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Full text of "The put-and-call"

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http://www.archive.org/details/cu31924013889633 



THE P U T-A N D-C A L L 



ABERDEEN UNIVERSITY PRESS 



THE 



PUT-AND-CALL 



BY 

LEONARD R. HIGGINS 



LONDON 

EFFINGHAM WILSON 

ROYAL EXCHANGE 

igo6 

All rights reserved 



140,^5 5 1 
ft £ 



SZ 



$*/-/ '/^ 



TO MY ESTEEMED FRIEND. 

Mr. E. HEDLEY CUTHBERTSON, 

THIS LITTLE VOLUME IS 

IRespectfullB 2>eMcateD. 



PREFACE. 

The writer of the following pages feels that, in 
publishing this little book on Options, he may 
be telling many of his professional friends what 
they already know perhaps better than the author. 
If, however, he succeeds in supplying in a read- 
able form an answer to the question which has 
so often been put to him by the uninitiated, viz., 
" What is an Option ? " and in placing before those 
who have mastered the intricacies of Option deal- 
ing the Theory of the "Value of the Put-and- 
Call " in a somewhat new light, the object of his 
little book will be attained. 

June, 1896. 



1-5 



TABLE OF CONTENTS. 



PREFACE. 

CHAPTER I.— Introduction. 

The Legality of Option Dealing — Day to Day Options — The Stock 
Exchange Settlement — Contango and Backwardation — Ecart — 
" Distance " .... 

CHAPTER II.— Definitions. 

Option— Call— Put— Put-and-Call — Call o' More— Put o' More- 
Option Money— The Giver — The Taker - - 6-9 

CHAPTER III.— Working the Single Option. 

A Favourable Call of Brighton "A" — An Unsuccessful Call of the 
Same Stock — A Successful Put of Spanish 4 / — A Call of Rio 
Tinto Shares — A Put of Rio Tinto Shares — The Conversion of 
One Option into Another - - . 10-17 

CHAPTER IV.— Working the Double Option. 

The Advantage of the Double Option — A Put-and-Call of Louisville 
and Nashville Shares — The Put-and-Call turned into a Call — A 
Put-and-Call of Milwaukee Shares — A Put-and-Call of Erie 
Shares alike Profitable to the Giver and the Taker of the 
Option Money .... . . 18-25 

CHAPTER V.— The Conversion of Options. 

Rules — How the Option Money is Affected and the Option Price 

remains the Same - - 26-30 

CHAPTER VI.— The Principles Formulated. 

More Conversions of Options — Selling Against a Call Over the Option 
Price — Selling Against a Call Under the Option Price — How the 
" Money " is Affected — Formulae — Examples — Fixing the Option 
Price Above or Below the "Right Price" — The "Distance" 31-39 



Vlll CONTENTS. 

CHAPTER VII.— The Call o' More— Put o' More. 

PAGES 

Conversion of Call o' More into Call or Put-and-Call — Four Different 
Ways of Doing One Transaction — Formulae for Call o' More and 
Put o' More - . . 40-48 

CHAPTER VIII.— The Call of Twice More, Three 
Times More, etc. 

The " Distance " Determined — Formulae — Why not Exactly Appli- 
cable in Practice — Exercise - - - 49-53 

CHAPTER IX. — The Single Option Disguised. 

Difficulty of Dealing in Firm Stock for the Option Period Discussed 
— The Put-and-Call Sometimes Relatively Cheaper than the Single 
Option — Giving for the Put-and-Call Instead of the Single Option 
to Disguise One's Position — Illustration 54-57 

CHAPTER X.— Option-Dealing Abroad. 

London the Option Market of the World — Paris — Berlin — English 
Superior to French and German in Expressing Optional Transac- 
tions — English, French, and German Vocabulary - 58-63 

CHAPTER XI.— The Value of the Put-and-Call. 

Options Compared to Insurance — Estir ating the Risk — Average 
Fluctuation the Basis of Estimate — Points of Difference between 
Option Dealing and Orthodox Insurance — Must be Sufficient Busi- 
ness to Establish an Average — The Giver of Option Money and 
the Insurer Contrasted — Essential Conditions in Taking Option 
Money — Market Quotations for Options Compared with Average 
Fluctuations — Table of Average Values ..... 64-76 



CHAPTER I. 

INTRODUCTION. 

The Committee of the London Stock Exchange re- 
cognise the legality of optional dealings in stocks and 
shares provided that the option period does not exceed 
two accounts beyond that for which bargains are being 
currently made ; but they will not legislate upon any dis- 
pute arising from an option transaction done for a longer 
period, nor can a claim be made against a defaulter's 
estate in respect of any such unrecognised bargain. 
Rule 90, applicable to registered stocks, says : " The 
committee will not recognise any bargain in shares 
or stocks effected for a period beyond the ensuing 
two accounts " ; and Rule 112 relating to securities 
to bearer is to the same effect.* 

In spite of these disadvantages, however, options 
for two or three months, and even further ahead, are 

* It must be stated, however, that the above-mentioned rules 
do not apply to English, India, Corporation and Colonial Govern- 
ment Inscribed Stocks, for under this heading Rule 79 reads : 
"The committee will not recognise any bargain for a future 
account if it shall have been effected more than eight days pre- 
vious to the close of the pending account". 

I 



2 INTRODUCTION. 

easily negotiated in the London market ; in fact, the 
" option period " may be said to range from a few 
hours to six months. Day-to-day options are not so 
largely dealt in as they were in former years, many of 
the persistent takers of " day-to-day money " having 
found that the risks involved were not sufficiently 
covered by the small amount of " money " given, and 
that the practice had a tendency to encourage the 
running of a large, unprofitable " book ". 

The " call o' more to-morrow " and " put o' more 
to-morrow " still survive ; for, on the one hand, such 
transactions are frequently found by parties interested 
in engineering a rise or a fall to be useful in puffing 
or depressing the stock which is the object of their 
attention, and, on the other hand, provide a more 
profitable method of taking option money, as the real 
amount of premium involved in a " call o' more ' 
transaction is greater than would appear at first sight 
from the difference between the market price and the 
option price of the stock. 

" Puts " and " calls " of stocks are commonly done 
for one week and for one account, but the majority of 
the options negotiated in the London market are for 
one month, two months, and three months on. 

It may be of interest to mention that dealings in 
the London Stock Exchange are settled twice every 
month, the dates of the settlements (which are fixed 
by the committee three accounts in advance) falling 
about the middle and end of each month. The length 
of the account ranges from thirteen to nineteen days 



INTRODUCTION. 3 

and the settlement occupies three days, called respec- 
tively, " contango day," " ticket day," and " settling " 
or "account day". 

On the contango day all stocks not being paid for 
or delivered are "carried over" to the following account 
at a " making-up " price, which is fixed by the official 
broker or by the market, those persons who are unable 
or unwilling to pay for stock bought giving a market 
rate of interest to those who have money to lend. It 
sometimes happens that dealers or speculators, who 
have sold more stock than they can conveniently 
deliver, have to pay a fine for non-delivery to those 
who have bought it. The postponement of delivery 
is arranged on the contango day, and the fine imposed 
is called a " backwardation " or " back ". 

On the second day of the settlement or " Ticket 
day " the names and addresses of the persons for whom 
brokers have bought registered stock are given to the 
sellers on what is called a ticket. This ticket also 
bears the name of the member paying for the stock 
and the price at which the transaction is done, or at 
which the transfer is to be made out, and it is passed 
from hand to hand until it reaches the ultimate seller, 
who saves the intermediate dealers the trouble of 
handling the stock by delivering both stock and ticket 
to the original issuer of the latter. 

On the third day (the settling day or account day) 
all stock passes and is paid for, and " differences " upon 
the accounts are settled by means of cheques drawn on 
" clearing" bankers. 



4 INTRODUCTION. 

Consols have a settlement for themselves at or near 
the commencement of each month. 

Day-to-day options are declared at 2*45 p.m., while 
those done for the current account or for a future 
account are declared at 12 "45 p.m. on the contango 
day (called also the first making-up day).* 

Options for future accounts are done, unless other- 
wise stipulated, at the price of the stock for the 
account in question, viz., the present market price, plus 
" contangos " or minus " backwardations ". Thus, if a 
stock stands at 50, and the estimated rate of interest 
in contango upon that stock is 4%, we must add on 
-h of 4%, if dealing for three accounts ahead, bringing 
the price up to, say, 50^, or -ri of 4%, for six ac- 
counts ahead, bringing it up to, say, 503-, and so 
on. 

In the case of a "back," the estimated amount of 
backwardation for the future period would be deducted 
from the present price when fixing the option price for 
that period. 

Apart from the question of rates, options are fre- 
quently done at prices considerably above or below the 
actual prices t for the period in question, and in the 
examples given of these "fancy" Options, we shall 
describe the difference between the market price and 

* The first making-up day for mining shares falls on the day 
before the contango day for foreign stocks, i.e., three days before 
the pay day. 

t It is usual to speak of the ordinary market price for a for- 
ward bargain in firm stock as the " right " price for the period in 
question. 



INTRODUCTION. 5 

the price fixed as the "distance". The French term 
" ecart" expresses the " distance" plus the amount of 
option money given ; thus i% given at a price which 
is ^% over the market price would be an ecart of ij%, 
of which i% is the Option money (i \ ecart, dont i). ■ 



CHAPTER II. 

DEFINITIONS. 

Option. The word "option" in connection with transactions 
in stocks and shares, means a right to buy or sell 
a certain quantity of stock on a given day, at a 
price agreed upon at the time the bargain is struck, 
for which right the "giver" of option money pays a 
consideration to the " taker " ; the said option money 
being payable at the end of the stipulated option period. 
The payment of option money may purchase the 
right :— 

call. First, to buy stock at a given price, at a specified 

future date, this option being known as a " call ". At 
the end of the option period, the "giver" declares 
whether he will exercise his option and call the stock 
or not.* 

Put. Secondly, to sell stock at a given price at a spe- 

cified future date ; the option is then called a " put ". 
When the option expires, the " giver " tells the 

* In actual practice, the formal declaration of an option only 
takes place when the market price at option time is so close to the 
agreed price of the option that the bargain does not speak for 
itself. When the market price of the stock is distinctly above or 
below, it is understood by the "taker" that the stock is bought, 
or sold, as the case may be 



DEFINITIONS. 7 

" taker " whether he wishes to put the stock on him at 
the agreed price, or not. 

Thirdly, to either buy or sell (whichever may suit Fut-and- 
the " giver ") stock at a prescribed price at a specified CaU 
future date ; the name of this double option is the 
" put-and-call ".* 

The enjoyment of the double right costs twice as 
much as the single option to buy or to sell would have 
done. There are, however, exceptional circumstances 
where, through great scarcity of stock, or dearness of 
money, the double option, or "put-and-call," can be 
done more easily than the single option ; in such cases 
the "put-and-call" money might not be quite as much 
as double the charge for the single option. An 
example of this is given in a future chapter. 

The premium paid for the right of calling or caiio'niore 
putting stock at some future date, at a stipulated 
price, is sometimes included in the price at which a 
transaction is done, for the same date, in firm stock. 
Thus, a " giver " of option money will buy a certain 
amount of stock firm for delivery, e.g., two months 
ahead, at a figure sufficiently over the current market 
price for that period to carry with it the option of 
calling a like amount at the same price. This trans- 
action in options is known as buying stock " call of 
more ". 

The "put of more" is the same kind of optional Put o' More 
transaction, in the other direction. The giver sells 

* In writing this term it is customary to abbreviate it into 
p.a.c. 



8 DEFINITIONS. 

stock to the taker under the market price with the 
privilege of being able to sell him another like quan- 
tity of the stock at the same price at the end of 
the option period. In these cases, the difference 
allowed between the market price and the price fixed 
upon is regulated by the market value of the option in 
question at the time of dealing, and is fully explained 
in chapter vii. 

A stock may be bought call o' more or bought put 
o' more: in the former case the buyer is "giving 
option money," and in the latter he is " taking option 
money". In like manner if A sells to B stock call o' 
more, the option to call rests with B, and A is "taking 
option money ". If A sells stock to B put o' more, 
he is giving the option money and has the right to 
put on B. 

The price given for the firm stock may carry the 
right to buy twice, three times, or any number of times, 
the amount of the firm stock dealt in ; the options 
being termed "call of twice more," "call of three 
times more," etc., or, in the selling direction, " put 
of twice more," " put of three times more," etc. Such 
fancy options, however, are not very frequently in- 
dulged in. 

It may be worthy of remark that "calls " are more 
often dealt in than " puts," the reason probably being 
that the majority of " punters " in stocks and shares 
are more inclined to look at the bright side of things, 
and therefore more often "see" a rise than a fall in 
prices. 



DEFINITIONS. Q 

This special inclination to buy " calls " and to leave 
"puts" severely alone does not, however, tend to make 
" calls " dear and " puts " cheap, for it will be shown in 
a later chapter that the adroit dealer in options can 
convert a "put" into a "call," a "call" into a "put," 
a " call o' more " into a " put-and-call," in fact, any 
option into another, by dealing against it in the stock. 
We may therefore assume, with tolerable accuracy, 
that the call of a stock at any moment costs the 
same as the put of that stock, and half as much as the 
put-and-call ; the causes referred to on page 7 being 
the only ones which would be likely to bring about an 
exception to this rule, and even then the difference 
would seldom be important. 



io 



CHAPTER III. 

WORKING THE SINGLE OPTION. 



Having discussed option dealing in a general sense, 
we will now pass on to some practical examples of 
"calls," "puts," and "put-and-calls," explaining how, 
in some cases, a favourable movement in the market 
price can be turned to advantage by a giver of option 
money, and showing the manner in which such deal- 
ings are booked. All the examples given have been 
based upon actual market movements, between the 
years 1888 and 1894, but it is of course understood 
that the amount of option money quoted is only 
approximately the market value of the option at the 
dates mentioned. 

9th May, 1892, given 2f % call £10,000 Brigh- 
ton " A " at 152| for end June. 
28th May, sold £5000 Brighton "A" at 157 
end June. 

The giver here sells half his option stock for the 
end of June, avoids carrying over a " bear" position for 
two accounts, and secures 4-g-°/ on £5000 stock equal 
to 2ts°/ on ,£10,000. His position now is that whatever 
Brightons go to, he can only lose |°/o on £5000, or A% 
on £10,000 ; for if they go higher he can secure his 
profit on the remaining £5000; and if they fall below his 
option price (15 2-|-) he can rebuy the ^5000 sold and 
abandon his option ; the whole f°/o would be lost only 



WORKING THE SINGLE OPTION. II 

in the event of their being quoted exactly 1 5 2% at the end 
of June, when he would call only the ^5000 he has sold 
and lose the difference of iw on ,£10,000, or ■§ on ^5000. 
At the end of June, however, Brighton A are 
quoted i58f, at which price he sells the remaining 
,£5000, and the account stands thus : — 



End June, 18Q2, Account, 

gth May. 
To 2§ call 10,000 B. A, at 

1525 .... £237 10 o 

25th June. 
To called io/m B. A, 152J 15,287 10 o 



Balance - - 243 15 o 



£15,768 15 o 



2%th May. 
By 5000 B. A, at 157 (sold) £7850 o 

25th June. 
By 5000 B. A, at 158I - 7gi8 15 



£15,768 15 o 



Balance of profit £243 15 

= 2 T V% on £10,000. 

