Put, Call & Win

Of all the deep mysteries on Wall Street, put and call options have long been among the most baffling to investors. Many market players shy away from the options, consider them as risky as a crap game. But that is just not so, says jaunty, white-haired Herbert Filer, 65, head of Filer, Schmidt & Co., the nation's largest stock option dealer. This week, in Understanding Put and Call Options (Crown; $3), the first book on the business to be published in the U.S., Filer presents a case for using options to reduce stock market risks as well as for speculating.

In today's market, where 90% in cash must be put up to buy stocks, put and call options have a new allure. They enable speculators to maintain a position in stocks for as little as 5% of the stock's market value at the time of purchase. This year such options will account for trading of about 8,000,000 shares, nearly 1% of all the shares traded on the N.Y. Stock Exchange annually.

Call options are most popular with bulls, who think the market will rise. A call is a negotiable contract giving the purchaser the right to buy stock, usually in 100 share lots, any time during a specified period running from 21 days to a year or more. For example, last June Filer sold a six-month, ten-day call on American Motors for $625. This gave the purchaser the right to buy 100 shares of American Motors at 37 1/8 at any time before the option expires on Dec. 7. With American Motors now selling around 80, there is already a profit of more than $3,500 on the call. Calls for six months and ten days or longer are the most popular because any profit on a call of that length is a long-term capital gain, taxable at a maximum of 25%.

A put, the opposite of a call, is favored by bearish speculators. The put is an option giving the purchaser the right to sell 100 shares of stock at a set price at a future date. Last June, Filer sold a put option on Boeing Airplane Co. giving the buyer the right to sell 100 shares at 37 5/8 by Dec. 2. Boeing is now quoted around 30, but the buyer of the put can still exercise it at 37 5/8. After deducting the $400 costs for the put and commissions, the purchaser has a profit of about $300.

The purchaser loses when the stock does not move enough to cover the costs of the put or call, or when it moves the wrong way. Then the buyer loses the amount he paid for the option. While puts and calls are primarily used for speculating, they are also being used more to limit losses, protect paper profits, and for tax advantages. Primarily, they are for the stock market sophisticate who can afford to lose the premiums he must pay to speculate.

Premiums for Sophisticates. But there is another group of market sophisticates whose risk in dealing with puts and calls is much less. These are the people who make options available from the stocks in their portfolios. To find them, Filer, Schmidt and the nation's 20 other put and call dealers turn to investment trusts, pension funds and individual portfolio holders who intend to hold their stock for long periods. For selling a put or call the stockholder receives a premium ranging from $112.50 on 100 shares and up, depending on the price of the stock and length of the option. Usually those who sell puts and calls offer them at different prices and for varying periods, thus lessen the chances of loss when options are exercised. "This," says Filer, "produces the same effect as an insurance company insuring thousands of houses against fire." With many options, the odds favor the seller, and he can receive enough premiums in one year to provide a fat return on his stocks.

For an option seller to avoid big losses, Filer cites two rules: 1) never sell a call option unless you own the stock, since you may have to buy it at a higher price if the call is exercised; and 2) never sell a put option unless you have the money to pay for the stock if the stock is put to you. "Following these rules," says Filer, "the risk in selling options is no greater than the risk in owning stocks."

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