Call Auction

  

Call auctions are like a big flea market for the buying and selling of options. Call options are those where one predicts the price of an underlying asset (such as a stock) will go up, while a put option is when you predict the price of the asset will go down.

Other types of assets that can be sold as options include bonds, commodities (corn, pork bellies, etc.) or foreign currency.

Traders sell their options at call auctions that take place either on a formal option exchange or over the counter. Here, sellers set the minimum price at which they will sell their options and buyers set a maximum price at which they will buy them. A specific timeframe to either buy the options or let them expire is agreed upon. Options orders are collected throughout the day and at certain times an auction takes place to determine the price.

All this is done electronically and orders are batched together for larger trades and more liquidity (meaning they are easier to sell). Traders interested in a particular security make all their trades at the same time. It's an order-driven system that matches buyers and sellers where an exact trading price is chosen. Sometimes traders can come out ahead in a call auction vs. a continuous auction where trading goes on at any time throughout the day whenever a buy and sell order matches up in price.

Let's say Savvy Investors Inc. puts in a buy order in a call auction with a maximum price to pay of $25.60, but it ends up executing at $25.50. The seller, Win at Options Inc., also makes out on the deal since their lowest price limit was $25.40, but they will now receive $25.50 from the call auction.

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