We will now take a case which works out less 
favourably to the giver : — 

13th August, 1892, given 3% call £4000 
Brighton A at 158i end October. 

By 3rd September the price has risen to 162, but 
our giver " seeing " a further rise does not sell against 
his option. If he sold the whole ,£4000 at this price 
he would obviously secure a profit of f % on the ^4000, 
as they "stand him in" at 161^, including option money. 
If he sold half (say .£2000) he would secure 3f °/ gross 
on ^2000 = i-g-% on ^4000, so that his loss would be 
limited to i£7„ on ^4000, and he might have a profit 
in the event of either a further rise or a considerable 
fall, for if the price at end of October is below 158 \, he 
would repurchase the ^2000 and abandon the call. 

He does nothing, however, and the price goes 



12 WORKING THE SINGLE OPTION. 

steadily back, until at the end of October Brighton 
" A's" have run down to 153-J-, and his account shows 
only the option money to his debit : — 
End October Account. 

13th August, 1892. 
To 3% call £4000 B. A, at 

158J £120 o 

We will now take the case of a giver for the put of 
Spanish 4% Bonds, who prefers covering the whole 
position at one price. 

26th September, 1891, given 1%% put of 
£5000 (£4761 10s.*) Spanish at 71f 
(cum dividend) end November. 
On 1st October Spanish are quoted 7of " ex divi- 
dend " (the quarterly dividend of 1%). This 1% taken 
off the price is no source of profit to the " bear," or the 
buyer of the put, for it will be debited to him if he puts 
the stock, the dividend belonging to the person on 
whom he puts it. By the 24th October Spanish Bonds 
are quoted 65!- ; still the giver will not buy against his 
option, although he could secure 4% net profit by so 

* The nominal " one thousand Spanish 4% " is a bond of the 
denomination of £952 6s. This was arrived at at the time of the 
issue by converting the 24,000 pesetas or francs into sterling at 
the fixed exchange of 25-20^, and then adjusting the amount of 
£ s. d. to the nearest amount which was divisible by 24, without 
making fractions of pence. Thus 1000 pesetas or francs Spanish 
4% i s £39 I 3 S - 7& nominal. These twenty-fourth parts are known 
as " halfpence of Spanish," the whole £952 6s. being called " a 
shilling". In the Paris market the nominal thousand Spanish is 
1000 francs Rente (4% on fcs. 25,000), so that the " one" Spanish 
French amount is "a shilling and a halfpenny" English; ten 
thousand Spanish French amount is " ten and fivepence " English, 
and so on. 



WORKING THE SINGLE OPTION. 1 3 

doing (i.e., the difference between 65^ and 7if — 1% 
div. - ii- option money). If he bought back half his 
stock at 65I x. d., i.e., 5^ below his option price, he 
would be in this position : having secured 5^- on one 
half, equal to 2 T V on the whole, he would in any case 
make a profit of 2A-i£= itV on the ^5000, and 
stand to make an additional profit on the other half of 
whatever Spanish were over or under 7of x. d. at the 
end of November But he fancies the next coupon 
will not be met, and is determined to run his option 
for all it is worth. Accordingly, on the contango day 
of the end of November account, he takes a profit on 
his put of s^% by buying back his ,£5000 Spanish at 
64-|-, and putting them at 7 if cum div. 

The option is recorded in the ledger as follows : — 



26th September. 
To ij% put £5000* (£4761 10s.) 

Spanish at 71} - - £53 11 4 

25th November. 
To 5 Spanish (bought 64J) - 3053 6 3 
To 1% dividend on do. (tax not 

reckoned) - - - - 47 12 4 
Balance » 261 17 7 



£3416 7 6 



2$th November. 
By 5 Spanish (put) at 71J - £3416 7 6 



£3416 7 6 



Balance ... £261 17 7 
= 54% °n £4761 ios. 

Subjoined are examples of a successful call and 
an unsuccessful put of Rio Tinto Copper Shares, in 
which a very large option business has from time to 
time been done. 

On 22nd March, 1890, when Rio Tinto Shares have 
been steadily recovering some of the enormous fall result- 
ing from the collapse of the copper corner of the previous 
year, our operator " sees " a further advance^ and — 



14 WORKING THE SINGLE OPTION. 

Gives Ittt per share call 200 Rio Tinto at 
15f for end June Account. 

The price fluctuates within narrow limits for 
several weeks, and by 26th April Rio Tinto are 
negotiable at i6|-. To sell at this price would not 
cover the option money risked ; therefore, as the option 
has still two months to run, and copper is rising 
steadily, our giver waits off. The following two weeks 
witness a remarkable rise, and on 

10th May he sells 50 shares at 17£ per 
end June. 

If he sold for the current account, he would have 
a "bear" position in 50 shares to carry over three 
accounts (mid May, end May, mid June), so he pre- 
fers to sell for the same date as that for which the 
option is done. This is, in most cases, the simplest 
and best way of dealing against a future option. 

On 17th May he sells another 50 shares at 
18f per end June. 

He has now sold 100 shares at a price averaging 
18^ against his call at 1 5-g-, and has thus secured a 
difference of 2§ per share on one half of his option, 
equal to 1^ upon the whole 200. But he has only 
risked 1^ originally ; therefore, whatever becomes of 
Rio Tinto, he cannot lose. Let us now examine what 
his position is. He has risked if T in option money, 
to counterbalance which he has, by selling half his 
stock, assured himself of a margin equal to 1^. on the 
entire 200 shares, and he still has 100 not realised. 
Whatever he can sell the remaining . 100 at, over 15-^-, 



WORKING THE SINGLE OPTION. 



15 



must be net profit. If Rio Tinto stand at exactly 15^ 
at the end of June, he can make nothing out of the 
remaining 100. But if they happen to be below 15^ 
he will abandon his call and purchase in the market 
the shares he sold at i8|- average, in which case he 
will again make on 100 shares the difference between 
15-g- and the price he buys them at. He practically 
has a call of 100 at 1 5^ for nothing, and a put of 100 
at 1 5f- for nothing (since all below 1 5|- is his profit on 
100); or, to use a professional term, he has given O for 
the put-and-call of 100 Rio at 15^. 

The conversion of a single into a double option thus 
exemplified is one of the most important features in option 
dealing, and the principle is further explained in chapter vi. 

To follow this option to its successful close we 
must observe that on 7th June " Rio" are quoted 22^ 
(ex dividend of 10/-), and at this price the giver, having 
had an exceptional run for his option money, sells 
the remaining 100, making upon them the whole differ- 
ence between 1 5-f- and 2 2^, and taking the dividend of 
10/- on 100 shares as well. 

End June Account. 



22nd March. 
To 1^ call 200 Rio Tinto, 15I 56237 10 
(end June) 

28th yune. 
To called 200 Rio Tinto, 15$ 3175 

Balance - - - - 675 








10th May. 
By 50 Rio Tinto (sold), 17$ - 

ijth May. 
By 50 Rio Tinto (sold), i8| - 

7th yune. 
By 100 Rio Tinto (sold), 22^ 

x.d. 
By 10/- div. on 100 

Balance of profit 
= 6$ on 100 = 3f on 200 


£893 15 
93i 5 

2212 10 
50 









£4087 10 





4087 10 

£675 
shares. 







16 WORKING THE SINGLE OPTION. 

A few days after the close of. this successful opera- 
tion Rio Tinto have advanced still further — to about 23, 
and thinking the price now high enough the operator 
turns round on the " bear tack," and on 

5th July, 1890, gives If put of 100 Rio 
Tintos at 23£ end August. 

In the former option we saw that he was able to do 
a three months' call of 200 shares at iA per share. 
The upward movement has been so rapid since then, 
and takers of option money have had such a bad time 
in Tintos, that he now has to pay considerably more 
for a two months' put than he had before for a call 
three months ahead. His view would appear to be 
right, when, on the 19th July, Tintos have run back to 
22^. If he now buys the 100 shares at 22A for end 
August he can save if of his option money, and in 
the event of the price being, at the end of August, 

First, below 23!-, he puts them and loses if - 

13 _ 9 

rr — ttt- 

Second, exactly 23^, he puts them and loses ^. 

Third, above 23^-, he abandons the put and sells his 
100 shares, the difference over 23^- going to reduce the 
above-mentioned loss of T 9 F : if he can get ^ over 23^ 
i.e., 23AJ, he comes out of the transaction "even," thus — 
100 shares bought22i^-l Difference if, the same as 
100 do. sold 23H) the option money risked, 
and anything higher than that is his profit on 100 
shares. 

We saw in the last example how the operator by 
selling one-half of his stock against a call practically 



WORKING THE SINGLE OPTION. \J 

got a put-and-call of one-half the original amount of 
stock. In this example we find that our giver, if he 
bought back all his stock against the put, would practi- 
cally have a call of the same number of shares. This 
operation is known as turning a put into a call, and 
will be further analysed in a later chapter. 

On 26th July the shares have risen again to 2 2-J, 
only to react by the following week to 22. Once 
more the giver Would have a chance to save a good 
deal of the option money (23^- — 22 = i|-) but he does 
not like to lose even the difference between if and i-J, 
He therefore holds out for a further fall, which, how- 
ever, does not come during the run of his option ; for 
on the 9th August Rio Tinto are 2 2§, on the .16th 
August 23^, on the 23 rd August 2\\, and three days 
later his option expires at 12*45 on the contango day, 
shares changing hands at 24^. The option money 
is consequently a total loss. 

End August, 1890, Account. 

$th jfuly. I 

To i| put 100 Rio Tinto, 23J £137 10 o | 



i8 



CHAPTER IV. 

WORKING THE DOUBLE OPTION. 

In the preceding examples the giver of option money 
has been made to take a view for the rise or fall of a 
certain stock, and to base upon this view an operation 
in the single option. Now, it frequently happens that 
a giver, wishing to do an option, is undecided as to 
the direction which the next few points move will take 
in the stock under consideration, so he commences 
operations by giving for the put-and-call of the stock 
and waits for further developments. This, by the way, 
frequently turns out to be a judicious mode of pro- 
cedure, especially when the object of the speculator's 
attention happens to be one of the American Railroad 
Stocks, in which the fluctuations are generally vtolent 
and uncertain. The American market has for many 
years offered a fair field alike for the giver and for the 
taker of option money, both parties to the deal in a 
three months' option having, as a rule, plenty of ex- 
citement for the money! Indeed, it is surprising that 
so many speculators in American shares should con- 
tinue to deal in " firm " stock, when so much amuse- 
ment can be procured at the moderate prices generally 
ruling for American options. A giver of option 
money on Americans once observed : " If only I had 



WORKING THE DOUBLE OPTION. 19 

given for the put as often as I have given for 
the call, how much money I should have made 
and how little I should have risked!" It is more 
than likely that if this operator had nerved himself at 
the time to pay twice as much for the put-and-call as 
he paid for the single option, he would, in the long 
run, have had little reason for regret. 

Let us illustrate our subject by a put-and-call of 
Louisville and Nashville Railroad Shares. 

* 2nd January, 1892, given $5£ per share 
put-and-call 200 Louisville at 86| end 
March. 

This looks a lot of money to give in a quiet mar- 
ket, but option takers have unpleasant recollections of 
rapid and unforeseen movements in the leading specu- 
lative American shares. They cannot forget the bad 

* American Railroad Stocks dealt in here are in shares of $100 
each (except Pennsylvania Shares and Philadelphia and Reading 
Shares, which are of $50 each). The nominal amount of stock, in 
dollars, of 100 shares is therefore $io,ooo, which at the nominal or 
fixed exchange of $5 to £1 is £2000. The price quoted in 
London is arrived at by converting the New York price per cent, 
into an English price per cent, at the exchange of the day. The 
English price is therefore in £ s. per cent. : thus, $97% New York 
at $4.85 is £100% London, so that if one bought 100 shares 
(= $10,000) in New York at 97 (= $9700) and sold £2000 
(nominal) in London at 100 (= £2000), the proceeds of the 
London sale at the exchange of $4.85 would yield 89700 to pay 
for the purchase in New York. But it is more convenient and 
therefore customary to speak of 50 shares or 100 shares in 
the London market, and regard the price quoted as a sort of 
English dollar (4/-) price. The above option example is accord- 
ingly expressed, " given $5§- put-and-call of 200 shares," but, 
correctly speaking, it would be £5 £% put-and-call of £4000 stock. 



20 WORKING THE DOUBLE OPTION. 

turn Louisville did them in ^October and November, 
1890, by dropping 16 points in half as many weeks, 
only to catch them " out " again the following autumn, 
when the same shares rushed up from 68 to 81 \ in less 
than two months. 

By 1 6th January Louisville are quoted %\\ (ex 
dividend 2 J). In comparing the market price with 
the option price the giver has now always to take into 
consideration the dividend ; if he puts the shares the 
taker will debit him with the dividend ; if he calls 
them, he will receive it from the taker. In other 
words, he will^^ the stock if it stands below 86f - 
2 i = 83-g-, or call it if it is quoted above that figure. It 
is usual to say the option price is 83^ x.d. 

The shares are now a weak market, and the giver 
decides to go with the tendency, and refrain from buy- 
ing until his option money is covered. 

23rd January, Louisville 79^. If he bought 200 
shares at this price he would make $4-|, and lose $5^, 
i.e., f|- on balance. 

On 30th January they are down to 76^-. Now is 
his chance. 

On 30th January he buys 200 Louisville at 
76J per end March. 

This not only covers his $5^ put and call money, 
but leaves a profit of $i|- per share as well, and there is 
the chance that he might make still more during the two 
months the option has yet to run. He cannot make 
more if the shares continue to fall — in that case he has 
closed his position too soon, and missed a further 



WORKING THE DOUBLE OPTION. 21 

chance of profit. Nor can he secure any additional 
advantage by an advance in price to 83!- x.d. (his 
option price), unless, indeed, he has the luck to hit off 
a reaction in selling out again and covering with a pro- 
fit ; but it must not be forgotten that in selling again 
under the price at which he has the right to put he 
risks losing part or all of the profit he has already 
secured. His only chance of more profit without risk- 
ing anything is for Louisville to rise above 83^ in the 
next two months. What is his position then ? We 
will leave out the i-J- realised profit, and consider it 
put away for some future enterprise. By his purchase 
of 200 shares he has covered the original risk of $5^-, 
but if the price is over 83^- at the end of March he 
will not put these 200 ; on the contrary, he will 
exercise the other part of his option, viz., call 200 
shares, and thus be in the position of having 400 
shares to sell. Then his additional profit will be the 
difference on 400 shares between 83J and whatever 
they fetch. Now, this is equivalent to saying that he 
has a call of 400 shares at 83^- for nothing. So he 
has, and the operation is known as " turning a put-and- 
call into a call " by buying all the shares. 

