Plunging in Puts & Calls

To the average investor, put and call options have always ranked as one of the stock market's more unfathomable sideshows. Despite a lingering taint as a game best fit for crapshooters, the option business this year has swelled to unprecedented size in line with both Wall Street's speculative fever and the sharp rise in total trading. Last month the volume of options written so far in 1967 climbed to 16,264,900 shares, eclipsing the old record of 15,418,200 shares for all of 1965.

In today's market, where investors must put up 70% cash to buy stocks, puts and calls have undeniable appeal. They allow speculators to maintain a position in a stock for as little as 10% of its market value when purchased. With that kind of leverage the option buyer who guesses right can often snare a return of 80% or 90% on the comparatively small sum he risks.

Shedding Disdain. Largely because the business is so speculative, most big brokerage houses have shied away from option writing for years, leaving that market largely in the hands of a score of put-and-call dealers operating on the periphery of the securities field without stock-exchange memberships. Now there is so much action in options that the large brokers have begun to shed some of their disdain. "Puts and calls," says Steve Brandt, head of the option department at Bache & Co., "are growing faster than any other part of the securities business." President Sidney D. Harnden of the Put & Call Brokers & Dealers Assoc. expects a volume approaching 50 million shares within a few years. "The industry," he says, "is just starting to spread out and become national."

Call options lure bulls who figure stock prices will rise. A call is a transferable contract giving the purchaser the right to buy stock (almost always in 100-share lots) at a specified price (generally the market price on the purchase date) at any time during a specified period ranging from 30 days to a year. Last week, when National Video common was selling for $31.50 per share, an investor could have bought a call at $450 expiring next April 4. Provided that the stock rises as much as $5 a share by that date, the investor will be able to exercise his call at a profit. If Video climbs $10 a share, he stands to net about $550 on a $450 investment, or 122%. Calls for six months and ten days account for about 40% of such activity because the profits from selling them are long-term capital gains, taxable at a maximum of 25%.

Put options, the opposite of calls, entice bears who figure that the price of a stock will fall. Puts give the purchaser the right to sell 100 shares of stock at a set price at a future date. Last March, Manhattan's Thomas, Haab & Botts, one of the largest put-and-call dealers, sold a put option on Fairchild Camera for $1,750. It permitted the buyer to sell 100 shares of Fairchild stock at $119 a share any time before Sept. 26. By last week, that stock had dropped to $92, enabling the put holder to buy the stock in the market, then exercise his sell option at a $2,050 profit after commissions. By investing in the put instead of selling Fairchild short, the investor kept his outlay down to $1,750 instead of $11,900 and made certain that he could lose no more than the $1,750 no matter how much the stock went up. Though most options are sold to speculators, market tacticians also use them in complex hedging maneuvers to protect paper profits, reap tax benefits, or limit the chance of losses. Bernard Baruch used them to grab control of whole companies--without disturbing the market.

Odds Against Amateurs. For more sophisticated plungers, options come in varied forms with arcane names--"strips," "straps," "straddles" and "spreads"--that conjure up visions of the Marquis de Sade. Actually, they are only combinations of puts and calls. A straddle is a put and a call on the same stock at the same price; a spread is a straddle with a different price on the put and call; a strip is a straddle with double-sized put; while a strap is a straddle with a double call.

Much of this year's action has centered on such volatile--or promising--stocks as American Motors, Allis-Chalmers, Chrysler, Flying Tiger, Occidental Petroleum and Pan American Airways. The hotter the stock, the more costly the call--sometimes as much as 20% of its current value. In its last study of the option market, the SEC found that only 40% of put and call options are exercised. "We are asked over and over whether we are encouraging people to pour money down a rathole," admits Paul Farmer, head of Goodbody & Co.'s option department. Farmer does not think so. "The problem," he says, "is to teach people how to use options." By doing that, brokerage firms figure they can expand the market.

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