What is term call for the top market

The call market refers to a market where trading does not take place continuously, but only at specified times during the trading day. Prices are dictated by the exchange rather than by bids and offers. In the call market, orders are aggregated and collected at designated intervals instead of trading throughout the day.

Orders in the call market are transacted at specific time intervals, and sell and buy prices are then calculated. The exchange will calculate the clearing price in the market based on the number of shares or securities sold by the sellers and the bid by the purchasers. Call markets are not used except for illiquid securites or in cases where there are few traders and few transactions take place.

Summary

• The call market refers to a market where trading does not take place continuously, but only at specified times during the day.
• Buy and sell orders are aggregated and collected at designated intervals and are matched to arrive at a clearing price.
• All participants in the call market are called to be available at the same place and time. Such a moment on the exchange is referred to as a trading session.

How the Call Market Works

In the call market, the auctioneer calls for buy and sell security orders and groups them for execution at designated times during the business day. The role of the auctioneer is to balance the supply and demand for a security in a better way to reach a clearing price.

Both buy and sell orders on the exchange shall be made at the clearing price. The auctioneer will execute some small buying orders at or below the clearing price and will restrict orders to be sold at or above the clearing price.

For example, assume that for Company ABC, the following buy orders are received:

• Buy 500 shares at $4.50
• Buy 600 shares at $4.00
• Buy 400 shares at $4.20
• Buy 700 shares at $4.50
• Buy 400 shares at $4.25
• Sell 500 shares at $4.50
• Sell 600 shares at $4.00
• Sell 400 shares at $4.20
• Sell 700 shares at $4.50
• Sell 400 shares at $4.25

In the call market, buy orders are bundled together and performed at a price and time that will clear much of the orders. In the example above, the clearing price would be set at $4.00. It can be seen here that even if some of the parties were ready to purchase or sell for $4.50, the price that clears the majority of the trades is $4.50, and that is the price at which the auctioneer executes the trades on the call market.

Usefulness of the Call Market

Call markets bring together the few buyers and sellers of a security to trade at the same place and time. Such a moment on the exchange is referred to as the trading session, which provides more liquidity for the investments. This process allows for the optimization of executing all potential transactions. All markets are frequently used in small economies where governments issue bonds or notes.

Call markets are seldom used in comparison auction markets, where price setting and trades occur continually between multiple buyers and sellers. However, the call markets are helpful for illiquid securities or when there are few sellers and buyers to establish an active market.

The drawback is that the traders in the call market are prone to greater price uncertainty. They submit their orders and then wait for the determination of the clearing price. The traders in the call market are, however, covered by limitations on variations from the previously executed price.

More Resources

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, they're usually referring to strategies that involve buying and selling two types of options, calls and puts.

This article provides an overview of why investors buy and sell call options on a stock, and how doing so compares to owning the stock directly.

🤓Nerdy Tip

The basic question in an options trade is: What will a stock be worth at some future date? Buying a call option is a bet on “more.” Selling a call option is a bet on “same or less.”

What is a call option?

Options are a type of financial instrument known as a derivative because their value is derived from another security, or underlying asset. Here we discuss stock options, where the underlying asset is a stock.

A call option is a contract that gives the owner the option, but not the requirement, to buy a specific underlying stock at a predetermined price (known as the “strike price”) within a certain time period (or “expiration”).

For this option to buy the stock, the call buyer pays a “premium” per share to the call seller.

Each contract represents 100 shares of the underlying stock. Investors don’t have to own the underlying stock to buy or sell a call.

If you think the market price of the underlying stock will rise, you can consider buying a call option compared to buying the stock outright. If you think the market price of the underlying stock will stay flat, trade sideways, or go down, you can consider selling or “writing” a call option.

For a call buyer, if the market price of the underlying stock price moves in your favor, you can choose to “exercise” the call option or buy the underlying stock at the strike price. American options allow the holder to exercise the option at any point up to the expiration date. European options can only be exercised on the date of expiration.

Buying and selling call options can also be used as part of more complex option strategies.

