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