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What is a 'Call'

A call auction is sometimes referred to a call market; it's a time on an exchange when buyers set a maximum price that they are willing to pay for a given security, and sellers set a minimum that they are willing to accept. The buyers and sellers are matched in a process that can increase liquidity and decrease volatility.

A call is also an option contract that gives the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time.

BREAKING DOWN 'Call'

A call auction, also known as a call market, is a type of trading on a securities exchange, while a call option is a derivative product.

Call Auction

In this type of trading, the exchange sets a specific time to trade a stock. It's most common on smaller exchanges where a limited number of stocks are traded. Larger exchanges also sometimes utilize this structure for less liquid stocks. Stocks might all be called to trade at the same time, or they could be done sequentially. Buyers stipulate the maximum price that they are willing to pay, and sellers do the same for their minimum. All interested traders must be present at the same time. Once the call period is concluded, the security is illiquid until it is called again. Governments sometimes use call auctions when they sell notes, bills and bonds.

The alternative structure is the more commonly seen continuous trading, when potential buyers and sellers post their desired price and are matched on an ongoing basis in an order book. Deals are made throughout the day in all securities.

Call Option

The owner of a call option has the right but not the obligation to buy the underlying instrument at a given price (the strike price) within a given period of time. The seller of a call is sometimes referred to as the writer of the option. The underlying instrument could be a stock, a bond, a foreign currency, a commodity or any other traded instrument. A put is essentially the opposite of a call; it is the right but not the obligation to sell at the strike price within a given period.

If the strike price on the call is cheaper than the price in the market on the exercise date, the holder of the option can use the call to buy the instrument at the strike price. If the price in the market is cheaper, the call expires unused and worthless. The option can also be sold prior to maturity, if it has intrinsic value based on the market's movements.

Derivatives traders often combine calls and puts to increase, decrease or otherwise manage the amount of risk that they take.

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