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