When And How To Close Options
Some individuals who are far from an office of a stock-exchange firm or who have no account with one often do business directly with an option-dealer. The option-dealer will hold options for the account of a customer and will exercise the options upon instructions from the customer.
In lieu of closing a contract for a client, the put and call dealer may buy the contract from the client. The price which he will pay will be computed after the dealer has exercised the contract for his own account and has sold the corresponding stock in the market (in the case of a call), or has bought the stock in the market (in the case of a put); the price will be equal to the net proceeds of the dealer’s transactions less two regular stock exchange commissions and any applicable tax. No margin has been required because the customer will have sold the contract itself to the put and call dealer.
The customer who expects to buy options directly from an option-dealer should make a deposit with his option-dealer to open an account and thereby avoid any delay in the execution of orders when he desires to buy an option. Any options bought by the client will be debited against his account, and any profit arising from the sale of a contract by a client to an option-dealer will be credited to the client’s account. Most dealers ask their clients to send their orders by wire, collect, because if a client gets an idea that a stock is going to move and wants to buy an option, the delay in sending an order through the mail could make him miss the move.
While option-dealers carry accounts for clients who want to purchase options, the making or selling of original put and call contracts must be arranged with a stock-exchange firm so that the contracts sold will carry that firm’s endorsement. The option-dealer will be glad to help make such arrangements for those who do not already have an account with a stock-exchange firm but the option-dealer does not carry customers’ securities and members of our association are not members of the New York Stock Exchange and cannot endorse options.
In the purchase of options, timing is most important. Many times, the customer has good information but buys 90-day options or six-month options, only to have the stock move just after his option expires. For that reason it might be well to consider the purchase of option contracts on the stagger system so that the expiration dates occur a week or so apart. Buy some of your options this week, some next week, etc., as far as you want to go, so that if the first set of options is bought too early, it is possible that those bought subsequently can prove profitable. It is also good policy to buy an option of longer duration than you think you need. If you think that a move may take place in 60 days, it is smart to buy an option for 90 days. The cost of the longer option will ordinarily be very little more.
Buying options is an art form, and it can be difficult to learn if an investor is far from his option-dealer. The relationship involves trust and confidence, as well as smart choices on the part of the investor. Investors would do well to take the advice of this author and stagger purchases of options, which in reality is simply another form of diversification—something we always advocate.
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