about how qualified the writer is to handle the subject; I suppose the reader might want to know my qualifica­tions for writing this book, so here goes.

I started in the option business in 1919-that's forty-three years ago-and today mine is the largest stock-option business in the United States, if not the world. My firm, Filer, Schmidt & Co., has dealt in nothing but options- "Options Exclusively"-for all these years. Options are not just a department of the firm. In 1932, when the Securities Act was being drawn up, the original attitude of the law­makers was, ". . . not knowing the difference between good options and bad options, for the matter of convenience we strike them all out." At that point the entire option busi­ness was threatened, and by appointment of the Put and Call Brokers and Dealers Association, Inc., I had the privilege of appearing before a committee of the House of Representatives and the committee of finance of the Senate to defend the usefulness and economic value of our business in the securities market. Subsequently, the Securities and Exchange Commission was formed, and the option business was allowed to function "if not in contravention of rules set down by the SEC." In all these years the SEC has not found it necessary to lay down any rules to govern the business of Put and Call options.

Almost all of the option business in this country is done by some twenty-five members of the Put and Call Brokers and Dealers Association, Inc. This association forms rules for the conduct of the business, polices the affairs of its members, arbitrates any differences between its members or between its members and the public, and reports each week to the Securities and Exchange Commission a list

of option trades made by the members of the association. While the options traded through our members run into millions of shares annually, there is rarely a matter which comes before our Board of Arbitration, and seldom is an error made in making a trade.

During my forty-three years in the business, I have lec­tured to trainees of stock-exchange houses as well as to rep­resentatives of stock-exchange firms from coast to coast, also to groups of professors of finance from various col­leges and universities who visit New York each spring. I have lectured on the subject of stock options for a number of colleges and universities, and it has been my pleasure to have lectured for a number of years to the class in finance of the University of Vermont, which each year visits Wall Street for a six-week course of instruction in various phases of finance. I have also studied the option business in London, Paris, Amsterdam, and Switzerland, after which we patterned the option business as we operate it today in this country. Option business was done in Europe long before any of our exchanges was organ­ized.

Of course, during the years of World War II, there was no trading on the European exchanges, for they were then closed. However, since the end of the war there has been trading on such exchanges where currency is free (for instance, in Switzerland), and today we do considerable option business between New York and Switzerland. It might be of interest to the reader to know that on the London Exchange, where option trading had been dis­continued since the war even though securities, as such, were traded, the members voted overwhelmingly for options, and actual trading was resumed in October, 1958. London options, however, are different from American contracts in many respects, the two important differences being that options can be traded only between members- not the public-and London options cannot be "done," as they term it, for periods over seven account periods (ap­proximately ninety days). In the United States we do a large part of our option business in six-month options and, occasionally, trade in contracts for one year. And our contracts can be bought or sold by members of an ex­change or the public.

Options were used in Holland about three hundred years ago in the boom of tulip bulbs. A grower engaging to deliver a shipment of tulip bulbs and concerned over the safe arrival of his shipment, would, for a small sum, acquire an option from another grower on a like amount of bulbs at the current price. If for some reason the boat carrying his cargo did not arrive at its destination and the shipment of tulip bulbs was lost, through his option he could reacquire the tulips of the other grower and thereby be able to make good on his contract to deliver without having to pay the possibly much higher price prevailing at the time of delivery.

Although his insurance could cover the value of the original shipment, it could not protect him against a much higher replacement cost. His option gave him the needed insurance against a price increase or costly breach of contract.

Options are used daily in real estate transactions, and such use is explained here in an attempt to draw a parallel,

as near as possible, between options on stocks and options on real estate.

A builder wants to buy a large plot of ground in order to build an office building or an apartment house. On this plot of ground there are a number of small buildings which he plans to demolish so that he can erect his build­ing-but only if he can acquire the entire plot of ground. To buy some of the buildings only to find out that he cannot purchase all, would prevent the erection of the complete project and would be costly and risky. So for a relatively small sum the builder tries to acquire an op­tion on each building, and having acquired such options he can buy all of the properties through these options and commence the building project. If, however, the company is unable to obtain options on all of the property, it can abandon its plans and its loss would be limited to the cost of the options acquired.

As another illustration, let us suppose that Mr. Jones wants to sell a piece of property for $100,000, and Mr. Smith believes that he can sell it to Mr. White for $125,000. Mr. Smith wouldn't want to buy the property and then find that he was unable to sell to Mr. White. So for a relatively small sum he buys an option from Mr. Jones, good for 90 days, to buy the property for $100,000. If, within the 90 days Mr. Smith is successful in making the sale to Mr. White for $125,000, he then exercises his option and buys the property from Mr. Jones according to the terms of his option contract, and sells it to Mr. White. Mr. Smith has made $25,000, less the cost of his option. If, however, he had been unable to sell the property to Mr. White, Mr. Smith would have allowed his option to lapse and his loss would have been limited to the cost of the option contract.

Options are used extensively in many businesses today. A ball club has an option on a player, a movie studio on an actor or actress, and you can even choose your own option as to how you wish to have your life insurance paid to your heirs.

Webster's Dictionary gives these definitions of "option":

(1) The exercise of the power of choice.

(2) Power of choosing: the right of choice, an alterna­
tive.

(3) A stipulated privilege of buying or selling a stated
property, security or commodity at a given price
within a specified time.

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