Color change in squid comes from 3 major sources: Chromatophores (the expanding and contracting circles), iridophores (sparkly bits under the chromatophores), and photophores (light-producing organs, bottom picture). 

Color change is often used for camouflage, but it can also be used for communication and to confuse prey when hunting. The MBARI video of Humboldt squid shows the vast repertoire of patterns that Humboldts use to talk to each other. The bottom video shows broadclub cuttlefish using their color changing skin to confuse a crab.