| Many people believe that the stock market can | | | | was the cost of the Put option, or $350, no |
| make you rich one day, but also make you | | | | matter how high the stock rose and no matter |
| bankrupt the next. Well, how eould you like to | | | | how wrong the person was, and that the person |
| know about a method of stock trading that | | | | would draw on the equity in the account to that |
| completely saves you from unlimited loss, but still | | | | extent only. Suppose, on the other hand, the |
| leaves the door open for unlimited profit? That | | | | person had sold the stock short in the market. |
| method is buying and selling stock options. How to | | | | The loss would have been 20 points and still no |
| trade stock options would best be explained using | | | | knowledge as to the possible extent of loss until |
| the following example. | | | | the person covered the short sale. But in the |
| Lets say a person who thought that a stock | | | | purchase of the Put option the account would |
| selling in the market at 50 would decline to | | | | read: |
| possibly 30, that person could buy a Put stock | | | | Bought Put on XYZ at 50 for 90 days: Loss $350 |
| option. Not, however, that in buying a stock | | | | Remember, too, that no trade has been made in |
| options, one should have some idea to what | | | | the stock, so no stock-exchange commission has |
| extent the stock might move. | | | | been paid. A regular stock-exchange commission |
| In inquiring what a Put stock option would cost, | | | | is charged by your broker only if a transfer of |
| the person might receive a nominal quote of, say, | | | | stock is made in connection with the option. |
| $350 for a Put at the market for 90 days. Most | | | | On the other hand, suppose the person's |
| options are negotiated "at the market," which | | | | judgment was correct and the stock declined to |
| means at "the current market," when the option | | | | 30. If the person had instructed the stockbroker |
| can be obtained by the option-dealer. | | | | to buy 100 shares at 30 and exercise the Put |
| Suppose that the stock is selling at 50 and the | | | | option, the account would look like this: |
| quoted price of $350 is satisfactory to you. You | | | | Sold 100 shares at 50 (through exercise of Put) |
| enter your order: "Buy a 90-day Put on 100 XYZ | | | | $5,000 |
| [the name of the stock] for $350." If you are | | | | Total Receipts $5,000 |
| trading through your stock-exchange broker, the | | | | Bought 100 shares in market at 30 3,000 |
| broker will give your order to an option-dealer | | | | Bought Put at 50 |
| who will contact one of their clients who sells | | | | Cost 350 |
| options on that stock and will attempt to buy the | | | | Total Cost 3,350 |
| option for you. | | | | Profit on trade $1,650 |
| When, after this contact or several others, the | | | | The profit then would be almost 500 percent of |
| dealer has obtained the Put option for you, the | | | | the cost of the Put contract. The profit is the |
| dealer reports to the stock-exchange broker who | | | | difference between the cost of the stock plus |
| gave him the order, and the broker in turn | | | | the cost of the Put option and the proceeds of |
| reports to the customer: "Bought Put 100 XYZ at | | | | the Put that was exercised. |
| 50 expires December 30 for $350." Let us say | | | | In all of these examples showing the use of |
| that the person who bought the Put option, | | | | options, the commission cost has been ignored. |
| expecting a decline in the stock, was wrong, and | | | | But at no time could the loss have been more |
| that the stock, instead of going to 30 (as | | | | than the cost of the option - $350 - and any |
| expected), advanced to 70 and was selling when | | | | stock-exchange commissions would have been |
| his option expired. The person would have lost the | | | | paid out of profit or out of possible recovery of |
| $350 that they paid for the Put option. | | | | part of the premium which was paid. |
| Bear in mind that the limit of the person's loss | | | | |