Definition of Cash-Backed Call

What does the term "cash-backed call" mean in the world of trading? What is a cash-backed call?

A "cash-backed call" occurs when a person purchases a call and sets aside the money to exercise the call in their trading account. This basically creates a situation where the investor is "taking a raincheck" on purchasing the underlying shares.

Definition and meaning of the financial term Cash-Backed Call - Stock tradingFor instance - let's say that you are interesting in purchasing Fitbit but you aren't quite sure if the company is reading to make a turnaround. You don't want to tie up too much capital in the position, so you elect to purchase a cash-backed call instead.

With the stock trading at $13.70, you elected to purchase a call that expires in a year and a half. You end up paying $4.25 per option for a $10 call.

You buy 10 of these options, which means that you can exercise your option at $10 anytime between now and the expiration of the contract. The position will cost you $4,250, instead of the $13,700 it would cost to purchase the shares outright.

You will set aside the money to exercise the position in your account, likely in some short-term, interest-bearing instrument. At any time prior to the option expiring, you may decide to exercise your option.

Let's say that you are now six months away from the option expiring and the stock is floundering at $13.55 per share. At this point, your option may be trading for $3.50, as time decay hasn't started to kick in as of yet. You may decide that you want to bail on your position, so you sell your options at $3.50 and move on.

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