How price forms underneath, and what options are

The course's final chapter begins, and it raises the level without changing language: everything ahead can be explained without formulas. First, how a price gets set when the market is shut and nobody can buy or sell. Then, what an option is and why they were invented.

What an auction is and how the opening price forms

During normal trading, orders cross one by one as they arrive. In an auction they don't: orders accumulate for a period without any executing, and in the final instant they all cross at once, at the same price.

How it works, step by step

You already saw the hours in the first chapter: on the Spanish exchange, the opening auction runs 8:30 to 9:00 and the closing auction 17:30 to 17:35.

Three things happen during that window:

Orders accumulate. Anyone can enter, amend, or cancel buy and sell orders.

Nothing executes. Even when a buy and a sell order are compatible, they sit waiting.

And the system publishes a theoretical price. As orders arrive, the platform calculates the price at which the largest number of shares would cross if the auction ended right then. That price is visible and keeps shifting.

At the end, a random close of up to 30 seconds — nobody knows the exact second it ends — sets the final price, and every compatible order crosses at that single price.

Why the opening price isn't yesterday's close

Here's the underlying reason for something you already saw in the earnings chapter.

Between one session's close and the next one's open, fifteen hours pass in which the world doesn't stop: earnings get released, news breaks, other markets move. None of that information can be absorbed gradually, because the market is shut.

The auction exists precisely for that: it's the mechanism absorbing, all at once, everything that happened while nobody could trade. Which is why the opening price can sit far from the previous close — exactly what the order types guide called a price gap.

Why the ending is random

Because if everyone knew the exact second the price gets set, whoever could react fastest would slip in an order at the last instant to move the outcome their way.

With an ending that can fall anywhere in a thirty-second window, that manoeuvre stops working. It isn't a technical complication: it's a deliberate defence, and it's the same logic the first chapter described when it said auctions stop the most nervous seconds being decided by whoever arrives a fraction earlier.

The practical detail

The closing price the end-of-day auction sets is the official price, and it's the one index funds use to value their portfolios and to buy and sell by mandate.

That partly explains the first chapter's U-shaped pattern: the final minutes concentrate heavy volume because a lot of money is obliged to trade at exactly that price.

Why a stock goes into auction mid-session

There's one that isn't in the schedule and that you will encounter: the volatility auction.

The Spanish exchange sets price ranges for each security, one referenced to the static price from the last auction and another to the last traded price. If an order would cross outside those ranges, continuous trading halts and the security moves into an auction for a few minutes.

It isn't a suspension or a fault. It's a deliberate brake: when a price moves more than expected in very little time, the system stops crossing orders one by one and reverts to accumulating and crossing everything at once.

The reason is exactly this section's. A sharp move in continuous trading executes at progressively worse prices against an emptying book. An auction gathers everyone, publishes a theoretical price for a few minutes, and gives time for supply or demand to appear on the other side.

If you see a stock "in auction" mid-session, that's what happened: it moved too far, too fast. It usually occurs around unexpected news, and it's why sometimes a stock can't be traded for a few minutes precisely when most people want to.

What an option is and what it's genuinely for

An option is a contract giving you the right, but not the obligation, to buy or sell something at a set price within a set period. You pay a premium for that right, and if exercising doesn't suit you, you let it expire.

The two kinds, with a non-financial example

Imagine you want to buy a flat costing €200,000, but you need two months to arrange financing and you're worried it will rise meanwhile.

You pay the seller €3,000 to hold the flat at that price for two months. That's a call option.

• If the flat rises to €230,000, you exercise your right and buy at €200,000. You've made €30,000 less the €3,000 you paid.
• If the flat falls to €180,000, you don't exercise. You buy at market price and lose only the €3,000.

The other kind works the same way in reverse: a put option gives you the right to sell at a set price, and it protects against something falling.

What they were invented for: hedging

This is the point that speculative use has almost entirely obscured, and it's the one explaining why options exist.

Their original function is hedging: reducing the effect of an adverse move by paying a certain cost upfront.

A farmer who doesn't know what price their harvest will fetch in September can lock in a minimum today. It costs money, and in exchange they sleep at night. They aren't betting: they're buying certainty, exactly as with insurance.

