In the case of rights issued on a stock, the prices in all outstanding options are reduced by an amount equal to the price at which the first sale of the rights is made on the day that the stock sells ex rights on the Exchange. Thus, if the first sale of the rights on the day the stock sells ex rights is 1V>>, then the price of outstanding Put and Call contracts would be reduced by 1% points. The stock at the opening on the day that the stock sells ex rights would probably open down l¹/^ points so that there would be no advantage to either the buyer or the seller of the options.

Suppose that one owns a Put and a Call at 52 and the company has declared a 5 per cent dividend. From the day that the stock sells ex stock dividend the holder of the Call contract, if and when he exercises his Call, calls for 105 shares of stock for $5,200 (the dollar amount specified in the original contract) and the holder of the Put option, if he exercises his Put, will deliver 105 shares for $5,200 (the total dollar amount specified in the original contract).

As an example: the holder of a Call on 100 shares of American Motors at 20, with stock selling at 40 after it has sold ex a 5 per cent dividend, would Call for 105 shares of stock for $2,000. Conversely, the holder of a Put on Amer­ican Motors at 20 if the stock were selling at 10 (after it had sold ex the 5 per cent stock dividend) would Put 105 shares of stock for the sum of $2,000. If the stock has sold ex a 50-cent cash dividend and then ex a 5 per cent stock dividend, the holder of the Call at 20 would reduce his Call price to 19^ and then Call for 105 shares for $1,950.

Percentage of Options Exercised

I can remember when I testified before the Senate Finance Committee in 1934. I was, of course, younger and less experienced, but I had been in the option business for fifteen years at that time and, although the business then was different from what it is now, I knew it well. I had already appeared before Congressman Sam Rayburn's committee in the House and now I had been selected by the Put and Call Brokers and Dealers Association to repre­sent the industry before the Senate. There I was in a big room with a "mike" before me; the senators who were on the committee sat at a large table, and there were about three hundred spectators and witnesses in the room. I was facing Senator Fletcher, Ferdinand Pecora, Ben Cohen, and "Tom" Corcoran-the framers of the Securities Act. "Tom the Cork," as Mr. Corcoran was called, had ex­plained the bill, paragraph by paragraph, and when he came to the part dealing with options, he said, in sub­stance, "Not knowing the difference between good options and bad options, for the matter of convenience we strike them all out." Don't hold me to the exact words, but that was the essence of it and it was my job to show the dif­ference. I think I did a good job. As I have said, the business of options was turned over to the newly formed SEC and, sitting before this body, I explained the difference between "the options in which we deal which are publicly offered and openly sold for a consideration, and the manipulative options that had been secretly given, for no fee but for manipulative purposes."

To get back to the reason for the heading of this section, Mr. Pecora, after other questions, asked me the percentage of options that were exercised, and I told him that about 12½ per cent were exercised at or before expiration. Re­member that in those days options were mostly of 30-day duration written not "at the market" price, but away from the market. In those days we also negotiated options for 2 days, 7 days, and 15 days. (More about this later.) But stock prices were high in the twenties (as we later found out), and with General Motors over $300, U.S. Steel over $325, and many stock in the hundreds, it was quite com­mon to trade options 20, 30, or even 40 points away from the market for 30 days.

Mr. Pecora then asked something like this: "If only 12½ per cent are exercised, then the other 87% per cent of the people who bought options have thrown their money away?" "No, sir," I said, "if you insured your house against fire and it didn't burn down you would not say that you had thrown away your insurance premium."

The same thing is true about options. Today the 30-day option is a very small percentage of our business, and the longer contracts in which we now deal constitute a very much greater percentage of options exercised. However, whether an option is exercised at expiration or not, it does supply considerable protection and advantage to the holder during its life.

Just one short example: A man owns stock that cost him 40 and is now selling at 70. He protects that profit with a 90-day Put at 70, for which he pays $400. During the life of the option, the stock advances to 80, and Mr. Trader allows his Put option to lapse. Instead of his selling his stock at 70, the protection afforded by the Put pro­vides him with the incentive or courage to hold the stock for an additional 10 points profit without risking the profit he already has. The option isn't exercised, but would you say that Mr. Trader "threw away" the premium that he paid for the Put option, or did he have protection during the life of his option for his full profit and against an unlimited loss?

"Years Ago"

It might be interesting to the reader at this point, after reading so much of the techniques of the option business, to know something of "years ago."