Just as in the example on page 15, we saw that the 
giver for the call of 200 Rio Tintos practically became 
the possessor of the put-and-call of one half the 
amount, so we find now that the giver for the put-and- 
call of 200 Louisville is able to turn his option into a 
call of twice the number. 

To return to the subject of this example, Louis- 



22 WORKING THE DOUBLE OPTION. 

villes have no recovery in them beyond reacting to 78 
on 13th February, and at the expiry of the option on 
contango day, at the end of March, the price has 
fallen to 75^- : the ledger shows the following entries : — 



2nd January, 1892. 
To $5j p.a.c. 200 L. and N. 

at 86| - - - ^205 o o 

$oth January. 
To 200 L. N. at 76$ x.d. - 3075 o o 

(bought) 
To $2^ div. on 200 shares - 100 o o 
Balance - - - 75 o o 



£3455 



27^ March, i8g2. 
By 200 Lou. N. at 86| (put) £3455 o 



£3455 



Balance of profit £1$ o 

(if on 200 shares.) 

The following shows a put-and-call of Chicago. 
Milwaukee, and St. Paul Shares which leaves a small 
margin of profit to the taker of the option money, and 
is therefore unprofitable to the giver.* 

2nd May, 1891, given $4£ put-and-call 100 
Milwaukee at 66f end June. 

We will suppose, in this case, that the giver is 

really in favour of a rise in Milwaukee Shares, but 

having often been mistaken before when he has 

' ' seen " a rise, he this time secures a put and call on 

not too onerous terms, and hopes to be able to do 

what we illustrated in a former example, i.e., cover his 

risk by buying his ioo shares $4^ lower than his 

option price. Then, if within the two months his 

* It is not unusual for both giver and taker to make a profit 
out of an option, as, on the one hand the eventual difference in 
price may still leave a margin of profit to the taker of option 
money, and on the other the giver, under the protection of his 
option, may have "jobbed in and out" several times, and ulti- 
mately have secured more than he originally risked. 



WORKING THE DOUBLE OPTION. 23 

option has to run, Milwaukees rise well over 66f, 
the difference is all his on 200 shares — double his 
original option amount. 

This speculator is, however, doomed to disappoint- 
ment, for he has embarked in his enterprise just before 
a period of unusual inactivity for American shares. 
The next week Milwaukees are down 1, a fortnight 
later they are quoted 65f, only $i^ under his option 
price, yet another week brings merely a niggardly £ 
move, and so on until at the very end of his term the 
price has barely managed to drop to 6t,%. He buys 
the 100 shares so, and puts them at 66f, saving $3 
only out of the $4^- risked. 

His account shows his loss thus : — 



2nd May, 1891. 
To $4j p.a.c. 100 Milwaukees 

at 66f - £%$ o o 

27th June. 
To 100 Milwaukees at 63f - 1275 o o 
(bought) 



£1360 



2"]ih June. 
By 100 Milwaukees at 66J - ^1335 
(put) 



By Balance 25 



£1360 o o 



Balance ... £25 o 

(1 1 loss on 100 shares.) 

This $1 J- on 100 shares is the profit to the taker of 
the money, unless he has jobbed against the option. 

The next is an example of a put-and-call of New 
York Lake Erie and Western Shares, where the 
giver manages to make a profit by dealing in the 
shares under the cover of his option, although the ulti- 
mate price shows a margin of profit to the taker. 

9th July, 1892, given $2f put-and-call 500 
Erie at 26| end September. 

Eries having been on the down grade all the year 



24 WORKING THE DOUBLE OPTION. 

(the price in the preceding January was about 35), the 
buyer of the put-and-call thinks there may be a reaction 
which will give him an opportunity of selling his shares 
and going for a further fall. His chance comes a 
month later. 

On 6th August he sells 500 Eries at 29| 
per end September. 

This is $2§ above his option price, so, if Eries con- 
tinue to rise, he only stands to lose ^. On the other 
hand, if they fall considerably, say below his option 
price, he stands to make a profit on the 500 he has 
sold, and the 500 he will put. In other words, for the 
risk of \ on 500 (= tV on 1000) he has the put of 1000 
shares at his option price, or, as a dealer would express 
it, he has given t\> for the put of 1000 Eries at 
26-J. This would be a case of turning a put-and- 
call into a put by selling all the shares. His view 
proves to be correct, and the following week Eries 
are 28f. He resolves to run the speculation until 
he can buy back under his option price, which he 
eventually succeeds in doing, for on 

9th September he buys 500 Eries at 25f per 
end September. 

He has secured $4^ on 500 shares, i.e, his 2-J option 
money and a profit of $ if besides. He is "even'' 
in the shares, he has a profit of if on 500 shares, and 
his original put-and-call for nothing. At the end of 
September he will make an additional profit of what- 
ever Eries are over or under 26^, and thus his 
circumstances are very comfortable. 



WORKING THE DOUBLE OPTION. 



25 



As a matter of fact, at the end of his time Eries 
are 26^ (only f below his option price — a very lucky 
quotation for the dealer who ran the risk of the option, 
i.e., the taker of the option money, who makes the 
difference between 2-J option money and.f loss, unless 
indeed he has spoilt it by dealing in the stock), and the 
fortunate giver buys again 500 shares at 26J, which he 
puts at 26f-. 

The transaction is thus stated in the " giver's " 
ledger : — 

End September, 1892, Account. 



gth jfuly. 
To $2| p.a.c. 500 Eries at 

26| - - £ 28 7 IO ° 

gth September. 
To 500 Eries at 25! (bought) 2537 10 o 

Tjth September. 
To 500 Eries at 26$ (bought) 2650 o o 
To Balance - - - 175 o o 



£5650 



6th August. 
By 500 Eries at 2gf (sold) - £2g62 10 o 

27^ September. 
By 500 Eries at 20J (put) 2687 10 o 



£5650 



Balance of profit £175 ° 

i| + § = i| on 500 shares. 



The taker's ledger would show his profit thus, 
if he had run his option until the last moment without 
dealing against it : — 

End September, 1892, Account. 



■2.7th September. 
To 500 Eries (put at 26 

Balance • 



-^2687 10 o 
250 o o 



£2937 10 o 



gth July. 
By $2$ p.a.c. 500 Eries at 26J £287 10 

17th September. 
By goo Eries at 26J (sold) 2650 o 



£2937 IO 



Balance of profit £ 2 5° ° 

82^ on 500 shares. 



26 



CHAPTER V. 

THE CONVERSION OF OPTIONS. 

The arguments employed in the eight foregoing 
examples of optional dealings will lead the giver of 
option money to the following conclusions : — 

1. That a call of a certain amount of stock can be converted 
into a put-and-call of half as much by selling one-half of the original 
amount. 

2. That a put of a certain amount of stock can be turned into a 
put-and-call of half as much by buying one-half of the original 
amount. 

3. That a call can be turned into a put by selling all the stock. 

4. That a put can be turned into a call by buying all the stock. 

5 and 6. That a put-and-call of a certain amount of stock can 
be turned into either a put of twice as much by selling the whole 
amount, or into a call of twice as much by buying the whole 
amount. 

We must now inquire to what extent the original 
option money is affected by these hedging operations 
in the firm stock, and whether the option price moves 
or remains always the same. For this purpose let us 
take a simple example for each of the six cases above 
mentioned, it being understood that the bargains in 
firm stock are effected for the same date as that for 
which the option is done. 



THE CONVERSION OF OPTIONS. 27 

Example i. 

Given i% call ^2000 stock at 80. 
Sold ,£1000 „ 80. 

At the end of the time, if the stock stands at 82, 
^2000 is called, of which ^1000 is already sold at the 
option price ; the other ,£1000 can be sold at 2% profit, 
which equalises the 1% on ^2000. Anything over 82 
would be profit on ^1000. 

If the stock stands at 78 the call is abandoned, the 
" bear" of .£1000 is bought back at 78, and the 2% on 
.£1000 again pays the 1% option money on ^2000. 
Anything below 78 is profit on .£1000; the position 
therefore can be expressed as : given 2% put-and-call 
of £ 1 000 at 80. 

Hence we are able to formulate the following 
rule : — 

To sell half the stock at the option price against a call is equi- 
valent to giving twice the amount of money for the put-and-call of 
half the quantity of stock at the same price. 

Example 2. 

The second example may, by way of variation, be 
explained by combining the single option given with 
the double option taken, thus : — 

Given 1% put of ^2000 stock at 80. 
Bought ,£1000 „ 80. 
Then to close the operation — 

Taken 2% put-and-call ^1000 at 80. 
Whatever may be the price of the stock at the end of 
the option period, the operator is "even". He has 
neither profit nor loss ; for, firstly, if the stock has risen, 



28 THE CONVERSION OF OPTIONS. 

say, to 90, he abandons the put of ^2000 at 80, the 
;£iooo stock bought at 80 is called of him at the 
same price, and the amount of option money given and 
received is the same. 

Secondly. — If the stock is quoted, say, 70 — 

Then he puts ^2000 at 80. 

He has bought .£1000 at 80 ; and is 

obliged to buy ^1000 at 80, 
which is put on him, the option money given and 
received again balancing. 

The following rule is established from this ex- 
ample : — 

If option money is given for the put, and half the amount of stock 
is bought against it at the option price, the dealer has practically 
given twice the option money for the put-and-call of half the stock 
at the same price. 

Example 3. 

A gives 1% call of ^2000 stock at 80 ; 
And sells ^2000 ,, 80. 
B gives 1% put of ,£2000 ,, 80. 
If the stock is over 80 at the expiry of the option, 
A calls the ^2000 he has sold at the same price and 
loses exactly the option money (1% on .£2000). 

B abandons the put and loses 1% on ^2000. If, on 
the contrary, the stock is below 80, A abandons the 
call and secures as much as he can on the ^2000 sold, 
anything below 79 (i.e., 80 — 1% money) being his pro- 
fit on ,£2000. 

B exercises his put, and also benefits on ^2000 to 
the extent of any difference below 80 — 1%. We see 



THE CONVERSION OF OPTIONS 29 

therefore that whichever way the price goes the 
positions of A and B are identical, and our deduc- 
tion is : — 

If all the stock is sold by the giver against a call at the option 
price, it is equivalent to giving the same option money for the put 
of the same amount of stock at the same price. 

Example 4. 

Given 1% put ^"2000 stock at 80. 
Bought ^"2000 ,, 80. 

If the stock stands below 80 when the option ex- 
pires, the ^2000 bought at 80 are put at 80, and the 
option money is lost. If it stands over 80 the put is 
abandoned, and a profit is made on the ^2000 bought ; 
the profit begins at 80+ 1% = 81 ; this is the same 
thing as if the giver, had bought the call of ^2000 at 
\% instead of the put, and establishes the next rule, 
viz. : — 

If a giver of money for the put buys the whole of the stock at 
the option price, he converts his operation into giving the same 
amount of money for the call of the whole amount of stock at the 

option price. 

The $th and 6th cases are too obvious to need illus- 
tration after the above examples, for it follows by in- 
version that if a call can be turned into a put-and-call 
of half the amount by selling half the stock, this same 
put-and-call can be converted into a call of twice the 
amount by buying all the stock ; the option money is 
first doubled and then halved, and the option price 
ahvays remains the same. 

The preceding examples have all been treated from 
the giver's point of view. It need hardly be men- 



30 THE CONVERSION OF OPTIONS. 

tioned that the principle remains the same whether the 
money is given or taken, only, when looking at it 
from the taker's side, the operation in the stock 
must be reversed. For instance, a taker for the call 
wishing to convert his option into the put-and-call, 
buys half the amount ; and a taker of the put-and-call 
sells the whole of the stock in order to convert the 
operation into taking for the call of twice the amount, 
but buys the whole when he wishes to turn it into 
taking for the put of twice the amount, etc. 



31 



CHAPTER VI. 

THE PRINCIPLES FORMULATED. 

Having propounded the six principal rules of option 
dealing, it remains now to be shown how the option 
money is affected by dealing in the stock at a different 
price from that at which the option has been fixed. 
We know that a giver for the call converts his option 
into twice as much money for the put-and-call of half 
the amount of stock, if he sells half at the option price. 
Now, at whatever price he sells half the stock, he still 
converts his option into a put-and-call at the original 
option price, but the amount of money staked is in- 
creased or diminished according as he sells the stock 
under or over the option price. 

It will not be necessary to give illustrations in each 
of the six examples considered in the last chapter, as 
the principle which we propose now to discuss applies 
equally to all optional dealing. 

Firstly* 

Selling against a call over the option price. 

Given 1% call ^2000 stock at 80. 
Sold ;£iooo „ 80^. 



* The illustration is in each case regarded from the giver's 
point of view. 



32 THE PRINCIPLED FORMULATED. 

If the stock stands higher than 80 at the maturity 
of the option the ^2000 will be called. |% has pre- 
viously been secured on ^"1000, so that the other 
;£iooo must be sold \\°/ above the option price {viz., 
8i|-) to cover the option money ; anything over 81 \ is 
profit on ;£iooo. If the stock stands below 80 the 
call is abandoned, and the repurchase of the ^1000 at 
\\°/ under the option price (viz., 78^-) will cover the 
option money, anything below that being profit on 
^"iooo. 

Obviously the same result would follow if the giver 
paid ij% put-and-call of ^1000 stock at 80. Hence 
we derive the following principle : — 

If a call is turned into a put-and-call by selling 
half the stock over the option price, the put-and-call 
money is less than double the call money by exactly the, 
difference between the option price and the sale price. 

This difference we shall call the " distance," and 
adopting the symbols — 

C = call money ; p.a.c. = put-and-call money ; 
P = put money ; D = distance, 
the principle may be thus formulated — 

P.a.c. (given) = 2C (given) — D. 

From the giver's point of view this " distance " is 
favourable, for he sells over the option price. The 
formula would remain the same from the taker's 
point of view, but in that case the " distance " would 
be unfavourable, seeing that he buys half the stock over 
the option price. 



THE PRINCIPLES FORMULATED. 33 

Secondly. 

Selling against a call under the option price. 

Given i% call ^2000 stock at 80. 
Sold ;£iooo ,, 79. 

It will be readily seen that if the stock at the end 
of the time is over 80, the ^"iooo hitherto unsold 
must fetch 83, in order to cover the 1% loss on ^"iooo 
and the 1% option money on ^2000. On the other 
hand, should the call be abandoned, the ^1000 must 
be repurchased at jy, in order to pay the 1% risked on 
^2000. In the first case, the difference over 83, and 
in the second case, the difference below jj, is profit on 
the ^1000, which again is equivalent to the expression, 
"given 3% put-and-call of ^1000 stock at 80;" and so 
we obtain our next rule, viz. : — 

If a call is turned into a put-and-call by selling 
half the stock under the option price, the put-and-call 
money is greater than double the call money by 
exactly the "distance" or difference between the option 
price and the sale price. 

