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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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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