Playing Options

One day early last week, not quite 15 million shares changed hands on the New York Stock Exchange--a fair day. The Chicago Board Options Exchange also had a middling volume, equivalent to 5.1 million shares, or one-third of the Big Board total.

In dollars, the Stock Exchange's tally was greater than that of the C.B.O.E.--but the latter's performance was still remarkable. The N.Y.S.E. lists more than 1,500 companies; the C.B.O.E. trades options in only 79--and while the Big Board is 183 years old, the Options Exchange will not celebrate its third birthday until next April. Its growth has been so stupendous that now, in terms of share volume, it is the second largest securities exchange in the world; last month it broke its own daily-volume record four times. The price of a C.B.O.E. seat has soared from an initial $10,000 to $60,000.

Others want to get in on the act.

Both the American Stock Exchange and the Philadelphia-Baltimore-Washington Stock Exchange have now begun trading options, and the venerable N.Y.S.E. itself is thinking about it. Undeniably, options trading has become the hottest securities game around.

It is not a new game. For generations, investors have been able to purchase put (sell) or call (buy) options through specialized brokerage firms. But the C.B.O.E., and then its imitators, has opened the game to many more speculators by listing options for regular daily trading on organized exchanges. At the moment, however; they offer a market only in call options.

The buyer of such an option gets the right to buy 100 shares of a stock at a prefixed price, called the "striking price," at any time during a specified period --on the C.B.O.E., three, six or nine months. For that right he pays a "premium" of somewhere between 5% and 20% of the striking price, plus a commission.

Last week, for example, an investor putting up $250 could have bought on the C.B.O.E. an option to purchase 100 shares of Polaroid at $40 a share any time before Jan. 31. Polaroid was then selling at $37.50. If by the end of January it were to rise to, say, $45, the option buyer could buy the stock itself at $40, sell immediately at $45, and make $500 on 100 shares; subtracting the $250 he had paid for the option would still leave a profit of $250, less commissions, in less than three months. Alternatively, if he did not want to bother buying the stock, he could resell the option at a profit. As the market price of Polaroid rose, the price of the option also would climb above the original $250--probably at a steeper rate than the price of the stock itself.

Of course, if the market price of Polaroid stock remained under $40, the option eventually would become worthless --but even if he let the option expire unused, the investor would lose only his initial $250. More likely, he would resell the option before its expiration date at a price lower than $250, to someone who was still betting on a rise in Polaroid. The vast majority of options are never exercised, and the average option buyer holds onto his contract only for about a month. The stock covered by options is held mostly by institutions or wealthy individual investors who sell calls on shares they already own. Their strategy: to pocket the premiums and to hedge their position by setting a floor price for their holdings.

Wary Eye. From the outset, the Securities and Exchange Commission has kept a wary eye on the C.B.O.E. and its sister markets. Options trading could become too attractive, the agency feared, draining money away from the stocks underlying the options. But two studies carried out for the C.B.O.E. by Robert R. Nathan Associates of Washington, D.C., established that market activity in the Big Board stocks represented by C.B.O.E. contracts has not fallen off. So the SEC has approved C.B.O.E. requests to increase its listings, and the C.B.O.E. is now asking the SEC to approve trading in put options. The timetable calls for the put market to begin in April. It will take at least until then for investors to figure out the myriad new strategies available--such as "straddles," "strips" and "straps"--that involve buying or selling puts and calls on the same stock. As Joseph W. Sullivan, the C.B.O.E.'s 37-year-old president puts it: "Like the old thing about Hallmark cards--whatever you want to say about stocks, there's a way to say it with options."

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