Here is the formula : — 

P.a.c. given = 2C given + D. 

In reckoning the amount of option money involved, 
when converting any one option into another, it will 
be necessary to consider always whether the " distance " 
is favourable or unfavourable. The terms are naturally 
reversed when the giver's and taker's positions are 
compared. In like manner, in turning a put into a put- 
and-call, a purchase of half the stock above the option 



34 THE PRINCIPLES FORMULATED. 

price involves an unfavourable " distance," and may be 
expressed — 

P.a.c. (given) = 2P (given) + D. 
On the other hand, a purchase of half the stock 
below the option price ensures a favourable "distance," 
and diminishes the risk of the giver — 

P.a.c. = 2P - D. 
Again, from the taker's point of view, the "distances" are 
reversed, as he has to do the opposite transaction to 
that of the giver ; therefore, in the two last formulae + 
D is unfavourable to the giver but favourable to the 
taker, and — D is unfavourable to the taker but favour- 
able to the giver. 

It is easy to deduce from the above examples the 
necessary formula for the conversion of any other 
option by substituting + D for — D and vice versa 
when the sense of the " distance" is changed by selling 
instead of buying, or by buying instead of selling : 
thus, if we wish to turn a put-and-call into a call by 
buying all the stock above the option price, we know 
that the distance in this case is unfavourable, and that 

P.a.c = 2C + or — D ; 
therefore 2C given = p.a.c. given + D (unfavourable), 
and C = p.a.c. + D 
2 
Example. 

Given 3J% put-and-call of £1000 stock at 80. 
Bought £1000 stock at 81£. 
How can this be expressed in one term ? 
We know that the put-and-call is turned into the 



THE PRINCIPLES FORMULATED. 35 

call of ,£2000 at 80 ; it only remains to be shown how 
much option money is involved. Formula : — 
_ p.a.c. + D 
2 

2 2s/ ° 

The present operation may therefore be expressed — 

Given 2§% call of ^"2000 at 80. 
Again, if a put-and-call be converted into a put of 
double the amount by selling all the stock above the 
option price, the distance here is favourable, and we 
know already that 

P.a.c. = 2P + or - D 
2 P (given) - p.a.c. (given) - D (favourable), 
therefore P = p.a.c. — D 
2 
Example. 

Given 2£% p.a.c. £1000 stock at 80. 
Sold £1000 stock at 81. 

What is the equivalent of this operation in one 
term ? Formula : — 

_ p.a.c - D 

2 
,1 



._ ^2 



2*- I 



2 

= 3o/ 
f/o 

The equivalent in one term is therefore — 

Given f% put of ^2000 at 80. 
The utility of the above formulae becomes more 
apparent when it is proposed to give or take option 



36 THE PRINCIPLES FORMULATED. 

money at a price other than the market price of firm 
stock for the term in question. For example, the call 
of a certain stock at 80 for a fixed period is 1^% ; what 
would the call be worth for the same period (1) at 805 ; 
(2) at 79I? 

Before discussing this point, it is necessary to ob- 
serve that the put-and-call money on a stock for a 
given period would be the same, whether the actual 
market price for the period or a price a little different 
be stipulated, providing that the difference does not bear 
any considerable proportion to the whole amount of the 
put and call money involved. Indeed, it might suit a 
taker better to fix a price rather above or below the 
actual market price for the period. It is difficult to 
define how far this difference may go without affecting 
the premium, but it is fairly safe to say that no ap- 
preciable difference would be made if the " distance " 
did not exceed one-fourth part of the put-and-call 
money. 

The reason is not far to seek. If a taker is willing 
to run the risk of a fluctuation of a stock from 80 for 
3%, he would also be willing to fix, say, 80^, as he 
would gain in the event of a rise exactly as much as 
he would lose in the case of a fall, and he does not 
begin his optional transaction with any considerable 
portion of his option money "run off". Further, in 
nearly every instance in active speculative stocks, the 
chance of a rise or a fall is, to borrow a sporting 
expression, " even money betting ". 

To return to our examples : The call at 80 costs 



THE PRINCIPLES FORMULATED. U 

1 5%. What is the call worth at 8oJ? Now, we 
assume that p.a.c. at 80 = p.a.c. at 8oj- ; we know that 
the call must cost less at 80^ than at 80 ; the formula 
therefore is — 

C = P^_D = 3_-i =if 
2 2 8 

Again, what is the cost of the call at 79! when the 

right price is 80 and the put-and-call 3% ? 

The "distance" is unfavourable here to the option 

money risked. The formula therefore is — 

= p.a.c. + D = 3 + j _ T 5 
2 2 8 

So we see that if a stock stands at 80, and the put- 
and-call is 3% for a certain period at 80 — 
The call at 7 of would cost i-f, 
„ at 80 „ if 



at 8oi ,, if, 



l 2> 

J 4: " L 8> 

and so on, the difference in the call money being 
always one-half of the "distance," or, to express it in 
another way, in giving for the call you deduct from the 
call money half as much as you add on to the price, or 
add on to the call money half as much as you take off 
the price. This conclusion can also be arrived at with- 
out examples by the use of our formulae : — 







c = 


p.a.c. 
2 






and C 1 = 


p.a.c. 
2 


±D 




C 


-0 = 


p.a.c. 
2 


p.; 


2 


(c- 


■0) = 


■ D 





38 THE PRINCIPLES FORMULATED. 

That is, twice the difference in the option money is 
equal to the "distance". 

It is quite usual for options to be done for long 
periods, e.g., three months ahead, where the price fixed 
is considerably above or below the "right" price for the 
period ; in these cases the call money is arranged on 
the basis of a put-and-call increased by an arbitrary 
amount calculated to cover the additional risk involved 
in taking option money with so much of the money 
already " run off" in one direction. 

For example, the call of Milwaukees at the actual 
price of 65 for three months is, say, $2^ ; that would 
make the put-and-call at 65 worth $5. If the giver 
wishes to risk $1 for the call, what price must he fix to 
do his business ? If the put-and-call at both prices 
were equal, the answer would be — 
D = 2 (C - C 1 ) 
= 2 ( 2 i- 1) 
Distance = $3 over the price. 

Now, a dealer would not, as a rule, care to take $5 
put-and-call of Milwaukee $3 over the right price, 
although the risk may be said to cut both ways. 
Milwaukee would have to rise from 65 to 73 before 
the taker would lose, and in the other direction his loss 
would begin proportionately sooner, viz., after a $2 fall 
to 63 ; the range of his risk, or, as the Americans call 
it, his " ten dollar straddle,'' would be from 63 to j$ 
instead of 60 to 70. But one of the reasons of his un- 
willingness to accept the same terms is that a taker of 
option money, from the nature of his business, backs 



THE PRINCIPLES FORMULATED. 39 

the inertia of the stock in which he is trading ; 
just as the giver places his money on the rise or 
fall, or both. If the stock does not move at all 
during the run of the option money (an unusual event 
by the way), the taker who has fixed 65 makes the 
whole $5, whereas he would only make $2 out of the 
$5 if he had taken his put-and-call money on the basis 
of 68. When, therefore, a price is fixed considerably 
under or over the actual price, the put-and-call is con- 
sidered to be worth a little more, but the increase in 
value cannot well be expressed in any fraction of the 
"distance," or said to bear any particular ratio to the 
whole of the " money '' ; it is rather a question of indi- 
vidual fancy at the time of dealing. 

To come back to our present example : the taker 
thinks that in dealing about $3 out of the price, he ought 
to have $5^ p.a.c. instead of $5, so, in answer to the ques- 
tion, what price must be fixed for Si call of Milwaukees 
for three months when the right quotation is $5 p.a.c. 
at 65 and the taker asks %\ more for the additional 
risk we have recourse to the same formula, C being 
2 | instead of 2± 

= 2(0-0) *?, 

-2(2|-l) 

= ?1 ',' 

2 *>]"' 

The price to be fixed is accordingly '$33- over the 
current quotation of 65, or $1 call at 68|-. 



40 



CHAPTER VII. 

THE CALL O' MORE— PUT 0' MORE. 

Having now firmly • established the principles involved 
in turning the single into the double option, and vice 
versa, and having discussed the manner in which the 
original option money is affected by dealing in the 
firm stock at the option price, or at any other price, 
we shall be able to cope easily with the apparent in- 
tricacies of call o' more and put o' more transactions. 

We have seen in the chapter on definitions that the 
call o' more is an option carried in a purchase of firm 
stock effected at a price which is above the right mar- 
ket price for the period in question. 

It now remains to be shown, with the assistance of 
the principles already laid down, at what prices such 
transactions should be arranged, given a certain put- 
and-call value. 

From its very nature the call o' more or put o' more 
must of necessity be an optional bargain at a price 
other than the right price, seeing that the option 
money is included in the price at which the stock is 
bought or sold. Consequently transactions of this 
description are not often done for long periods ahead, 
for the "distance" would become so large that the option 
would have to be very dear to compensate the taker's 



THE CALL O MORE — PUT O' MORE. 4 1 

risk in commencing a " long shot " operation with a 
considerable amount of the money " run off". Call o' 
more bargains are therefore more freely done from 
day to day or for a week, one account or one month 
ahead. 

We will first follow one of these fancy options 
through in the manner adopted with the examples 
given in chapters iii. and iv. 

On 20th August, 1892, De Beers Shares stand at 
i4§. The three months' call until the middle 
November account is worth, say, t# per share. Our 
operator " sees his way " to buy 

200 De Beers Shares at 15t\ call o' more 
middle of November account. 

The price of 1 5 A includes the contango rate for 
five accounts (end August, mid and end September, 
mid and end October), and as this rate has been ruling 
about od. per share, tV must be allowed for contangos. 
The speculator, therefore, has paid |- above the right 
market price for the period for 200 shares, in order to 
have the privilege of calling 200 more at the same 
price at the end of the time. By 3rd September the 
price has reached 1 5x5-, which, with allowance for con- 
tangos, would be just about 15A for the mid November 
account : he could now sell his firm stock at cost price, 
and be left with the call of 200 shares for nothing. 
He keeps it, however, for another week, and on 

10th September sells 200 shares at 15H for 
the mid November account. 



42 



THE CALL O MORE — PUT O MORE. 



Whatever happens now, he will make a profit of 
10/- per share on 200 shares, and he still has the call 
of 200 shares at 1 5 tV for nothing. For the next month 
there are but small variations, and, thinking" to provide 
still further against contingencies, on 

8th October he sells 100 shares at 15t# per 
mid November. 

His position now is : having first secured a profit of 
\ per share on the firm 200, he again secures f on 
100 shares, and, as shown in former examples, he has 
the put-and-call of 100 shares at 151F for nothing ; so 
that, besides the above profit, he stands to net an 
additional gain on 100 shares of whatever De Beers 
are above or below 1 5 A at the middle of November. 
The rise continues, and by the contango day of the 
middle of November account, when his option has to 
be declared, De Beers have reached 1 7 J-, at which 
price he sells the remainder of his stock, thus scoring 
another 2 A on 100 shares. 

His account is booked thus : — 



Mid November, 

7.0th August. 
To 200 De Beers at 15^ (call 

o' more) - - £3037 10 o 
10th November. 

To 200 De Beers at 15^ 

(called) - - - 3037 10 o 

Balance • - - 393 15 o 



£6468 15 o 



1892, Account. 

10th September. 
By 200 De Beers at 15^ (sold) £3 137 10 o 

8tk October. 
By 100 De Beers at 15^1 (sold) 1593 15 o 

10th November. 
By 100 De Beers at 17! (sold) 1737 10 o 



Balance of profit - 
4 on 200 £100 o 

§ on 100 - 75 o 

2^ on 100 218 15 



£6468 15 o 
^393 15 o 



£393 IS ° 



THE CALL O' MORE — PUT O' MORE. 43: 

We see from the foregoing example that, in order 
to turn a call o' more into a put-and-call, the giver or 
buyer must first sell the whole of the firm stock and 
then half as much again. He thus obtains a put-and- 
call of half the original amount at the same price. 

Let us now ascertain what amount of put-and-call' 
money was represented in his purchase of 200 De Beers 
at 15TF, when the right market price for the period 
was i4§ + tf contango = 14 A. 

He gave 15A — 141? = ■§ for the call of 200 shares, 
at f- distance over the price. 

Now, p.a.c. given = 2C given + D (unfavourable) 

-if 

His option risk, therefore, was on the basis of if put- 
and-call at 15TF. 

This may be more clearly illustrated in the follow- 
ing manner : — 

De Beers are 14A per mid November account. 
A buys 200 shares at 1 5 A call o' more, 
and sells 300 shares at 14A (market price) ; 
B gives i|- put-and-call of 100 shares at 15A, 
C gives # call 200 shares at 15A ; 
and sells 100 shares at 141V ; 
D gives 1 \ put 200 shares at 15 A, 
and buys 100 shares at 14A. 
Whatever De Beers mark at the end of the option 
period, all four operators are in exactly the same 
position. 

A having sold 200 at f- loss, practically gives that 



44 THE CALL O' MORE — PUT O' MORE. 

amount for the call of 200 shares f- over the price, and 
then, having sold another 100 at -| " unfavourable dis- 
tance," converts his option into a put-and-call of 100 
•shares at the original price— 

P.a.c. = 2C + D 

= 1 1 + 5 
l 4= T 8 

= 1 1 p.a.c. at i5tV. 
By the same formula we see that C, having con- 
verted his call of 200 into a put-and-call of 100, gives 
P.a.c. = 2C + D (unfavourable) 
= i-J put-and-call at i5xV. 
D begins in the opposite direction, but has a 
" favourable distance," and his position being also a 
put-and-call of 100 shares, is expressed by the for- 
mula — 

P.a.c. = 2P - D (favourable) 

_ »l_ 5 

~ z 2 8 

= i-g- p.a.c. at I5tV. 
A, C, and D, therefore, have only gone a roundabout 
way to do what B has done in one transaction, 
viz. : — 

Given if p.a.c. 100 De Beers at isA. 

We have now only to go one step further to arrive 
at the formula for the call o' more or put o' more, 
which latter works on the same principle as the former, 
but in the selling direction. 

We have seen that the buyer of the call of more 
practically gives the distance for the call at a price 
-equal to the market price, plus the distance. 



THE CALL O' MORE — PUT O* MORE. 45: 

Now, p.a.c. = 2C + D (unfavourable *) 
therefore, p.a.c. = 2D + D = 3D 

and D = P^" 

3 

o ?i c 
Therefore the distance of a call o' more = 

3 

nop 

and the distance of a put o' more is likewise F 

3 
Exercise. 

If, when a stock stands at 80, A buys ,£2000 at 81J 
call o' more, and B is willing to give 4§ put-and-call 
of ,£1000 stock at 8i£, what profit would A have if he 
dealt with B, and how much stock must he sell to 
secure his position ? 

