Want to know what is Call Unwinding? If you are a trader or investor in the stock market, you will see many terms used to deal with securities. Some of these terms you may know, but some can be new to you. This post will explain one of the basic terms Call Unwinding, with several other essential terms.
Futures and Options are crucial and complex parts of the stock market to understand for the investors. Many people prevent this segment because they have less information about it. And during their investment journey, they stay away from crucial terms like unwinding, call writing, and much more. As a new trader or investor, you will not be willing to stay away from F&O segments. You can have many opportunities available to improve your wealth.
So, if you also want to gain information about these terms with some crucial examples. Then it would be best if you stayed tuned to this post and kept scrolling down slowly.
Unwinding: Brief Intro
Unwinding is a frequently used term in the share market. It refers to completing or closing the trading position for the particular stock. It can be used if the trading process is complicated or requires big numbers of transactions. Unwinding can also be used to solve the trading issues made by the trader. Mainly, it is used to get rid of complex trading or buying and selling of stock that require multiple transactions to do so. The unwinding can take place in two cases such as unwinding by investor and unwinding by mistake. Let’s understand both types of unwinding with examples to understand more comprehensively.
Case 1: Unwinding By Investor Or Trader
When an investor wants to sell the security using the call option, it is called unwinding by the investor or trader. This significant action occurs when investors show their interest in repurchasing short stock to get some benefits. Investors can unwind if they do not want to do multiple transactions for the same stock or securities. And in this case, the investor can purchase the short shares back to complete or close the position.
Case 2: Unwinding By Mistake
Unwinding by mistake is another type of unwinding that can occur if the broker has sold part of the investor’s security to add to their portfolio. So, in this case, the broker will unwind the trade to acquire the sold assets or part of stocks that were initially. In simple terms, if the broker performs the trading action from the investor’s fund accidentally. Then in such cases, he is liable to resell the security to purchase and correct the mistake done by him to maintain the investor’s fund same as earlier. Also, the mistakes that have already been found before completing the trading process can be canceled successfully. And if this transaction gets canceled, then it does not require unwinding.
You may also want to know what is called writing and unwinding. So, let’s understand call writing and call unwinding to understand essential terms of the share market.
What is Call Writing?
Call writing refers to the process of creating a contract to sell or buy securities at the prefixed cost before the desired time. The call writing can also take place on a specific date. Here, the writer is responsible for selling or buying the securities before the expiry of the contract on the predetermined price. Also, the person who writes the call options needs to be paid for entering the formal contract to trade the particular stocks.
Now you have understood unwinding and call writing so let’s move to understand call unwinding.
What is Call Unwinding?
Call unwinding meaning refers to a scenario when an investor sells its position using the call option. The call unwinding can form when the person gets some news or analyses the call option price that will hit his desired target for which he is looking. It can also happen due to an error while creating the call writing or placing more call options.
Example Of Call Unwinding
For example, trader A, who took part in the call option of Reliance in 2000 and set his target of 2020. Although the desired target was achieved on 15 December 2020 before the 16 days of the expiry of the contract. So, in this case, trader A has the option to sell his position to Reliance once he hits his desired target. Once he performed this process is known as a call unwinding. It is the process where a trader can sell his position once he achieves his target before the expiry of the contract.
Unwinding Vs. Liquid Risk
Liquid risk can affect the investor’s or broker’s ability negatively with their unwind trading. Liquidity means the ease to sell or buy the asset within the given time. If the asset has low liquidity, it will create problems for the investor and broker to unwind. Aside from this, it will also be hard to find a potential buyer of that asset who can offer a reasonable price. So, whether the transaction takes place intentionally or accidentally the risk associated with assets still takes their place during the unwinding process.
So, here you learned unwinding refers to the closing position for the asset by the investor in the stock market. And the Call unwinding means the contract prepared to buy or sell securities on the prefixed price and before the expiry date. In this post, we also discussed many other terms as well with examples. I hope you all have understood, and if you still face any issues, you can go through this post again or ask your doubts in the comment section. If you want to take advantage of F&O segments of the share market. Then it would help if you stay tuned with the Finance Point and its articles. We post several essential pieces of information to help you make your trading journey more accessible and successful to increase your wealth.