What is a call option？

A call option is a contract between two parties that gives the buyer the right to purchase the underlying stock at an agreed price on or before the expiration date。

What is call auction？

Collective bidding is a matching process in which buyers and sellers set a maximum price to buy securities and a minimum price to sell them, which usually increases liquidity and reduces volatility。Typically, collection auctions are held on smaller stock exchanges or used to issue other instruments, such as bonds。

What is the difference between pooled bidding and continuous trading markets？

Flexibility and liquidity are two differentiating factors。

pooled bidding will match buyers and sellers within the scheduled trading window。pooled auctions are liquid during the trading period, after which the market is illiquid until the next trading day。

The continuous trading market is very flexible, trading is carried out throughout the trading time, buyers and sellers are matched according to fluctuating market prices.。

The call option market is often used to organize small markets, and many governments use this structure to sell government debt instruments, such as bonds.。

Important Terms

Matching Orders: A matching order is an order to buy and sell securities or derivatives at the same price.

Order Driven System: The size of the order will determine the settlement price of the auction.

Strike Price: The agreed buy/sell price of the security underlying a call option contract.

Call Option Premium: The agreed premium paid by the buyer to open an option contract.

Expiration date: The date on which an option contract expires.

In-the-money (ITM): A call option is said to be in-the-money if the current price of the stock is higher than the strike price.

Out-of-the-money (OTM): A call option is said to be out-of-the-money if the latest stock price is lower than the strike price.

At-the-Money (ATM): When the strike price of an option is the same as its market price, it is said to be at-the-money.

Time Value: The premium of a call option consists of both time and intrinsic value, with the length of time determining the time value before expiration. To calculate this metric, you need to subtract the intrinsic premium from the total option premium.

Intrinsic Value: The intrinsic value (IV) of a call option can be calculated by subtracting the strike price from the stock price.

Time Decay: The closer a call option gets to its expiration date, the more the value of the premium decreases.

Exercise: If the option contract is in real value, the buyer can exercise the option, which means that the buyer will purchase the stock at the strike price and take delivery.

Assignment: If the option is in real value on or before the expiration date and the option owner exercises the contract, the seller of the call option (the lister) may receive a notice of assignment, which means that they will need to sell the stock to the option buyer at the agreed upon price.

How call option prices are calculated？

Two main models - the Black Scholes model and the binomial model - are used to calculate the call option premium, with the main differences between the two models being flexibility and predictive power。The Black Scholes index is more like a black box that calculates the premium with the factors (stock price, time to maturity, etc.) unchanged; the binomial divides time into parts and gives a positive or negative forecast。

Both models are basic templates, and many brokers have developed their own models for their clients.。In order to better understand how these two calculators work, we need to determine the maturity time, current stock / execution price, volatility, dividends and interest rates。

Expiration Time

Similar to an insurance policy, if the option has a shorter expiration date, the time value of money will be smaller, which will make the option itself cheaper.。

Current Stock / Execution Price

Black Scholes and the binomial model will consider the current stock and execution price when calculating the premium.。For example, if the stock price is higher than the strike price, the call option will be in real value - the model considers the option to have intrinsic value。

Volatility

Fluctuations in stock prices can have a huge impact on call option prices, and high volatility in stocks can translate into premium increases。

Dividends

If the stock is about to pay a dividend, the option fee will be adjusted based on the dividend amount。

Interest Rate

If investors buy call options, they can benefit from interest rates。Because instead of buying shares and spending more cash, they can buy call options at a fraction of the cost and deposit the remaining funds in the bank to earn interest, and the call option premium is adjusted accordingly。

What is the difference between a call option and a put option?？

A call option gives the buyer the right, but not the obligation, to purchase shares at an agreed price on or before a specific date。Conversely, if you sell a call option and the buyer exercises the option, you must sell at the strike price。

A put option, on the other hand, gives the buyer the right to sell the stock at an agreed price, but not the obligation to。Conversely, if you sell a put option, if the buyer decides to exercise the option, you are obliged to purchase the underlying stock at the strike price。

So if an investor is keen on a particular stock, they can buy a call option, which means they have to pay a premium。If the stock does not rise above its strike price, then there is no point in exercising the option because they will lose the initial cost (premium) if they can buy the stock at a cheaper price in the market。

On the other hand, if the investor believes that the value of the stock will fall, he can buy a put option。If the stock price falls and the strike price is higher than the stock price, then the investor can exercise the option to buy the stock at the current price and sell the stock at the agreed strike price。In this case, the risk is that if the stock price is flat or above the execution price, the investor will lose the royalty paid。

Keep in mind that options trading carries significant risk and is not suitable for all investors, and that certain complex options strategies can even bring additional risk。Investors must carefully consider their investment objectives and risks before trading options.。