Heard of a swap meet? Where people just show up to buy and sell each other's stuff...that's kind of like a call market for the buying and selling of options.
Just to review: call options are bets that the price of an underlying asset (such as a stock, bond or commodity) will go up, while a put option is a bet that the price of the asset will go down. But where do you buy and sell an options?
You can place an order in a call market, where buy and sell orders are batched together and then executed at certain times. This system is opposed to an alternative, where options are bought and sold one by one throughout the day in what is known as a call auction. Call markets are generally used for low volume markets where there are few shares to trade or few buyers and sellers. Buyers and sellers in a call market will not know what the final price on their trades until they are executed, making a call market a little riskier.
An "auctioneer" announces that a call will be made for a particular stock at 2 PM EST. He or she already has the following orders on hand:
Buy: 1) 900 shares @ $5.25 2) 400 shares @ $5.00 3) 500 shares @ $5.50
Sell: 1) 900 shares @ $5.25 2) 300 shares @ $5.00 3) 700 shares @ $5.50
The best match is $5.25 per share to clear out the majority of the orders even though some buyers were willing to pay more, so that's the clearing price at which the options are executed in the call market.
Related or Semi-related Video
Finance: What is a Strike Price?40 Views
Finance a la shmoop what is a strike price well before going
even a second further with this video be sure you've seen our Steven Spielberg [Introduction to a movie at the cinema directed by Steven Spielberg]
directed what is a stock option video here are the reviews from variety.. well
to review a stock option is the right to buy a share of stock for a set price
over a given period of time so let's say you were granted an option to buy a [Graph of amazon stock prices]
share of Amazon stock in 2015 when the stock was around 400 bucks a share the
option lasts as long as you work at the company in good standing or after 10
years have passed which ever ends first well one day you decide you want another job [Woman signing a contract]
your contract says that if you're no longer an employee with the company then
you have 90 days in which to either buy out your option that is to buy the
option and then own the stock or just forfeit the option [Woman underlining words on a contract]
well since Amazon is now at a thousand bucks a share you obviously don't want
to forfeit the option to buy that share of stock for 400 bucks but you note that
your many friends who joined apcray.com at a high price a high strike price which
creators know they're stock while they're doing a lot of option forfeiting
that is their options ended up being worthless so you've got a lot to think [Man holding out a bag of dog poo]
about here this is Amazon not apcray so you want to buy out your option so
what happens well you were granted your own options at the price Amazon stock [Amazon box falls off shelf]
was trading at the day you joined the company it was 400 bucks a share so
that's a strike price that $400 is the price you pay to buy a share of stock at
some point there in the future that strike price has nothing to do with [Protestors holding signs outside an Amazon building]
unions not working got it? all right well in order to buy that stock it's
currently trading in a thousand bucks a share
you pay Amazon 400 bucks and that buys out your option you then own the stock [Man writing a check to Amazon for 400 dollars]
that's it Amazon cancel your option then they give
you a share of actual stock which you now own for as long as you want to own [Man delivering an Amazon box]
it you can sell it immediately and make a
$600 a share profit that's a thousand bucks a share it's trading at now minus the
$400 strike price you just paid to buy out that option got it or you can hold [Grandparent bribing grand-daughter for amazon stock]
onto those shares and you know use it to bribe your grandchildren one day it's
worth like a million dollars a share
Up Next
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What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...