Buying a call option

Buying calls, or having a long call position, feels a lot like wagering. It allows traders to pay a relatively small amount of money upfront to enjoy, for a limited time, the upside on a larger number of shares than they’d be able to buy with the same cash. Call buyers generally expect the underlying stock to rise significantly, and buying a call option can provide greater potential profit than owning the stock outright.

If the stock's market price rises above the strike price, the option is considered to be “in the money.” An in the money call option has “intrinsic value” because the market price of the stock is greater than the strike price. The buyer has two choices: First, the buyer could call the stock from the call seller, exercising the option and paying the strike price. The buyer takes ownership of the stock and can continue to hold it or sell it in the market and realize the gain. Second, the buyer could sell the option before expiration and take profits.

When the stock trades at the strike price, the call option is “at the money.”

If the stock trades below the strike price, the call is “out of the money” and the option expires worthless. Then the call seller keeps the premium paid for the call while the buyer loses the entire investment.

Let’s look at an example. XYZ stock is trading for $50 a share. Calls with a strike price of $50 are available for a $5 premium and expire in six months. In total, one call contract costs $500 ($5 premium x 100 shares).

The graph below shows the buyer’s profit or payoff on the call with the stock at various prices.

Because one contract represents 100 shares, for every $1 increase in the stock price above the strike price, the total value of the option increases by $100.

The breakeven point — above which the option starts to earn money, have intrinsic value or be in the money — is $55 per share. That’s the strike price of $50 plus the $5 cost of the call. When the stock trades between $50 and $55, the buyer would recoup some of the initial investment, but the option does not show a net profit.

When the option is in the money or above the breakeven point, the option value or upside is unlimited because the stock price could continue to climb.

If the stock trades below the strike price, the option is out of the money and becomes worthless. Then the option value flatlines, capping the investor’s maximum loss at the initial outlay of $500.

Buying a call option vs. owning the stock

Buying call options can be attractive if an investor thinks a stock is poised to rise. It’s one of two main ways to wager on a stock’s increase. The other way is by owning the stock directly. Buying calls can be more profitable than owning stock outright.

Let’s look at an example to compare the outcomes for investors of the two call strategies with owning the stock directly.

XYZ stock trades at $50 per share. Call options with a $50 strike price are available for a $5 premium and expire in six months. Each options contract represents 100 shares, so 1 call contract costs $500. The investor has $500 in cash, which would allow either the purchase of one call contract or 10 shares of the $50 stock.

Here’s how the payoff profile would look at expiration for stockholders, call buyers and call sellers.

Stock price at expiration

Price movement

Stockholder's profit/loss

Call buyer's profit/loss

Call seller's profit/loss

$70

+40%

$200

$1,500

-$1,500

$65

+30%

$150

$1,000

-$1,000

$60

+20%

$100

$500

-$500

$55

+10%

$50

0

$0

$50

0%

$0

-$500

$500

$45

-10%

-$50

-$500

$500

$40

-20%

-$100

-$500

$500

$35

-30%

-$150

-$500

$500

$30

-40%

-$200

-$500

$500

Assumes no transaction fees

The attraction to buy calls the more the stock price rises is obvious. If the stock moves up 40% to $70 per share, a stockholder would earn $200 ($70 market price - $50 purchase price = $20 gain per share x 10 shares = $200 in total profit). However, owning the call option magnifies that gain to $1,500 ($70 market price - $50 strike price = $20 gain per share. $20 - $5 cost of the contract = $15 gain per share x 100 shares = $1,500 in profit).

If the stock price moves up significantly, buying a call option offers much better profits than owning the stock. To realize a net profit on the option, the stock has to move above the strike price, by enough to offset the premium paid to the call seller. In the above example, the call breaks even at $55 per share.

The entire investment is lost for the option holder if the stock doesn’t rise above the strike price. However, a call buyer’s loss is capped at the initial investment. In this example, the call buyer never loses more than $500 no matter how low the stock falls.

