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Chapter 1. The Use Of Stock Options

Practically all the orders for the purchase and sale of Put and Call stock options come to New York, where they are executed by members of the Put and Call Brokers and Dealers Association, Inc. As previously explained, this association consists of approximately twenty-five members who deal exclusively in Put and Call options, and all of the options in which these members deal are guaranteed by member firms of the New York Stock Exchange. The option contracts in which the members deal are transferable contracts, and on the back of each stock options contract is the name of the stock-exchange firm where the individual or company that sold the contract has his account. This endorsement of a member firm of the New York Stock Exchange guarantees that the terms of the contract will be met. The contract is made out in bearer form and can be resold by one person to another.

The option-dealer is a middleman; he arranges for the purchase of and/or sale of options between a possible buyer and a seller. It is his business to try to sell options which are offered and, conversely, to try to buy options which his clients want to obtain. The option-dealer works with, not against, his client and rarely takes the position of maker of the option. His profit is made between what he pays for an option and what he sells it for..

Stock Options Contracts

Stock options contracts are traded in units of 100 shares, not in odd lots, and they are made for periods of 30 days, 60 days, 90 days, 6 months "plus," and, occasionally, for one year. Puts and Calls are usually done "at the market." That is, the price at which the stock is selling when the trade is made. A Put or a Call on a stock selling at 50 would be made at 50 in the usual way of business. However, it is possible to buy or sell an option "away from the market," that is a Call at 52 when the stock is selling at 50 or any differential by agreement. The most popular stock options contracts are those that run for 90 days or 6 months. A contract can be exercised at any time before expiration at the option of the holder. It is not necessary to wait until expiration to act on or exercise one's option. If a man owns a Call option at 50 which expires on December 10, and by November 20 the stock has risen to 60—at which point he would be satisfied with such a profit—he may exercise his option at that time. He need not wait until the expiration of the contract.

Stock Options Money

The option money or premium is the amount paid for the contract. The amount paid for the option is not applied to adjust the price at which stock is bought or sold upon the exercise of the option. If you have a Call on stock at 70 and you exercise the option, you pay $70 a share for the stock less any dividends that accrue to the contract. If you have a Put at 70 and you exercise the Put, you receive $70 a share for the stock less any dividends that are due on the option contract.

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A Put Option Contract

A Put option is a transferable-bearer contract paid for by the buyer upon delivery of the contract, giving him the right, at his option, to deliver to the maker or seller of the contract a certain number of shares of stock at a fixed price on or before a stipulated date.

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In the above contract the holder may deliver to the endorser of the contract 100 shares of XYZ common stock at 70 any time before the expiration date (August 20) at his option.

The exercise of a stock options contract is not automatic. The contract must be presented to the cashier of the endorsing firm before expiration.

The above contract has been approved by the Put and Call Brokers and Dealers Association, Inc. and is used by members of that association.

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This is the reverse side of a Put contract and will be signed by a member firm of the New York Stock Exchange, guaranteeing to the holder of the Put contract that the stock will be accepted if the holder of the Put wishes to exercise his option.

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A Call option is a transferable bearer contract paid for by the buyer upon delivery of the contract, giving him the right, at his option, to buy or "Call" from the maker or seller of such contract a certain number of shares of stock at a fixed price, on or before a stipulated date.

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In the above contract the holder may call for or buy from the endorser of the contract 100 shares of XYZ common stock at 70 any time before the expiration date (August 20) at his option.

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This is the reverse side of a Call contract whereon is put the endorsement or guarantee of a stock-exchange house guaranteeing to the holder of the Call that the stock specified in the contract will be delivered to him, at his option, upon presentation of the Call contract.

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THIS IS A QUOTATION SHEET DATED MAY 25, 1959.

This is what we call a nominal quotation sheet from May 25, 1959, which is sent along with explanatory literature to those who inquire about our business. It is merely an approximate price at which options are quoted on a representative list of stocks on which stock options are written. However, options are written on a much longer list of stocks than those indicated; in fact, options can be arranged on most common stocks listed on the New York Stock Exchange, some stocks listed on the American Stock Exchange, and at times on stocks traded in the over-the-counter market. Anyone interested in the buying or selling of an option can obtain quotations through his stock-exchange broker or directly from an option dealer.

These quotes are nominal. Latest quotations should be obtained from your Stock Exchange broker, or directly from us.

QUOTATIONS FURNISHED BT
Filer, Schmidt & Co.
ESTABLISHED 1919
Members Put & Call Brokers & Dealers Ass'n, Inc.
THE PUT & CALL MARKET
120 BROADWAY, NEW YORK 5, N. Y.     BArclay 7-6100

All contracts are endorsed by Members Firms of the New York Stock Exchange
The following quotations are on the issues that are most active in the Option Market

Other Quotations May Be Had On Request
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Orders for these or other contracts can be placed directly with us or through your Stock Exchange Broker by SPECIFYIN

"BUY FROM FILER, SCHMIDT & CO."
State and Federal tax must be added to the cost of call options.
 No Tax On Put Options.    Quotations Subject To Change Without Notice.

The stock options described above are facsimiles of the contracts used by members of the Put and Call Brokers and Dealers Association, Inc., of New York. They are bearer transferable contracts endorsed or guaranteed by member firms of the New York Stock Exchange and can be sold or transferred at will, like checks. The law requires that New York state and federal tax stamps be affixed to Call options but not to Put options; stamps so affixed are the same as if the stock in question had been sold in the market. The tax is based on the selling price of the stock, but is never more than $12.00 for the combined federal and state tax per each 100-share Call. The New York state tax is as follows:

On stocks—

under $5, the tax is $1, to be affixed to each 100-share

Call contract;

$5 and over but under $10, the tax is $2, to be affixed
to each 100-share Call contract; $10 and over but under $20, the tax is $3, to be affixed

to each 100-share Call contract;
on $20 and over, the tax is $4, to be affixed to each 100-share Call contract.

The federal tax is based on the dollar value of the stock specified as follows in the Call contract for each 100-share Call:

FEDERAL TAX

                        $.04 per $100 value          
                        $.04 any fraction above ½

as an example:

                        (.04/100.00 of $4000.00)
                        $40.00 STOCK =      $1.60
                        40 ½    "           =          1.60
                        405/8   "           =          1.64
                        50 ½    "           =          2.00
                        505/8   "           =          2.04

The maximum federal tax is $8.

The combined maximum federal and state tax is $12 per 100-share Call.


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