From the Real Estate Call Options example provided here, the investor buys a call option on a property in La Jolla, CA. The call option is sold as “European Call”, which can be exercised by the investor at the end of the contract term. If the property is sold before the end of the term, the investor requires a fair compensation. In order to fairly compensate the investor, the strike price is adjusted backward and the calculated payout is based on the adjusted strike price. The adjusted strike price is calculated based on the given Real Estate Call Options price at the time of the origination discounted by an average rate of return for the property to the date of the recall.

For example, let’s assume that the property is sold in 3 years and the term of the Real Estate Call Options contract is 5 years with a strike price of $1,200,000, for which the investor paid to $30 per share. To discount the strike price of this Real Estate Call Options contract with a new term of 3 years, the strike price is adjusted down by average return rate of 6% per year to $1,067,996. Since the property is sold, the new strike price will be used to calculate the payoff.

Consider Scenario 1

If the derived property value is $900,000, the investor payoff is $0 since the derived property value is less the derived strike price.

Consider Scenario 2 and 3

If derived property value is $1,200,000, the investor payoff is $132 per share as shown in the table. And if derived property value is $1,400,000, the investor payoff is $343 per share as shown in the table.