For the stockholder, if the stock price is flat or goes down, the loss is less than that of the option holder. Owning the stock directly also gives the investor the opportunity to wait indefinitely for the stock to change direction. That’s a significant benefit over options, whose life expires on a specific date in the future. With options, not only do you have to predict the stock’s direction, but you have to get the timing right, too.

Selling a call option

Call sellers (writers) have an obligation to sell the underlying stock at the strike price and have a “short call position.” The call seller must have one of these three things: the stock, enough cash to buy the stock, or the margin capacity to deliver the stock to the call buyer. Call sellers generally expect the price of the underlying stock to remain flat or move lower.

If the stock trades above the strike price, the option is considered to be in the money and will be exercised. The call seller will have to deliver the stock at the strike, receiving cash for the sale.

If the stock stays at the strike price or dips below it, the call option usually will not be exercised, and the call seller keeps the entire premium. But on rare occasions, the call buyer still might decide to exercise the option, so the stock would have to be delivered. This situation benefits the call seller, though, since the stock would be cheaper than the strike price being paid for it.

Let’s look at an example. XYZ is trading for $50 a share. Calls with a strike price of $50 can be sold for a $5 premium and expire in six months. In total, one call contract sells for $500 ($5 premium x 100 shares).

The graph below shows the seller’s payoff on the call with the stock at various prices.

Since each contract represents 100 shares, for every $1 increase in the stock above the strike price, the option’s cost to the seller increases by $100. The breakeven point of the call is $55 per share, or the strike price plus the cost of the call. Above that point, the call seller begins to lose money overall, and the potential losses are uncapped. If the stock trades between $50 and $55, the seller retains some but not all of the premium. If the stock trades below the strike price, the option value flatlines, capping the seller’s maximum gain at $500.

At most, call sellers can receive the contract premium — $500 — but they have to be able to deliver the stock at the strike price if the stock is called by the buyer. Potential losses theoretically are infinite if the stock price continued to rise, so call sellers could lose more money than they received from their initial position.

Selling calls can be dicey, but there is a popular and relatively safe way to do it via covered calls, which limits the unlimited liability of a “naked” call option discussed above, where the seller sells the call without also owning the underlying stock.

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Why call options can make sense

Call options are popular because they can allow investors to achieve different means. One lure for investors wanting to speculate is that they can magnify the effects of stock movements, as the table above indicates. But options have many other uses, such as:

Limit risk-taking, while generating a capital gain. Options often are seen as risky, but they can also be used to limit risk or hedge a position. For example, an investor looking to profit from the rise of XYZ stock could buy just one call contract and limit the total downside to $500, whereas for a similar gain a stockholder’s much larger investment would be wholly at risk. Both strategies have a similar payoff, but the call limits potential losses.

Generate income from the premium. Investors can sell call options to generate income, and this can be a reasonable approach when done in moderation, such as through a safe trading strategy like covered calls. Especially in a flat or slightly down market, where the stock is not likely to be called, it can be an attractive prospect to generate incremental returns.

Realize more attractive selling prices for their stocks. Some investors use call options to achieve better selling prices on their stocks. They can sell calls on a stock they’d like to divest that is too cheap at the current price. If the price rises above the call’s strike, they can sell the stock and take the premium as a bonus on their sale. If the stock remains below the strike, they can keep the premium and try the strategy again.

What are the different types of call options?

Types of Call Options As mentioned below, there are two sorts of call options: Long: Here, the buyer has the right, but not the obligation, to purchase an asset at a future strike price. Short: Here, the seller promises the buyer to sell shares at a set strike price in the future.

What is the meaning of call market?

A call auction, or call market, is where market participants place orders to buy or sell at certain bid or offered (ask) prices, which are then batched together and matched at predetermined time intervals.

What are calls in the stock market?

A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks.

What is long call and short call?

A long call has unlimited upside potential and losses are limited to the premium paid. A short call has an unlimited loss potential with a max profit that is simply the premium collected at the onset of the trade. Time decay works to the benefit of an options seller, such as when you enter a short call trade.