Call Market

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.