If A sells ,£2000 stock at 80, he has then given. 
\\°/ call ^"2000 at 8i|- (i|- distance) ; he can turn the 
operation into a put-and-call of ,£1000 by selling 
another ^1000 at 80 ; 

he has then given p.a.c. = 2C + D 

= 4-J p.a.c. at 8 1 \. 
So that, if he sells in all ^3000 stock, and takes from 
B 4f% p.a.c. ;£iooo at 8i£, his position is "even," and 
he has secured \% on ^1000 stock. 

Exercise. 

A stock stands at 80. Given that the put-and-call 
is 3% for a certain period, what price is the stock (1) 



* N.B. — In buying call o' more, or in selling put o' more, the 
" distance " must always be unfavourable. 



46 THE CALL O' MORE — PUT O' MORE. 

-call o' more ; (2) put o' more ? (3) What is the call 
worth at 8of ? * (4) What is the put worth at 79^? 

O 3. C 

(1) Call o' more = = 1% above the price. 

Answer, 81. 

nop 

(2) Put o' more = * = 1% below the price. 

o 



Answer, 79. 



p.a.c. - D 3 



- a 

4 



(3) Call given = ^ *_A = i*. 

Answer, 1^ call at 8o|. 

. . _. . p.a.c. - D 3 - h , 
(4) Put given = v - = 6 -^ = ii 

Answer, 1^ put at 79^-. 
Exercise. 

Bought ^4000 stock at 80 call o' more. 
Sold 1000 „ 78. 
„ 1000 „ 78|. 
„ 2000 „ 79f. 
„ 2000 „ 80^. 
What single transaction would now make the 
position even, without profit or loss ? 

The first ^4000 stock is sold at an average of 78^-. 
The risk is therefore limited to i^- on .£4000, and can 
be expressed : Given \\ call ^"4000 stock at 80. Now, 
this is converted into a put-and-call of ^2000 by selling 
one half the option stock at 8o| — 
P.a.c. - 2C - D 

= 2 

* Presuming that p.a.c. at 80 = p.a.c. at 8of, see page 36. 



THE CALL O' MORE — PUT O' MORE. 47 

■which can in turn be expressed : Given 2% put-and-call 
^2000 stock at 80. 

The operator must therefore take 2% put-andrcall 
of ^"2000 stock at 80, in order to make himself even 
without profit or loss. 

Exercise. (From the takers point of view.) 

Bought ^2000 stock at 80 put o' more. Given 
that this option money has been taken, on the basis of 
2^% put-and-call, what is the present price of the stock 
for the period in question ? 

Now, we know that the stock must stand higher 
than 80, for the buyer, who is here the taker of 
option money, has allowed for the option money in the 
price. 

r> > V.3L.C. l\ 

rut o more = = — *- 

3 3 

D = |7o. 
Therefore, the stock must now be 8of. 

Exercise. (From the taker s point of view.) 
Sold ^2000 stock at 80 call o'more, given that the 
put and call is 3% ; at what price would this dealer buy 
stock put o'more ? * 

We must first find the market price of the stock. 

r 11 ' P- a - c - 
Call o more = * 

3 
therefore D = 1 
and the market price must be 79. 

Now if the stock stands at 79, and the dealer is willing 

* In this exercise the question of contangoes is not con- 
sidered. 



48 THE CALL O' MORE — PUT o' MORE. 

to take 3°/ put-and-call, even if the price fixed is i% out 
of the market price, he would also buy the stock put o' 

more at a distance of = i. Answer, 78. 

In the introduction, it was stated that the amount 
of option money involved in a call of more transaction 
was greater than would appear at first sight to the 
uninitiated. Take the following illustration : From 
time to time there have been immense optional trans- 
actions done in Consols, and at those times the 
difference between the buying and selling price of 
£ 1 00, 000 consols would seldom exceed ^%. Thus, 
at a given moment we will say Consols are 105^-^. 
An option dealer (not a jobber in the Consol market) is 
anxious to sell a block of Consols for which he would 
perhaps be willing to take 105^. As, however, he has 
a buyer of Consols call o' more, he sells them to him at 
105!- cau °' more f° r tne account ten days ahead. He 
has apparently only asked the full market turn, and 
has " thrown in an option ". But on examination 
it appears otherwise. It would have suited him to 
sell his Consols at 105^, but finding a giver of option 
money, he charges him 105! call o' more. The seller, 
from his own point of view,, has thus taken ^ call at ^ 
above the price — equivalent to § put-and-call at 105^; 
which will admit of a fluctuation of f% (from 105^ to 
106) without causing him loss. Thus a " straddle " of 
f % seems to be the result of getting instead of giving 
the turn of the market. 



49 



CHAPTER VIII. 

THE CALL OF TWICE MORE, THREE TIMES MORE, ETC. 

In doing a call o' more transaction, the price at which 
the firm stock is bought may carry the right to pur- 
chase more than an equal amount of the stock at the 
same price ; it may give the buyer the privilege of 
calling twice more, three times more, or indeed any 
number of times more ; but in this country such fancy 
options are not much done, although in Germany 
the call of twice more {zweimal noch) is not unfre- 
quently negotiated. 

It may, nevertheless, be of interest to give the for- 
mulae upon which the prices are based for these 
optional transactions, more especially as the sequence 
of fractions is somewhat curious and withal easy to- 
remember. 

Firstly. — If a stock stands at 80, at what price* 
ought one to buy it call of twice more, when the put- 
and-call is 3% ? 

Now, in this case the " distance " given in the firm 

stock is to carry a right to call twice the quantity 

at the whole distance above the price. The 

4 



SO CALL OF TWICE MORE, THREE TIMES MORE, ETC. 

option money staked is, therefore, one half of the 
distance. 

P.a.c. = 2C + D 

Now here C = — 
2 

therefore p.ax. = D + D 

therefore D = ' ' = — = ij over the price. 

Answer 81^. 

Again, what is the "distance" of a call of three times 
more? Here the call money is one-third of the "dis- 
tance " given on three times the amount of stock : — 

P.a.c. = 2C + D 



here C = 


D 

3 

3 


therefore p.a.c. = 




5D 




3 


and D = 


3 p.a.c. 

5 



Hence if the stock stands at 80, and the put-and-call is 
57„» then the price would be 83 call of three times 
more. 

Thus we see that the call of twice more is worth at 



least over the price, the call of three times more 

% D eL C 

over the price, and by the same process we can 
ascertain the distance of call of n times more. 



CALL OF TWICE MORE, THREE TIMQES-MORE, ETC. 5 1 

., ' P.a.c. = 2C + D. Now C = — 

■ I-'. (>■> r., :. n \i 

therefore' p.a.c. = - — + D ' i 

2D + nD ' . " ', 

.-,.<* i 1 il 

•'I -->• i , ,1 A f ' , - 

,\ ; ... = D {n + 2) 

n 

, n (p.a.c.) 
therefore D = — ^ '- , , 

Or, putting it more plainly, the' " distance " involved 
in a call of any number of times more is that fraction 
of the put-and-call money represented by a numerator 
equal to the number of times more, and a denominator 
equal to the same number + 2. 
To recapitulate — 

Call of more = '— LJ - over the price. 

.!,'■') , : , 2 p.a,c. _ p.a.c. 
„ twice more = _ — „ 

'• •-, 3 p.a.c. 
„ three times m6re' = —*—■ „ 

4 p.a.c. = 2 p.a.c. 
., /our „ g — — - — ■ „ 

, • ' ' , _ 5 ,P- a - c - 

_ 6 p.a.c. _ 3 p.a.c 

7 p.a.c/ i '- 
„ seven „ -— . ( „ 

etc., etc. In practice it would be found that a givet 
could not as a rule "get on "at the .figures obtained by 



52 CALL OF TWICE MORE, THREE TIMES MORE, ETC. 

the preceding formula, for the reason set forth in 
chapter vi. For instance, supposing a stock is 80 and 
the put-and-call 4%, then; according to the formula that 
stock would be worth buying at 83 call of six times more. 
But what is the taker's position then ? Assuming that 
he has sold ^"iooo stock at 83 call of six times more he 
must first rebuy the ^1000 firm at 80 ; he has then 
taken — 

3% on ;£iOOO = |% on ^6000 call at 83.. 
If he now wishes to turn his position into put-and- 
call— 

He buys ,£3000 more at 80, 

then p.a.c. = 2C + D (favourable to taker) 

- 47, 
He has taken 4% put-and-call of ^3000 stock with 

three-fourths of the option money already run off, and 
has dealt in ^5000 stock firm in order to do it. Pro- 
bably no dealer would be willing to run such a risk on 
these terms, viz., on the basis of the current rate for 
the put-and-call. 

Exercise. 

A stock is quoted at 80, and the put-and-call for a 
certain period is about 2^°/o- A is willing to take 
2§ c /o put-and-call of the stock at about 1^-% above the 
price. B will take 2§7„ put-and-call at about ij c / e 
below the price. At what price would a dealer 

(1) Sell ^2000 call of three times more ; 

(2) Buy ^2000 put of three times more, 

to leave himself a profit of ^ on the put-and-call ? 



CALL OF TWICE MORE, THREE TIMES MORE, ETC. S3 

And how must he hedge in the firm stock to make 
himself "even? " 

(i) If he wants ^ profit he must secure 2V L put- 
and-call. 

Now call of three times more = — = - = ii. 

5 5 

He would therefore sell ^2000 stock at 8i£ call of 

three times more, and in order to fix his profit he 

must first buy ^2000 stock at 80. He then stands 

thus: Taken 1% call of .£6000 stock at 81?. Next, 

by buying ^3000 more at 80, his position is : Taken 

2-l7o p-a.c. of ^"3000 stock at 8 1 1. He then gives A 

2! p.a.c. of ^3000 stock at 8ii. He has thus levelled 

his position, has secured I profit on ^3000 stock, and in 

order to accomplish this he has had to buy ^5000 stock. 

(2) In the same manner, 

r 1 ■ 3 P-a.c. 3 x 24 
put of three times more = — = = ij; 

so our dealer would buy ^2000 stock at 78! put of 
three times more. Then, in order to be able to secure 
his profit by dealing with B, he first sells at 80 the 
^"2000 he has bought at 7 81. He has thus taken ¥L 
put of ^6000 stock at 78i He next sells further 
^3000 stock at 80, and his position is, by the formula 
p.a.c. = 2 P + D : — taken 2\ p.a.c. of ^3000 at 78^. 
Accordingly, by giving B 2% p.a.c. of .£3000 at 78I he 
secures I profit on ^3000 stock and makes himself 
"even," the operation having necessitated the sale of 
^5000 firm stock. 



i54 



CHAPTER IX. 

THE SINGLE OPTION DISGUISED. 

In all the examples of option dealing considered in 
former chapters, the operator has been made to deal 
against his options in firm stock for the option . period. 
In actual practice this is frequently very difficult to do,, 
especially when it is a question of dealing for two or 
three months ahead in times of excitement and great 
speculation. At such seasons a buyer of stock for. 
forward delivery would have to make a great conces- 
sion in the price in return for the convenience of 
avoiding a difficult contango. Again, it may occur 
that, on account of some very bad news, a certain stock 
has been much oversold ; that is to say, many people 
not possessing any stock themselves, may have sold 
"bears" of considerable quantities, which, at the, 
follpwing contango day, they must either borrow or 
buy back. Holders, in such cases, if they lend their' 
stock at all, may demand a "backwardation," of which' 
speculative "bulls" also get the full advantage. In 
the war scare, some ten years ago, Russian stocks were 
so freely sold here by "bears" that the German holders 
were able to exact from ^°/ to I i°L backwardation per 
account for the loan of their stock for many months. 
At that time it would have been more difficult to give 



THE SINGLE OPTION DISGUISED. 55 

for the put of Russian than for the put-and-call — for 
this reason : A taker of option money, as a rule, does 
not wish to run a single option, for that would be 
purely a matter of taking a view for the rise or the fall. 
He likes to turn every single option straight away into 
a double option, because, in spite of then " standing to 
be shot at " in both directions, he is covered by twice 
the amount of option money on half the quantity of 
stock, and, as we said in a former chapter, he likes to 
back the inertia of the stock in preference to taking 
a view of its activity one way or the other. Now, if 
an option dealer had already taken money freely for 
the put of Russian stock, and in every case sold one 
half of the amount for the current account, he would 
find himself at each settlement a big borrower of stock 
at a growing backwardation, which was perhaps not 
allowed for at all at the time of dealing. In such a 
case, although he might be willing to increase his 
"book" in the put-and-call, he would be very un- 
willing to increase his "bear" position in the firm stock. 
To put it into figures, he would probably say to an 
intending giver : "I will take 5-|% put-and-call of 
^5000 stock at 82 for three accounts ahead, but if you 
want to give for the put I must protect myself and fix 
either 3^% put at 82, or 2§% at 81 ". 

An operator, in order to disguise his position and 
avoid suspicion, may elect to give for the put-and-call 
of a stock instead of either the call or the put, and 
afterwards turn his position into the single option by 
degrees. There is a story of a German banker, 



56 THE SINGLE OPTION DISGUISED. 

anxious to dispose of a large amount of some bank 
stock, approaching an option dealer who, after some 
conversation upon the merits of the stock in question, 
took money from him for the put-and-call of a con- 
siderable portion of the amount the banker really 
wished to dispose of. Some little time after the 
option dealer found that the stock was easier to buy 
than to sell, and not wishing to have this large block 
thrown on his hands he took every opportunity of 
raising the price whenever it could be done at the 
expense of buying a few thousand pounds more of the 
stock. A short time before the option became due the 
selling seemed to have ceased, and, in fact, the price 
rose so rapidly that the option dealer began to 
wonder where he would get the balance of stock 
from in case it was called of him. Indeed, so 
great was his uneasiness that by degrees he covered 
the whole of his position, the seller of the stock, 
unknown to him, being his option giver ; and on 
the day the option was due, the price was so far 
above the option price that no doubt was left in his 
mind as to which way the banker would declare his 
option. At option time the banker approached the 
proddealer, who said : " I congratulate you on the fine 
fit you have on your option ; you, of course, call the 
whole of your amount ". " On the contrary," replied 
the knowing banker, " I do not call any I put it ; on 
you." And the operation being well timed, an un- 
favourable announcement concerning the affairs of the 
institution was made that afternoon, and the option 



THE SINGLE OPTION DISGUISED. 57 

dealer found himself the unwilling possessor of the 
whole amount of stock which had belonged to the 
banker, who throughout the operation had never once 
been obliged to show his hand. 

The above anecdote, which is probably fictitious, is 
not quoted so much with a view to dwell upon the 
ethics of Stock Exchange transactions as to remind 
the reader that the apparent market in ioo shares is 
one thing, and the actual market in 10,000 something 
very different 



58 



CHAPTER X. 

