How Option Orders Originate

Before going into the further explanation and application of options, it might be interesting to explain how orders for options originate and are executed.

An interested party perhaps in Detroit will ask his stockbroker to ascertain on what terms a Call option can be had on a certain stock for, let us say, 90 days.

The stockbroker will find this out through his New York office, which in turn gets in touch with an option-dealer for the terms on which a Call option can be had on that particular issue. The option-dealer might quote the contract at a nominal price of $400.

This quotation is sent back to the customer in Detroit, and if the quotation meets with his approval, an order will be given to the option-dealer to "buy Call on 100 XYZ at market for 90 days for $400."

On receipt of such an order, the option-dealer will get in touch with his clients who might be interested in selling such a contract, and when he has been successful in negotiating the trade, he will report to the stock-exchange firm from whom he received the order:

"Sold you Call 100 XYZ at 70 for 90 days for $400 expires October 24." The Call option contract is then delivered to the stock-exchange firm which gave the order and the latter will pay for the contract from the customer's account and hold the contract, subject to instructions by the customer before expiration as to whether or not the option should be exercised. (The cost of federal and state tax will be added to the cost of a Call option. There is no tax required on a Put option.)

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