When I first came into the option business forty years ago, and up until about the time of the "big break" in 1929, the holder of an option could trade against it with no margin. His broker had to have coverage for just the commissions and interest and any market difference. Often I had Puts on 500 shares against which I would trade, back and forth, as many times as the swings in the market would allow; margin was not necessary because the option, guaranteed by a member firm of the New York Stock Exchange, was sufficient margin. Not so today, how­ever. Today all stock commitments must be covered by the required margin and the option is not a substitute for such margin.

"Years ago," Spreads and Straddles were sold so that the exercise of one side of the option, before expiration, voided the other side of the contract. The Straddle was made out as one contract and the contract was surrendered to exercise one side.

"Years ago," there were no tax stamps required on either the Put or the Call option.

"Years ago," contracts were made out in 500 or 1,000 shares, or even in 5,000-share pieces, instead of in single 100-share pieces as they are today. The largest trades I ever made were some 25,000-share pieces, but 5,000-share trades were common. The largest trade I remember was an order I had for Call options on 5,000 shares each on 22 different stocks. The order was filled without too much trouble in about 3 days.

"Years ago," very few option-dealers had their own offices. The "market" was in a restaurant in New Street, New York City, where most of the option-dealers congre­gated, and many large writers and buyers of options would come to meet with their special option-dealers and give an order. There were telephone booths and a ticker in the restaurant, and the telephone booths were our offices. All the dealers walked around with a pocketful of nickels, ready to use a phone to call a customer and try to make a trade. (A phone call was still a nickel in those days). Of course, we all ate in that restaurant-we had to, for a customer might call and this was our "office."

"Years ago," we did a very large business in "2-day options." We bought them for $25 or $30 per hundred and sold them for $35 or $37.50. They ran from, say, Monday- that would be at any time Monday that we traded-until Wednesday at 2:45 p.m.-the Exchange closed at 3:00 p.m. in those days. We would buy Calls on some stock 2, 3, 5, 10, or 20 points above the market for 2 days. But the number of points demanded for a Call was in proportion to the way the stocks were moving. And if you knew which pool was going to move which stock in the next 2 days, you could do well. There was a broker in the business who would sell a Call on 100 shares of stock good, for the next day only, for one dollar's worth of cigars (which were seven for a dollar, then). The idea was to buy one of those "seven-cigar Calls" and about noon the next day, if the stock had had a run, to sell it for $25 or more-just for the rest of the day. I saw one of my colleagues make $1,200 on a call like that.

All of the brokers would congregate in the restaurant after the close of the market to "chew the rag." There was one fellow who would sell lists-100-share Calls on, say, seven different stocks at a price above the close with the Calls good for the next day-and he might offer the whole list for $25 or $50, according to the list of stocks. Very often, before noon the next day, the buyer of the list sold one of the Calls for $100. Fluctuations were wide in those days and stocks weren't split so quickly. Some of the lead­ing stocks sold over $300-General Motors, Mexican Petro­leum, Texas Company moved 10-20-30 points in a day. I remember selling a man Puts on General Motors and Mexican Petroleum 30 points below the market for 30 days. Those Puts cost $137.50 per hundred shares, but the next day or so those stocks were down 40 points and the next day they were up 30.1 sold a fellow a Call on Radio once for 30 days at 100-the stock was 89 and the Call cost $137.50. There were 100 points in the Call when it was exercised.

"Years ago," there were two individuals in the street- not Put and Call brokers exactly-who traded for their own account. They bought Spreads-they would buy a Spread on 500 Studebaker selling at 80-Puts at 72, and Calls at 90, for 30 days for $200 per 100-share Spread. If the stock went up in a few days, they sold the Call for $200, and then if the stock declined they sold the Put for $100 or $200, according to the price of the stock. But one partner wouldn't sell a contract unless the other partner agreed, and it was funny to watch one partner run up and down New Street looking for the other to O.K. a contemplated sale of a contract. Sometimes a broker would ask to have the contract "in hand" for a few minutes to see if he could sell it. He'd disappear into a nearby brokerage office and wait to see if the stock moved and then come out to say, "O.K., I sold it."

"Years ago," I remember trading a Call on 10,000 shares of Pan American Pete at 11:00 p.m. at night. When I first started, I did the trading, I made out the contracts in ink who owned a typewriter?-I made out the checks, I delivered the contract, I picked up the checks and made the deposits, I opened the shop and closed the shop; I was the business. But all of the option-dealers did very well. After a while I chipped in with another broker and we hired a boy for $15 a week to stand at some phone booths in a nearby building (these phone booths were our branch office), and if we were wanted on the phones down the street our boy would come running after one of us "big shots" and whoever was wanted would run up to answer "his" phone. What fun if the restaurant phone wanted you at the same time!