OPTION-DEALING ABROAD. 

Although very large transactions are from time to 
time done on the French and German markets in 
options, London is par excellence the option market of 
the world. Perhaps the largest individual transactions 
have been done in Paris, where speculators occasionally- 
deal in amounts which are almost unheard of on this 
side ; but there is nowhere the same facility for giving 
and taking, for operating in long and short options, and 
for hedging against a favourable put or call in the firm 
stock as that which exists in London. It rarely 
happens that an option is done in the Paris market for 
more than one month ahead, and in Berlin too the 
majority of such dealings are arranged for a similar 
period. In London two and three months' calls are 
easily negotiated in the active stocks. 

Moreover it is curious to note that only in Eng- 
lish is it easy to express in one term the various 
positions relating to option dealing. Both the French 
and the German expressions for any option other 
than a plain call are as a rule awkward — frequently 
even ambiguous. The difficulty of expressing " which 
way " a person intends to deal is sometimes overcome 
in German by adding on at the end of the sentence. 



OETIONhDEAIXNG. ABROAD'.- S9 

"I -remain, still " (Ich bleibe 'itillj, or " you ■ remain 
still " (Ihr bleibet still), which means in the.ifirst case 
you are giving the option moneys < and innthe latter / 
am giving the option money. A certain (icohfueioii; of 
the English and German option expressions is. brought' 
about by the different sense in which, the words to 
give and to take are used in the \ two. languages; fl. In 
English, to "give for the call" or. to "give -'option 
money " means to buy the option, whereas iii German 
geben is generally used in the sense of "ito- .'sell ". 
Again, nehmen means to take, but the Germanl'wiord 
conveys the idea of buying when applied to transactions' 
in stocks. 

The French language provides very few direct and 
clear expressions in connection with option j dealings. 
An option is known as uHe option or une prime 
(a premium), but no good expression exists for 'either a 
call or a put, the former being known as une prime, 
and the latter, on the rare occasions when it may be 
required, being interpreted as "the right to be able to 
deliver ". The terms for the call and put in German 
are more expressive. They are " the forward pre- 
mium" (Vorpramie) and the " back premium 1 " (Ruek- 
prmnie). In Germany the put-and-call is treated some- 
what differently from the London method. It is called 
Die Stellage for which no English equivalent can 
be found, but which corresponds with the American ex- 
pression " straddle ". A put-and-call of, -2% at 80 
covers a range of 4°/! from 78 to 82 ; this 4% range or 
straddle is called the Spellage in German. There- 



60 OPTION -DEALING ABROAD. 

fore the straddle or Stellage is twice the put-and- 
call and four times the single option. 

The term call o ! more finds an equivalent in 
German, " the option with more " (Option auf mehr, 
or Prdmie mit nock), but none in French. The 
best expression that the French language can provide 
for the call of more is " the right of being able to claim 
the same quantity," but as this operation is hardly ever 
practised in France, it does not matter much. 

The custom of speaking of " so much option money 
at such and such a price " is only prevalent in England. 
The foreign mode of expression, "a certain price, oj 
which so much is option money," is convenient in rela- 
tion to calls, but breaks down completely if one attempts 
to apply it to puts. Give f call of ^5000 stock at 80 
is very neatly turned as " Achetez, £5000 at 8of, dont 
f," or " Kaufet, £5000 zu 8of, dont \ ". But where 
are we when we want to telegraph to Paris with as 
much economy as is consistent with business principles, 
" Give f put of £5000 at 80," and have to say, " Payez 
%°/ a pour avoir le droit de pouvoir livrer £5000 a 80 " ? 

Again, in a call o' more or put o' more transaction, 
there is a crispness in the English expression which 
leaves no doubt as to which way the person giving his 
instructions wishes to act. It is quite clear that any 
one who desires to buy call o' more or to sell put o' 
more is a giver of option money, and that he would be 
a taker of option money if his instructions read "sell 
call o' more," or " buy put o' more ". The intention of 
the operator, however, is not quite so transparent when 



OPTION -DEALING ABROAD. 6 1 

his instructions are given in such terms as, " Achetez 
^2000 a 80, dormant le droit depouvoir livrer autant," 
or " Kaufet, £2000 zu 80, mit einmal nock Ruck- 
pr'amie ". 

The following brief vocabulary in English, French 
and German of expressions incidental to dealing in 
stocks, more particularly in relation to optional trans- 
actions, may be of some little use : — 



62 •' Option -dealing abroad. 

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OPTION-DEALING ABROAD. 



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«4 



CHAPTER XL 

THE VALUE OF THE PUT-AND-CALL. 

The reader of the headline to this chapter will 
probably ask, " What do you mean by the value ot 
a put-and-call ? The price of a put-and-call may be 
quoted in the option market at a given moment, but 
what the value of that option is no one can say until 
it has expired. " And to a certain extent this statement 
would be correct, but it may be worth while to discuss 
the conditions regulating the prices of options, and to 
see if we can determine some method of ascertaining 
at any rate the probable minimum value of a put-and- 
call for a certain given period. 

In order to do this, let us first see what the givei 
for the call of a certain stock really does. He thinks, 
for example, that Brighton " A " stock is going to rise, 
but having, on previous occasions, found that the 
movement of this stock for some inscrutable reason 
had been diametrically opposed to the favourable 
opinion he had preconceived of it, he seeks to insure 
himself against unlimited risk, and is willing to pay an 
insurance premium for the convenience. Accordingly, 
he goes to an option dealer, who is willing to grant 
insurances against rises and falls, and says : " I wish 



THE VALUE OF THE PUT-AND-CALL. 65 

to speculate in Brighton ' A for two months ; if I 
buy ^"5000 stock, at what rate will you insure me 
against loss?" The option dealer replies: "I will 
take the risk of the rise or fall for 2i°/o. or the risk of 
both for 4l%"- Now what is it that suggests the 
figure of 4.VU to the option dealer as a reasonable 
cover for the risk he is taking over? He must say to 
himself: " I do not think, judging from my experience, 
that the fluctuation of Brighton ' A ' during the next 
two months will be more than 4*%. It has been much 
more at times but the market is dull now, 4i°/ is a 
good deal of money in hand, and I think the business 
is worth doing". He forms in his own mind an 
estimate of the probable movement of the stock during 
the next two months, and the result of his mental 
calculation is that he runs the risk of the rise and fall 
from the present market price of Brighton ' A ' for a 
premium of 4¥ / o . Had the proposition been Consols 
he would probably have asked about t°/ , Erie Shares 
2F/0. Milwaukee Shares 5% — all on the same rough and 
ready principle. Now, is it not possible to ascertain 
by statistics a figure which should represent more 
accurately the "probable risk'' run than one which 
has been determined, in the first place, by guess work, 
and in the second, by the speculative impulse of the 
moment. 

The writer is of opinion that the risk can be 
ascertained with a considerable degree of accuracy ; 
and in this belief he has selected some of the principal 
speculative stocks and traced their fluctuations from 

5 



66 THE VALUE OF THE PUT-AND-CALL. 

week to week over a period of seven years from 
January, 1888, to December, 1894. The price of each 
week has been compared with those of the previous 
week, fortnight, month, two months, and three months 
(the fluctuations being carried out in columns), and 
averages have been taken over the whole period in 
question. 

The stocks selected for the purpose are : Consols, 
Brighton ' A,' Spanish 4%, Rio Tinto Shares, De 
Beers Shares (since 1890, five years), and the fol- 
lowing shares in the American market : Erie, Norfolk 
and Western, Union Pacific, Chicago, Milwaukee and 
St. Paul, and Louisville and Nashville. 

During the seven years under review these ten 
representative stocks have been subject to every kind 
of influence, financial and political ; they have seen 
times of utter stagnation, and times of the greatest 
activity ; weak markets and strong markets ; alternate 
periods of excessive optimism and desperate depression, 
and during the whole term they have moved up and 
down consistently with the spirit of the seasons through 
which they were passing, the fluctuations at one 
moment being rapid and violent, at another almost 
imperceptible. If, therefore, an average be ascertained 
of the fluctuations for given periods in the market 
prices of these representative stocks, would not that 
average form a fair basis upon which to calculate the 
expected performance of those particular stocks in the 
immediate future ? In fact, does it not come to a 
question of insurance pure and simple, a premium 



THE VALUE OF THE PUT-AND-CALL. 6? 

being asked to cover a risk ascertained by a kind of 
actuarial calculation ? Very nearly, although there is a 
difference between this and other classes of insurance ; 
were it not so, one could reduce Stock Exchange 
operations to a certainty, which is known, to borrow 
Euclid's expression, to be absurd. The difference 
lies partly in the fact that the statistics governing 
the premiums exacted for insurances upon life, fire, 
accident, etc., are obtained with greater accuracy from 
results spread over a much longer period than it would 
be possible, or even useful, to do in the case of stocks, 
and that the conditions from which those results fol- 
low are much more regular and reliable. Thus, a life 
insurance company knows that out of one thousand 
"healthy males" of thirty years of age, it can, with 
the greatest amount of certainty, expect eight or nine 
to disappear from the scene of its actuarial calcula- 
tions before the age of thirty-one. In other words, 
the " cost of carrying the life " for one year of a man 
aged thirty, of robust health and good habits, is ascer- 
tained to be under £g per ^"iooo. Whatever the 
company can charge over and above this amount, plus 
the working expense, must be its profit, always pro- 
vided that it can do sufficient business to establish an 
average. And it is precisely these last words that express 
the great difference existing between the insurance 
against fluctuation of stocks and most other classes of 
insurance. To calculate the value of a risk is one 
thing, but to make a profit by dealing on that basis is 
quite another. An individual might insure the life ol 



68 THE VALUE OF THE PUT-AND-CALL. 

another to the extent of ^"iooo for ^30 per annum (on 
the assumption that the actuarial risk was ^15), and 
consider that he was making ,£15 a year by the trans- 
action ; but if the insured dies in the first year there is 
a loss of ^970 in spite of all actuarial reckoning. He 
must "take the money" very many times to make it pay. 

It is just so with the taker of option money. Not 
only must he ascertain the average past behaviour of 
the stock he is about to deal in, but he must be careful 
that he can sell this risk a sufficient number of times 
during the year to establish the average upon which 
his premium is based. 

Now, most people who are conversant with the 
nature of speculative transactions in stocks, and with 
options in particular, will know that owing to the fickle 
nature of givers of option money it is impossible to 
establish the average as suggested above. In actual 
practice, it is found by option dealers that, unlike other 
classes of insurers who are willing, e.g., to insure their 
lives although they are in the best of health and spirits 
at the moment, or their houses in spite of their enter- 
taining no immediate fear of being burnt out, the giver 
of option money only seeks protection when he con- 
siders that the option money paid does not anywhere 
nearly represent the risk of which he is relieving him- 
self by passing it on to his taker. There is not that 
noble unselfishness about a buyer of a put or a call 
which is displayed by the man who insures his life only 
because "all men are mortal," and provision must be 
made for his little ones. Indeed, where would our 



THE VALUE OF THE PUT-AND-CALL. 69 

great life insurance companies be if they only re- 
ceived proposals from people who came in because 
they were not feeling very well ? It amounts to this, 
that the greatest demand for options springs up at 
a time when it is least profitable for the taker to 
operate, when dealing against the option in the firm 
stock is fraught with the most serious danger and diffi- 
culty ; and, per contra, just when the option taker has 
a chance of recouping his losses by "running the put- 
and-call" in a dull and inactive market, he finds that 
there are " no givers " f Then, it may be asked, how is 
it possible ever to find a taker of option money at any- 
thing like a reasonable rate ? The answer is that the 
option dealer does not work upon any regular system 
or actuarial basis, but is guided in his operations 
mainly by the speculative impulse of the moment. 
This speculative impulse does not exist in any other 
description of insurance, and had it existed to any 
appreciable extent, the life 01 the great insurance cor- 
porations would be as extinct at the present moment as 
is the business of the majority of the great option 
dealers who have found by experience that it is the 
givers, and not the takers, of option money who have 
gained the advantage in the long run A comparison 
of the table of the Average Fluctuations with lists of 
option quotations ruling in the market during past 
years will suffice to illustrate the argument that takers 
of option money have been carrying on an insurance 
business with no margin for profit and working ex- 
penses, even if they could rely on being able to take 



yo THE VALUE OF THE PUT-AND-CALL. 

the same amount of option money on the same quan- 
tity of stock all the year round and for many years 
in succession. 

To lay down a distinct rule for the amount which, 
in order to provide a reasonable margin for profit and 
working expenses, it would be necessary to add in the 
shape of "loading" to the option values, as set out at 
the end of this chapter, would be extremely difficult ; 
for the conditions of the markets vary so much that 
what might appear a liberal allowance at one time 
would be inadequate at another. It is safe to assert, 
however, that in order to carry an option-taking busi- 
ness to a successful issue it would be essential : — 

Firstly, to ascertain the past average fluctuations 
over a considerable period of time of the stock to be 
operated in. 

Secondly, to consider whether there is any special 
influence at work calculated to modify that average 
result in the immediate future (such as a particular 
scarcity of the stock for delivery, financial strain, or 
probability of political complications). 

Thirdly, to accept risks on approximately the same 
amounts of stock at regular intervals of time. 

Fourthly, to add to the " average value " of the put 
and call an amount which will give a fair margin of 
profit and allowance for working expenses. 

Fifthly, to make provision for possible default on 
the part of the giver (since the option money only 
becomes payable at the end of the option period), and 
for special contingencies, such as large differences or 



THE VALUE OF THE PUT-AND-CALL. J\ 

bad debts on option stock carried over — through buying 
one half of the stock to convert the call into a put-and- 
call — or loss through an unexpected rise in the money 
rate, none of these mischances being provided for in 
the "average value" tables, which have been calculated 
simply from the average fluctuations. 

Sixthly and lastly. — To be careful that, having once 
accepted a risk, the option shall be allowed to run to the 
end of the option period without being tampered with 
by hedging operations in the firm stock or "cutting the 
loss" before its time, and that at the expiry of the 
option the profit or loss shall be taken as final and the 
position be absolutely closed. 

Neglect of any of these conditions would com- 
pletely spoil the average and convert a stocks insurance 
business into a mere gamble. Let us examine how far 
they have been observed in the quotations of options 
for two months and three months respectively in two of 
the leading speculative shares of the American railroad 
market — Milwaukee shares and Louisville and Nash- 
ville. 

Tak rig the first-named stock we find that in 1888 
fifty-two fluctuations of two months averaged 4*47% ; 
the same number of fluctuations in 1889 averaged 
3-02%; in 1890, 6-05°/ ; in 1891, 4-63%; in 1892, 
2.88°/ ; in 1893, 6-48%; and in 1894, 4-29%— showing 
a grand average over the seven years of 4 - 54°/ . 

