your profits which are sad enough.

Also, the last rookie mistake is to compromise the risk parameters to cover for losses from past trades, this will always be a problem for traders who want to get to the top fast, and thus they fail even harder.


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