Arbitrage-Purchasing in one market for immediate sale in another at a higher price.

Hedge-To counterbalance a sale or purchase of one se­curity by making a purchase or sale of another.

Neither of the above-described operations can be com­pared to option-trading. Neither the arbitrageur nor the hedger has any option; he has made two complete trades. The holder of a Put or Call option exercises his option contract only if it is to his advantage to do so. He has one side of his trade in his option contract and the other side -the buying against a Put or the selling against a Call-is done only if it is profitable to the one who holds the option contract.

Options can be used as a speculative medium with small, or relatively small, risk and with unlimited possible profit. The leverage in connection with option-trading is exceedingly attractive. In any venture, the relation of the possible profit to the possible loss is something that can­not be overlooked. The uses to which options can be put are numerous, and because the general public and even the brokerage fraternity are not well versed in the various uses of options, this book will explain in considerable detail many of the general uses and even the intricacies of option-dealing.

Colleges and universities have begun to realize that this subject, which is part of Wall Street procedure, could well be included in a course on finance. I feel that the informa­tion gained through such education will stand the students in good stead when they enter the business world, par­ticularly the field of finance.

It is my contention that options are protective con­tracts-they protect either before or after a stock commit­ment. A man can buy an option to protect a purchase or sale already made or about to be made. He can acquire a Put contract to protect stock which he holds. He can buy a Put to protect him against unlimited loss when he buys a stock. He can buy a Put to protect a profit which he already has and doesn't want to lose. Or he can acquire a Put or a Call to protect him against a commitment which he expects to make at a later date and on which, when he makes such commitment, he does not want to take an unlimited risk. So an option is a protective device no matter when it is used.

It is not my contention that everyone must trade in options, but I do say that anyone who has an interest in securities should have a knowledge of Put and Call options because at some time or other options can play a part in one's security-trading, whether to protect a profit or possibly to recapture stock after taking a profit.

From figures recently gathered, there are about 12,000,000 stockholders in the United States. I will venture to say that of these 12,000,000 stockholders, not even 12,000 have more than a smattering of knowledge of Put and Call options, and not more than 1,200 out of the 12,000,000 could explain very much of the technical work­ings of the option contract. Take my word for it-to understand the workings of options is not very difficult and any effort to unravel this supposed mystery will be rewarding to the stockbroker and also to his customer.

The use of options spread into the securities business as a protective and also a speculative device. In the late nineteenth century, options in this country acquired the names of "Puts" and "Calls," and they have been dealt in in increasing numbers ever since, for those who deal in securities recognize both their protective and their specu­lative value.

Put-Call options can be used profitably in either a rising or a falling market, and the increasing interest in them is a result of the knowledge gained by the public of the various uses to which options can be put.

Of course a man wouldn't think of owning a home with­out insuring it against fire; nor would he think of not insuring his wife's jewelry and furs against loss or theft; he carries life insurance to protect his family when he dies. Yet it is strange that relatively few people understand that through Put and Call options they can protect themselves against unlimited loss in stock-holdings, or can preserve substantial "paper" profits without selling. Many of the large losses, either of invested capital or "paper" profits, sustained by traders in the bad breaks in the market that come every now and then, could have been avoided through the protection that is available through options. It has been my experience that small stock-losses do not break a man, but it is the large loss taken by the stubborn trader in a market like that of 1929, 1937, 1946, or 1957 that can wipe out a trader or leave him with little chance to recoup his losses.

Now seems to be the time when options are needed in the field of finance more than ever before because they act as a protection against excessive losses and as a safeguard for profits. It should be made known to every investor and speculator that there is a way to guard against excessive losses by limiting such losses to a specified and rela­tively small amount.

Option-Dealers

Practically all the orders for the purchase and sale of Put and Call options come to New York, where they are executed by members of the Put and Call Brokers and Dealers Association, Inc. As previously explained, this association consists of approximately twenty-five members who deal exclusively in Put and Call options, and all of the options in which these members deal are guaranteed by member firms of the New York Stock Exchange. The option contracts in which the members deal are transferable contracts, and on the back of each contract is the name of the stock-exchange firm where the individual or company that sold the contract has his account. This endorsement of a member firm of the New York Stock Exchange guar­antees that the terms of the contract will be met. The contract is made out in bearer form and can be resold by one person to another.

The option-dealer is a middleman; he arranges for the purchase of and/or sale of options between a possible buyer and a seller. It is his business to try to sell options which are offered and, conversely, to try to buy options which his clients want to obtain. The option-dealer works with, not against, his client and rarely takes the position of maker of the option. His profit is made between what he pays for an option and what he sells it for.

Option Contracts

Option contracts are traded in units of 100 shares, not in odd lots, and they are made for periods of 30 days, 60 days, 90 days, 6 months "plus," and, occasionally, for one year. Puts and Calls are usually done "at the market." That is, the price at which the stock is selling when the trade is made. A Put or a Call on a stock selling at 50 would be made at 50 in the usual way of business. However, it is pos­sible to buy or sell an option "away from the market," that is a Call at 52 when the stock is selling at 50 or any differen­tial by agreement. The most popular contracts are those that run for 90 days or 6 months. A contract can be exercised at any time before expiration at the option of the holder. It is not necessary to wait until expiration to act on or exercise one's option. If a man owns a Call option at 50 which ex­pires on December 10, and by November 20 the stock has risen to 60-at which point he would be satisfied with such a profit-he may exercise his option at that time. He need not wait until the expiration of the contract.

Option Money

The option money or premium is the amount paid for the contract. The amount paid for the option is not applied to adjust the price at which stock is bought or sold upon the exercise of the option. If you have a Call on stock at 70 and you exercise the option, you pay $70 a share for the stock less any dividends that accrue to the contract. If you have a Put at 70 and you exercise the Put, you receive $70 a share for the stock less any dividends that are due on the option contract.