Puts And Calls
A "put" is a negotiable contract giving the holder the privilege to sell
a specified number of shares of a certain stock to the maker at a fixed
price, within a specified time. A "call" is the exact reverse. It is a
negotiable contract giving the holder the privilege to buy a specified
number of shares of a certain stock from the maker at a fixed price,
within a specified time. The price fixed in a put or call is set away
stock and the condition of the market. When the market is steady and not
fluctuating, the price fixed is frequently only two points away, but in
a more active market it is considerably more.
For instance, at the present time, U. S. Steel is selling at about 95,
and you can buy a call on it at 97 or a put at 93. That is by paying a
certain amount, which at present is $137.50, you can have the privilege
of buying 100 shares of U. S. Steel at 97, within thirty days of the
date of the purchase of your call. If Steel should go up to 101 you
could have your broker buy it at 97 and sell it at the market, and you
would make a profit of four points, less the cost of your call and
commissions.
As a method of operating in the stock market, we do not recommend the
buying of puts and calls. Professional speculators may be able to use
them to advantage sometimes, but for the outsider, who is not in close
touch with the market, there is nothing about them to recommend.
Here is one point: the people who sell puts and calls fix the terms. If
the market is irregular, they will set the point of buying or selling
far away from the market price. These people are shrewd traders and they
make the terms in their own favor. It is generally said that nearly all
the buyers of puts and calls lose, and that is our opinion. Therefore,
we advise you to leave them alone.
More
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