A Peek Into The World Of Option Dealers
Practically all of 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.
This association consists of approximately 25 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 are traded in units of 100 shares, not in odd lots, and they are made for periods of 30 days, 60 days, 90 days, six 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 six 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 Dec. 10, and by Nov. 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.
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.
Buying an option from an option-dealer can be a lucrative deal. Making a partnership with an option-dealer can be even better, as he will always have his clients’ interests first and foremost in his mind.
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