An option, in its most honest form, is insurance under another name. You pay a premium, cover a specific risk over a specific period, and if the risk doesn't materialise you've lost the premium and nothing bad happened.

Buying and selling aren't symmetrical

And here's what has to be understood before anything else about this product, because the asymmetry is enormous.

Whoever buys an option pays the premium and is done. Their maximum loss is exactly that premium, known in advance. It's the policyholder's position.

Whoever sells an option collects the premium and takes on the obligation. Their maximum gain is that premium, and their potential loss can be far larger, in some cases without a clear ceiling. It's the insurer's position.

Selling options has a very characteristic outcome pattern: many small, frequent gains and rare but large losses. It's exactly the profile the risk chapter's first session described as the most deceptive, because it produces a constant sense of being right while expected value can be negative.

Whether that's a bad idea depends entirely on whether the premium collected compensates the risk taken, and that's a question requiring measurement rather than intuition.

What the Greeks measure, in plain language

The Greeks sound like advanced mathematics and they're four simple questions: how much the option moves, how much that answer changes, how much it loses over time, and how much market nervousness affects it. They're named with Greek letters by convention, not because Greek letters are needed to understand them.

Delta: how much it moves

The question: if the asset rises a euro, how much does the option rise?

A delta of 0.5 means that for every euro the stock rises, the option rises about 50 cents. A delta of 0.9 means the option moves almost like the stock.

The image: it's the speed at which the option follows the asset.

There's a second use worth knowing: delta also reads, roughly, as the probability the option ends up being useful. A delta of 0.3 suggests around a 30% chance the price gets where it needs to.

Gamma: how much that speed changes

The question: how much does the delta change when the asset moves?

If delta is speed, gamma is acceleration. High gamma means the option's sensitivity changes fast, and therefore that the position behaves very differently depending on where the price sits.

Why it matters: high gamma makes a position hard to control, because its risk changes on its own while you do nothing. It's why options close to expiry are the most uncomfortable to manage.

Theta: how much it loses each passing day

The question: if absolutely nothing happens, how much less is the option worth tomorrow?

An option is a right with an expiry date, so each passing day it's worth a little less, even if the asset's price doesn't move a cent.

The image: it's an ice cube. It melts on its own, and it melts faster the closer the end gets.

It's the Greek that most surprises beginners. You can be right about direction, watch the price move as you expected, and still lose money because the move arrived too late. Option buyers have time against them; sellers have it in their favour.

Vega: how much nervousness affects it

The question: if the market starts expecting bigger moves, how much does the option rise?

It's the sensitivity to implied volatility, the one you know from the earnings chapter. When the market expects more movement, options get more expensive all at once, whether they bet up or down.

The image: it's the thermometer of nervousness, and it explains something you already saw by name.

Recall IV crush: someone buys an option before earnings, calls the direction right, and loses money. Now it has a full explanation: vega was extremely high before the announcement and collapsed afterwards, and that fall outweighed the gain from delta.

The four together

Greek	The question it answers	The image
Delta	How much does the option move if the asset moves?	Speed
Gamma	How much does that speed change?	Acceleration
Theta	How much does it lose each passing day?	Melting ice
Vega	How much does market nervousness affect it?	The thermometer

And the takeaway for someone who will never trade options, which is most people: an option carries at least four sources of risk acting simultaneously, and three of them don't depend on the price's direction.

Which is why calling the direction right isn't enough to make money on this product. And why the earnings chapter insisted that the expected move, calculated from option prices, is useful information even for someone who will never buy one.

What to remember

• In an auction nothing executes until the end: orders accumulate and all cross at once, at the same price, with a random close of up to 30 seconds.
• The opening auction exists to absorb at once everything that happened while the market was shut, which is why it produces price gaps.
• An option is a right with an expiry date, and in its original form it's insurance: you pay a premium to cover a specific risk.
• Buying and selling options are asymmetrical positions: the buyer knows their maximum loss, the seller doesn't always.

Published August 3, 2026. Last reviewed: August 3, 2026.

Related: what the options market is saying before the announcement · what actually happens when you hit buy