The three months' fluctuations in the same stock 
come out as follows : In 1888, 4'20% ; in 1889, 3'i6°/ o ; 
in 1890, 8-ii /c; in 1891, 670%; in 1892, 2-go"j o ; in 



72 



THE VALUE OF THE PUT-AND-CALL. 



1893, yo2°U ; in 1894, 5-4070— giving a grand average 
in seven years of 5 - 29°/ - 

By the same process we find that the two months 
and three months' fluctuations of Louisville and Nash- 
ville shares were — 





Two Months. 


Three Months 


1888, 


- " 3-84°/. ■ 




4 19/0 




1889, 


- - 5 '43% 




8-027. 




1890, 


477% 


Average, 


5-05% 


A 


1891, 

1892, 


4-32% 
2-88% 


* 4-457c 


■ 4'59% 

2'907o 


■ 


1893. 


5-4i% 




7-287. 




1894, 


4"53%. 




5*40%, 





Average, 

5"34%- 



Now, to put the argument into a practical form we 
will assume that it would have been possible for an 
individual or a company to take 4 ~457o for the put-and- 
call for two months of 1000 Louisville Shares once 
every week from 1st January, 1888, to 31st December, 
1894 ; that it was not necessary, in order to do this, to 
take for the call of 2000 shares and buy 1000 shares, 
thereby indirectly increasing the risk and working 
expenses ; that no bad debts were incurred by givers 
failing to pay up at the end of the time ; that every 
transaction was closed at the expiry of the option, and 
that no unfortunate hedge against a dangerous-looking 
option was ever done during its currency. The taker 
would have had a running risk of 8000 shares against 
him, one option maturing every week and another 
taking its place ; he would have dealt fifty-two times 
in 1000 shares in each year, and again fifty-two times 



THE VALUE OF THE PUT-AND-CALL. 73 

in iooo shares in re-buying or re-selling to close 
his position; that is, in 104,000 shares (of $100 
each), or in a total of 728,000 shares in the seven 
years, equal to a turnover (taking an average price of 
60) of ,£8,750,000, with a result of no profit, many 
heartaches, and the whole of his working expenses 
to the debit of the account. 

But suppose that an individual dealer could conduct 
an option business on the above scale at a working 
expense of ,£1300 per annum, inclusive of bad debts, 
and that, being a modest individual, he would be will- 
ing to run a permanent risk against himself of 8000 
shares for about ,£5000 a year profit ; finally, that he 
uses in his option business only an amount of capital 
sufficient to cover the loss on 8000 shares in the 
greatest two months' fluctuation in Louisville known 
during the last seven years (i6|°/o in November, 1890), 
say ^26,000 ; he would then have to charge for the 
option — 

(1) The " average value," say - - 4^-% 

(2) Proportion of working cost .£1300 ■§■% 

(3) Proportion of 5% interest on a 

capital of .£26,000 - - -g-% 

(4) Other contingencies ... i°/ 

(5) Margin of profit - - - ^% 

Total .... 5 f°/ o 

Thus, by taking every week 5§ put-and-call of 1000 
Louisville Shares for two months ahead, and closing 
the operation in each case at option time, a taker 



74 THE VALUE OF THE PUT-AND-CALL. 

would secure a profit in the average of $J per share, 
equal to ^5200 on 52,000 shares. On the basis of 5^ 
his profit would be ^2600, and at 4§ he would have 
paid his working expenses and the interest on his 
capital, but have no profit. 

Now, to turn for one moment to fact, notice that : — 

In the first week of January, 1895, the two months 
single options in Louisville and Nashville Shares, and 
Chicago Milwaukee and St. Paul Shares were quoted $ 1 %, 
equal to %? > \for the put-and-call 7 

The three months' single options of these two 
stocks on the same date were quoted respectively $2^ 
and $2§ , equal to $4^ put-and-call on Louisville and 
$4f on Milwaukee. The " average values " for three 
months come out 5'34°/ on Louisville and S' 2 9°L on 
Milwaukee, and, treating these figures in the same 
manner as we have done in the case of the two months 
options, we find that, on the basis of $6^-, the option 
taker would have averaged a profit of $^ per share 
during the seven years, 1888- 1894, and that at the 
premium of $5§ he would just have paid his expenses 
and interest on capital. At any lower premium he 
would have worked at a loss. 

It is not the intention of the writer to illustrate any 
further the difference between the actual market prices 
of options and their " average values ". The fore 
going examples have been quoted with a view to 
suggesting further investigation on the part of the 
reader, and for the purpose of placing before him a 
method of examination which may make the study of 



THE VALUE OF THE PUT-AND-CALL. 75 

options and option dealing something better than dry 
business and dull figures. The appended table of 
average values is by no means complete, although it 
has been prepared, as far as it goes, with a consider- 
able amount of care, and the main object of intro- 
ducing it into this little volume is to offer a practical 
reply to those who have been heard to say : "If the 
option dealer thinks it good enough to take the money, 
it cannot be ' business ' for me to give it ". 



7 6 



TABLE OF AVERAGE VALUES. 



The approximate value of the " put and call " of some leading stocks, as ascertained by the average 


fluctuations for the periods in question, between ist January, 1888, and 31st December, 1894. 








5> 




M 




M 


•) 




a. 


V 






j£ 


rt 


^ 


cd 




en 




n 




ra 




u 
u 

>< 




0} 

> 

< 


OJ 


0) 

> 
< 


OS 


> 

< 


c 


> 
< 




. > 

< 




1888 


'25 




•40 




■67 




'% 




I'l8 






1889 


•ig 




'29 




'39 




■58 




79 






1890 


■30 




'49 




72 




i' 06 




I '34 




CONSOLS. 


1891 


•25 




■36 




•47 




■64 




75 






1892 


■24 




•32 




■49 




79 




I'lO 






1893 


•23 




■36 




56 




•85 




1*07 






3894 


■22 


■24 


•38 


•37 


70 


'57 


1-17 


•86 


i'65 


1 12 




1888 


'9 1 




1 '39 




2'OI 




3'6g 




5'65 






1889 


'•41 




2'2I 




3'8o 




6-o8 




7'3l 






J 890 


1'26 




2'09 




2'g7 




3'4° 




4'oo 




BRIGHTON "A". 


1891 


1 25 




1-88 




2'99 




464 




5'28 






1892 


i"o6 




i'6o 




271 




475 




6*40 






1893 


1-23 




2'00 




3-04 




4'65 




6'25 






1894 


ri6 


1.18 


i'6g 


■•83 


2-87 


2*90 


3-92 


4 '45 


473 


5-66 




1888 


•46 




74 




1 '14 




1 '97 




2'88 






1889 


•50 




78 




1 '29 




178 




1 '99 






l8go 


■52 




•80 




I '20 




i'74 




205 




SPANISH. 


1891 


75 




1-08 




i'63 




2'25 




2-63 






1892 


•82 




I '22 




l'93 




2'8 5 




319 






1893 i -6i 




1*00 




1*63 




2-13 




2'24 






1894 1 '59 


•60 


■87 


■92 


1*30 


1-44 


2-31 


2'I4 


3'I9 


2-59 




1888 | -62 




•88 




I'I4 




2-14 




2'g5 






1889 


■61 




•96 




1 '6g 




3"02 




3'93 






1890 


•50 




•80 




1 '55 




2'05 




2'64 




RIO TINTO. 


1891 


'42 




•6b 




•81 




I'og 




1 "29 






1892 


'33 




'51 




•86 




rog 




roi 






1893 


'22 




'37 




'57 




•83 




1 '06 






1894 


■28 


■42 


•38 


■64 


■60 


1-03 


'91 


1-59 


I"02 


198 




1888 
1889 
1890 






















OE BEERS 


'44 




•59 




■92 




1 '27 




1 '40 






1891 


'35 




'5° 




74 




no 




1 '25 




(five years only). 


1892 


•22 




'37 




•58 




1 '06 




1 '47 






1893 


32 




•47 




■77 




1 '22 




l'6i 






1894 


■32 


'33 


'39. 


46 


•66 


"73 


1-07 1 -18 


l'26 


l - 39 




1888 


72 




'97 




1 "64 




2'53 ! 


2-51 






1889 


•62 




•70 




97 




I'46 


1 '43 






1890 


'57 




'97 




1'56 




2-36 




2-88 




ERIES. 


1891 


'93 




1-24 




1 '97 




3-10 




3'8 5 






1892 


•go 




l'25 




l'63 




2*07 




2'22 






1893 


•go 




1 '32 


1-89 




273 




3'22 






1894 


•56 


'74 


■83 


1-04 


1 '43 


■■58 


2*06 


2-33 


2'37 


2-64 




1888 


r'45 




2'og 




3'*3 




4'47 




4'20 






1889 


-1*27 




l'56 




2'44 




3*02 




316 






l8go 


I-I6 




2 21 




3'45 




6-04 




8'll 




MILWAUKEE. 


l8gi 


1-28 




r8i 




274 




4'63 




670 






l8g2 


rig 




1 '44 




2 '00 




2'88 




2'90 






1893 


1 '95 




2'94 




4*22 




6' 4 8 




7'02 






1894 


ri8 


'•35 


2'0I 


2 'OO 


2-97 


2'99 


4-29 


4 '54 


4-97 


5 '29 




1888 


I'lO 




i'55 




2'6o 




3'84 




4'lg 






1889 


I "22 




176 




3'o5 




5'43 




8'02 






1890 


I '25 




2 "04 




3'I3 




477 




5'05 




LOUISVILLE. 


l8gi 


1 '49 




2-05 




3'20 




4'32 




4'59 






i8g2 


rig 




1-44 




2*00 




2-88 




2'go 






1893 


i'75 




279 




3-29 




5'4l 




7-28 






1894 


'94 


1-27 


1 '67 


1-pO 


3'03 


2-90 


4'53 


4 "45 


5 '40 


5 - 34 




1888 


'92 




1 '33 




2'3I 




3'I9 




3'6o 






1889 


78 




I '22 




rg6 




3'0I 




3'63 






l8go 


•84 




1 '45 




2'ig 




3'i6 




3'2I 




NORFOLK PREP. 


l8gi 


I'OO 




1 '32 




2*25 




3'°3 




2'go 






l8g2 


75 




I"22 




1-67 




2'39 




2'59 






l8g 3 


'97 




1 '53 




2*04 




3'47 




47o 






1894 


■87 


•87 


l'36 


■'34 


2'II 


2*07 


278 


3"<>0 


3'io 


3 '39 




1888 


n8 




1-63 




2*13 




287 




3-48 






1889 


1-07 




1 '42 




I'gg 




293 




3'29 






1890 


ri8 




1 '97 




3-01 




473 




6'i7 




UNION PACIFIC. 


1891 


i'39 




2*00 




2'62 




3'25 




3'3° 






1892 


'93 




l'3l 




i'8g 




3'02 




3'82 






1893 1-38 




2'II 




3'°9 




4'37 




4'92 






1894 j 79 


1-13 1-34 1-68 211 


2'40 


2-94 


3 '44 


3'23 


4"03 



PREMIER CODE USED— see back. 

Telegrams: "EPFINGERE, LONDON". NOVEMBER, 1913. 

CATALOGUE 

OF 

LEGAL, 

Commercial and other fttork$ 

PUBLISHED AND SOLD BY 

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EFFINGHAM WILSON undertakes the printing and 
publishing of Pamphlets and Books of every description 
upon Commission. Estimates given, and Conditions of 
Publication may be had on application. 



INDEX. 



Arbitrage— page 

Deutsch's Arbitrage in Bullion, etc. 13 
Willdey's American Stocks . . 26 

Arbitration — 
London Chamber of . . . .24 
Lynch, H. Foulks . . . .19 
Rudall's 23 



Banking — 

Balance Sheets 

Bank Book-keeping 

Banks of the Clearing House 

Bibliography (Bank of England) 

Easton's Banks and Banking , 

Eastons Work of a Bank 

Howarth's Clearing Houses 

Hutchison, J., Practice of 

Scottish Banking . 

Smith's Banker and Customer 



Bankruptcy — 

Duckworth's Trustees ... 9 

McEwen (Accounts) . . .20 

Stewart (Law of) . . . .7 

Bills of Exchange- 
Smith (Law of Bills, etc.) . , - 6 

Book-keeping — 

Donald (Mining Accounts) . . 14 
English Banks . . . .14 

Holah . , . . ' . .8 
Jackson ...... 17 

Johnson's Book-keeping'and Accounts 17 
Killik's Stock Exchange Accounts . 18 
Merces' (Indian Currency) . 21 

Munro's Down to Date and Key . 21 
Seebohm's (Theory) ... 8 
Sheffield's Solicitors . . .24 
Tradesman's Simple Ledger . 19 

Van de Linde . . . . 26 



Clerks- 
Commercial Efficiency . 
Corn Trade . 
Counting-house Guide . 
First Years in Office Work 
Kennedy (Stockbrokers) 
Mercantile Practice (Johnson] 
Merchant's 
School to Office 
Solicitor's 

„ Part II. . 
Work of a Bank 

rrespondence (Commercial) — 

Martin (Stockbrokers) ' . 
Coumbe ..... 
Russian Commercial (Bondar) 

Counting-house — 

Cordingley ... 

Pearce ..... 
Administration Orders . 



County Court — 

County Court Practice . 

Jones 

Currency and Finance — 

Aldenham (Lord) . 

Barclay (Robert) . 

Clare's Money Market Primer 

Cobb's Threadneedle Street . 

Cuthbertson .... 

Del Mar's History . 

Del Mar's Science of Money . 

Gibbs, Hon. H., Bimetallic Primer 

Haupt ..... 

Indian Coinage and Currency 

Poor (H. V.) The Money Question 
Dictionaries — 

Cordingley's Stock Exchange Terms 

French Abbreviations 

London Commercial 

Milford's Mining .... 
Directors — 

Pulbrook (Liabilities and Duties) . 

Exchanges — 

Brazilian Exchange 

Clare's Money Market Primer 

Deutsch's Arbitrage 

Escher's A Foreign Exchange Primer 

Foreign Exchange in Accounts 

Goschen 

Norman's Universal Cambist 
Tate's Modern Cambist . 

Exchange Tables — 

American Exchange Rates 
Continental Calculator . 
Dollars or Taels or Sterling . 
Eastern Currencies 
Garratt (South American) 
Koscky (Russian) .... 
Lecoffre (Austria and Holland) 

,, (French) .... 

,: (General) .... 

,, (German) . 

,, (United States) . 
Merces (Indian) .... 
Schultz (American) .... 

,, (German) .... 
Uruguay and Argentina . 

Insurance — 

.Principles of Fire Insurance 
Short-Term Table ..... 
Interest Tables — 

Bosanquet .... 
Crosbie and Law (Products) . 
Cummins (2| °/ ) .... 
Dougharty's Simple and Compound 
Gilbert's Interest and Contango 

Gumersall 

Ham (Panton) Universal 
Indian Interest (Merces) . 
Oppenheim .... 
Rutter's General (Decimals) . 
Schultz ... , . 