But we had a peculiar sense of honor in those days. If I was sick for a time, one of my competitors would answer my calls and do business for me, and upon my return to work, he would give me a list of the trades he had made for me, along with a check for my profits. And though every one of us was a competitor and would try to offer an option better than the next fellow, the broker who took care of the sick fellow's customers would not, on the latter's recovery, solicit business from his fellow broker's customers. It just wasn't cricket. I had pneumonia once after I had been in business about four years. At the time I was trying to follow a buying pool-only I didn't know that it was selling in another place. I lost my money and worried about my wife and kid, and got sick and con­tracted pneumonia. I was home for about four weeks, but one of my competitors took care of my business and wouldn't take more than a "thank you" for it.

While I still had my office in my hat-I mean the restaurant-I made a trade in 500 shares with an English fellow I had seen around "the shop," and as he said, "I'll take it," he winked his eye. Trying to be careful because I couldn't afford to make a mistake, I asked him again if it was a trade and again he said, "I'll take it," but gave another wink. I went over to one of the boys and asked him about this fellow, who, every time he said, "I'll take it," winked at me. They reassured me that the sale was O.K.-he just had a nervous twitch-but I was scared.

Despite the length of time I've been in this business, I can remember almost all of the mistakes that were made in trading, they were that few. It's amazing because of the millions of shares of options that are traded: a Put is a Put and not a Call; 100 is 100 and not 500; and Steel is Steel and not Studebaker. I hope I don't jinx it, but I can't remember a serious mistake in our office in almost 10 years.

Just to show how mistakes were not made-often we would call a certain seller of options at his home at 7 p.m. (he was a fellow who had quite a thirst-so much so, that his tongue thickened) and we'd trade a thousand or two with him, and next morning our contracts would come in 100 per cent perfect-just as they had been traded. I don't think there is another business in the whole wide world that has had as few errors in the last forty years as the option business. And it's fast-we've over 50 phones on our trading table, and on a fast day the twelve ears and twelve hands that our six traders have can't stop for a minute; still, I think it should get an "Oscar" for being the least understood of all Wall Street businesses.

And speaking of "years ago," the following pages are reproductions of a few pages of a book that was given to me. The book fascinated me so much that I had a limited number of copies made, not only because it tells of the option business and the stock-exchange of those days, but because I felt it was a museum piece. The frontis­piece is dated 1875. One of the sketches shows the Sub-Treasury Building at Wall and Broad Streets, New York, but there was no statue of George Washington in the picture, as there is now. I investigated and found out why: George was put there eight years after this little book was published. I have added these few pages of this little book to mine because I thought that the reader would be interested in it. I hold the original in my Wall Street "Put and Call Library" for posterity.

We have daily inquiries from correspondents at a distance, saying that living so far from the city, and not knowing the best stock to select, or the most favorable time to close their contracts, that if we would attend to not only securing the privilege, but the selection of the stock, and closing the same, using our best judgment, they would be willing to forward their money to us for investment. We reply, that when requested, we will not only secure the privilege, but make the selection of stock and the kind of contract best to be taken, and also attend to the closing of same, exercising our best judgment. We are enabled to do this without prejudice to our customers, as our business is done strictly on commission, and we are entirely disinterested when we give our views of the market, which we never do until after studying the movements of the different cliques, and watching the outside influences that may be brought to tear on the market. It is to our interest as well as our customers', to select such stocks as are most likely to pay the best profits, for as we make money for them, we make it for ourselves, by increasing our business; and all who trust us with their business may rest assured that we will attend promptly and faithfully to their interest.

We do not guarantee or promise success in every instance. We present such facts before our readers from week to week as may come into our possession, and give them our best judgment as to the probable course of the market for the ensuing thirty days, and we say to them, if you choose to risk $106.25, you may realize a considerable profit. The stock broker who buys and sells for his customers can do no more than this. If he is con­sulted and is candid, he will tell his client what he thinks as to the pros­pects of a stock, desiring him at the same time to exercise his own judg­ment. He does not guarantee profits or promise success by any means. Those of our patrons who have followed the course of our suggestions, will agree with us when we state that our prognostications have generally proved correct, and when they have taken our advice, success has resulted in nine cases out of ten.

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