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 Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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