PAGE 
13 
17 



IO 
12 
12 
13 

X J 
14 

15 
16 



13 

18 

13 
21 



23 

26 
12 

13 

IS 

17 

IS 



IS 

19 
15 
18 

19 
19 
19 
19 
19 

21 

24 
24 
17 

18 

25 



13 
13 
14 

IS 
16 
16 
21 
22 
5 
24 



Effingham Wilson, 54 Threadneedle Street, London, E.C. 3 



Interest Tables (continued) — page 

Stevens on Sums under £i -25 

Wilhelm (Compound) . . .26 

Investors (see also Stock Exchange 

Manuals) — 

Houses and Land \ . . . 8 

How to Invest Money ... 8 

How to Read the Money Article . 14 

Investment Ledger . . . .11 

Investor's India Year-Book . . 5 

Investors' Tables . . . .16 

Investment Profit Tables . . 26 

Nigerian Mining Manual . . 5 

What's What in the City . . 20 

Joint-Stock Companies — 

Company Frauds Abolition . . 23 
Company Management . . .15 
Company Transfer Work . . 4 
Common Company Forms . . 23 
Formation and Flotation . .11 
Prospectuses (Law of) . . .4 
Pulbrook's Handy Book on Com- 
pany Law 23 

Pulbrook's Responsibilities of 

Directors 23 

Receivers and Liquidators . . 4 
Reid's Companies Acts, 1900 and 

1907 23 

Reid's Reminders for Secretaries . 23 
Secretary's Everyday Guide . . 15 
Secretarial Practice . . . 24 
Simonson's Debentures and Deben- 
ture Stock (Law of) . . . 24 
Simonson's Reduction of Share 

Capital 24 

Simonson's Reconstruction and 

Amalgamation . . . .24 
Simonson's Revised Table A . .24 
Smith (Law of Toint Stock Companies) 6 
Transfer Work .... 4 
Law (Various Subjects) — 
Abridgment of the Law (Folkard) . 15 
Agricultural Holdings Act, igo8 . 17 
Bills of Sale Acts .... 16 

Charter Parties 14 

Children'sAct,PoliceOfneer'sGuidetoi5 
Commercial Law (Neave) . . 21 
Compulsory Taking of Land . . 9 
Constable's (A) Duty . . .20 

Death Duties 11 

Declaration of London . . . n 
Divorce Law and Practice of . .16 
Evidence in Brief . . . .18 
Factors (Law relating to) . . n 
First Elements of Legal Procedure . 10 
Foreigners and Foreign Corporations 14 
Gaming, Betting and Lotteries , 22 
General and Particular Average . 14 
High Court Practice . . .22 
Injuries to Workmen ... 9 
Landlord and Tenant ... 9 
Local Government Law (Provincial) 10 
Magisterial Handbook . .9 

Marine Insurance , , . .14 



Law (Various Subjects) (continued) — page 
Maritime Law . . . .25 
Mortgages ..... 23 
My Lawyer . .... 21 
National Insurance Act . . .10 
The Master Mariner's Legal Guide. 23 
Patent Law and Practice (Emery) . 14 
Payment of Commission ... 9 
Police Officers' Guide . . 15 

Port of London Act, 1908 . . 10 
Powers of Attorney and Proxies . 19 

Railway Law 9 

Reduction of Share Capital . . 5 
Repairs, Household . . . 12 
Small Holdings and Allotments . 17 
Solicitors' Forms (Charles Jones) . 18 
Sunday Travellers . . . .10 

Title Deeds 25 

Trade Union Law .... 9 
Trust Accounts . f . . 25 

Legal and Useful Handy Books — 
List of .... . 6-10 

Maritime Codes — 

German 10 

Holland and Belgium . . -23 
Italy ...... 23 

Spain and Portugal . . .23 

Mining- 
Accounts of G. M. Cos. . . .14 
Gabbott's How td Invest in Mines . 15 
Milford's Pocket Dictionary . . 21 

Miscellaneous — 
Arithmetic (Practical) , . .22 
Author's Guide . . . .26 
Business Barometers . . . 10 
Compound Interest and Annuities . 24 
Constable's (A) Duty . . . 20 
Copper, A Century of . . .11 
Cotton Trade of Great Britain . 14 
Dynamics of the Fiscal Problem . 19 
German Grammar (Boudar) . . 5 
Gresham, Sir Thomas (Life of) . 12 
Ham's Customs Year Book . . 16 
Ham's Year Book (Excise) . . 16 
His Lordship's Whim . . , so~> 
Income Tax . . . . 5„ 19. 
Kew Gardens (Illustrations) „ , 261 
Land Tax Valuation . . ■ 9- 
Lawyers and their Clients . . ijfc , 
New York Stock Exchange from 

Within e 

People's (The) Money ... 13 
Police Constable's Guide to his 

Daily Work , 

Public Meetings . . . ! 25 
Rates, Taxes and other Outgoings . 21 
Russian Commercial Handbook . 22 
Russiar Grammar, Bondar . . 5 
Traders and Railways . . . 26 
Workiig Classes, The Future of . 10 
X Raj' 5 in Freemasonry-, , . ™ 

Money Market (see Currency and 
Finance). 



Effingham Wilson, 



Options — 
Castelli's Theory 
Put-and-Call . 



PAGE 
12 

. 16 



Pamphlets 2; , 28 

Prices — 

Mathieson (Stocks) . . .20 

Railways — 

American and British Investors . 25 

Argentine Railway Manual . 18 

Mathieson' s Traffics 20 

Poor's Manual (American) . . 22 

Railroad Report (Anatomy of a) . 26 

Railway Law .... 9 
,, Traffic .... 9 

Ready Reckoners {see also Exchange 

Tables, Interest, etc.) — 
Buyers and Sellers' (Ferguson) . 7 
Elgies' Metric Ready Reckoner . 14 

„ .Wages Reckoner . . 14 

Ingram (Yards) . . . .17 
Kilogramme Table . . .26 

Kinmond's.Universal . . .18 
Merces (Indian) . . . .21 
Metric Valuation of Weights and 

Measures ... .5 

Norman's Commission and Due 

Dates .21 

Robinson (Share) . . . 23 

Sinking Fund and Annuity Tables — 
Booth and Grainger (Diagram) . n 
Dougharty's Annuities and Sinking 

Fund .14 

Speculation (see Investors and Stock 
Exchange). 

Stock Exchange Manuals, etc. 

Chevilliard's Le Stock Exchange . 12 

Contango Tables . . . .15 

Copper, a Century of . .11 



16 



PAGE 

Stock Exchange Manuals, etc. icontd.) — 
Cordingley's Guide and Dictionary 13 
Fractional or Decimal Table . .12 
Higgins. Leonard.The Put-and-Call 16 
Houston's Canadian Securities . 16 
Investor's Ledger . . . .20 
Investors' Tables, Permanent or 

Redeemable Stocks 
Key to the Rules of the Stock Ex- 
change 

Laws and Customs (Melsheimer) . 
Mathieson's Redeemable Invest- 
ment Tables 
Options (Castelli) .... 
Poor's American Railroad Manual 
Poor's Manual of Industrials . 
Poor's Manual of Public Utilities . 
Redeemable Stocks (a Diagram) 
Registration of Transfers 
Robinson (Share Tables) 
Stockbrokers'' Investment Tables 
Stock Exchange Values . 
Willdey's American Stocks 
Yield Tables for £1 Shares 
Tables (see Exchange Tables, Interest 
Tables, Ready Reckoners, and 
Sinking Fund and Annuity 
Tables, etc.). 
Telegraph Codes — 
Ager's (list of) 
Hartfield's (list of) . 
Miscellaneous (list of) . 29, 30, 

The Premier Code .... 
The Premier Code Condenser 
Trustees — 

Investment of Trust Funds 
Trustees, their Duties, etc. 



. 6 
. 6 
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Books List .... 6-10 



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16 Effingham Wilson, 



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HIGGINS, LEONARD R. 

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HUTCHISON, JOHN. 

Practice of Banking ; embracing the Cases at Law and in 
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JONES, CHARLES (continued). 

County Court Guide. A Practical Manual, especially with 
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22 Effingham Wilson, 



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24 Effingham Wilson, 



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28 Effingham Wilson, 



HARTFI ELD'S CODES. 

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AGER'S TELEGRAM CODES. 
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30 Effingham Wilson, 



TELEGRAPH CODES— continued. 
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E.C. Code Condenser, by Arthur Hebden, F.C.I.S. Price 
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"Ironscrap* Telegraph Code. 

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Engineers, Directors of Mining and Smelting Companies, Bankers, 
Brokers, Solicitors and others. Price 21s. net. 

McNicol's Nine Figure Code, or 1,100 Millions Pronounceable 
Words. 

Price £10 net per copy (for not less than two copies). 

Moreing and McCutcheon's Telegram Codes. 

Code I. "The General, Commercial and Mining Telegram Code," 

containing 274,000 Phrases and Sentences. Price £5 5s. net. 

Code II. "The Multiform Combination Telegram Code," with 206,460 

Cypher Words, with 960,045 Groups of Numbers. £8 Ss. net. 

Code III. " The Catalogue Combination Telegram Code," consisting of 

274,979 separate References to Catalogue Numbers. Prices, etc. 

Price £7 7s. net. 

Moreing and Neal's General and Mining Code. 

For the Use of Mining Companies, Mining Engineers, Stockbrokers, 
Financial Agents, and Trust and Finance Companies. Price 21s. 

Montgomery Code (Fifth). 

Especially adapted for use in Banking and Investment Business. Price 
20s. net. ' 



54 Threadneedle Street, London, E.C. 31 



TELEGRAPH CODES— continued. 
Official Vocabulary in Terminational Order. 

Price 40s. net. 

Pieron's Code Condenser, 30 °/„ Economy without changing 
Codes. 

Can be had in English, French, Spanish or German. Price 30s. each net. 

Scott's Shipowners' Telegraphic Code. 

New Edition. 1906. Price 52s. 6d. 

• Stockbrokers' Telegraph Code. Price ss. net. 
The Tenmil Code. 

Can be used as a 6, 7, 8, 9, or 10-figure Code (or more). ' Adaptable to 
any size of Telegraphic Code, on any subject and in any language. By 
Arthur Tracey. Price, with patent binder, £3 13s. 6d. net. 

Yollers' 12-Figure System. 

1,000,000,000,000 Pronounceable Words, all of 10 letters, in strict accord- 
ance with the decisions of the London Telegraph Conference of 1903. 
Price £2 net. 
Supplement to the above. 2 copies. Price 30s. 

Yollers' 9-Figure System. 

1,000 Millions Pronounceable Words of ten letters. Price £2 net. 

Watkins' Ship-broker's Telegraph Code. 

Price £7 Is. net. Six copies, £42 net. 

Western Union Telegraph Code. 

Price 65s net. 

Whitelaw's Telegraph Cyphers. 

400,000 Cyphers in one continuous Alphabetical order. Price £12 10s. 
200,000 words, French, Spanish, Portuguese, Italian 
and Latin. Price 



53,000 English words . 
42,600 German „ 
40,000 Dutch 



150s. each net. 
50s. „ „ 
50s. „ „ 
50s. „ „ 



338,200 in all. 

68,400 Latin, etc., etc. (Original Edition), included 

in the above 202,600 - 60s. „ 

25,000 English (Original Edition), included in the 

above 53,000 < ■ ■ 40s. „ 

22,500 of the English words, arranged 25 to the 
page, with the full width of the quarto page 

for filling in phrases 60s. „ 

401 Millions of Pronounceable Words, all of 
Ten letters, representing 4 complete sets 
of 8 figure groups. Also . an additional 
134J millions, representing 12 complete 
sets of 7, 6 and 5 figure groups, and all 
numbers thereunder Price 150s. 



AGENT FOR ALL HARTFIELD'S CODES. 



Medium 4to, 500 pp. Cloth, price 10s. 6d. net. 
THE 

PREMIER 

CYPHER TELEGRAPHIC 

CODE 

Containing close upon 120,000 Words (from A to M, 

specially selected from the Berne Official 

Vocabulary) and Phrases. 

THE MOST COMPLETE AND MOST USEFUL GENERAL CODE YET PUBLISHED. 

COMPILED BY 

WILLIAM H. HAWKE. 

SOME OPINIONS OF THE PRESS. 

" It is calculated to save expense by making one word do the duty of two to five 
words as compared with other codes, without trouble or loss of time. This result 
has been obtained by introducing novel and simple methods of tabulation. The 
scope of the code is a very wide one, and makes it suitable to the traveller as well as 
to the commercial man." — Telegraph. 

" Is distinguished among books of its kind by the unusual width of its range. 
For the rest it is a careful work, which keeps constantly in view the practical needs of 
men of business." — Scotsman. 

" The code is certainly a marvel of comprehensiveness, and at least the translation 
of messages would appear to be easy, owing to the system of initial words and cross 
references embodied in it, and the conspicuous headings." — Manchester Guardian. 

" An extremely valuable cypher telegraphic code. The saving of expense is, of" 
course, the primary object of a code ; but another consideration with Mr. Hawke has 
been to arrange a code so that what is required to be transmitted can be sent with 
the least possible trouble and waste of time.'* — Financial News. 

1 ' This compilation is excellent in choice of messages and simplicity of arrangement. 
Those who have had to deal with other codes will appreciate this point. Particularly 
admirable are the joint tables for market reports, which can give quotations and tone 
in one word. What with careful indexing to the matter and ingenious simplicity this code 
is certainly one of the best we have yet seen." — Shipping Telegraph, LiverpooL 

" An Vollstandigkeit diirfte es von anderen Werke gleicher Art kaum ubertroffen 
werden." — Frankfurter Zeitung. 

" The systems of tabulation are simple, and the general appearance of the 
volume seems to confirm the claim that this is by far the most complete code ever 
issued." — Tribune, Chicago. 

" Mr. Hawke's long experience as an expert in telegraphic code systems is a full 
guarantee of the excellence of the ' Premier Code '." — Liverpool Courier. 

Now Ready. Medium 4to. Cloth, price zos. 6d. net. 

100,000 WORD SUPPLEMENT TO THE PREMIER CODE. 

Words specially selected from the Berne Official Vocabulary, remainder of 
alphabet from M to Z. 

compiled by WILLIAM H. HAWKE. 

For special Tables for Offers, Buying, Selling, etc., the Five Figure 
System, worked in conjunction with Keys of Words, numbered from 00,000 
to 99,999, and 2440 Reserve Words for Indicating or Catch Words or Special 
or Temporary Tables, does not clash with the Premier Code. 

These two volumes contain between them all the telegraphically good 
words of the Berne Official Vocabulary, as they have been selected with, 
the greatest care. 

LONDON : EFFINGHAM WILSON, 
54 THREADNEEDLE STREET, E.C.