A Call option is a contract,
paid for when it is purchased, which gives the holder the right
to buy, at his option, a specified number of shares of a stated
stock at a fixed price, on or before a fixed date.
The option money is the amount paid for the option contract. Should
the option be exercised, it is not applied against the purchase
price of the stock.
If you pay $500 for a Call on XYZ at 70 and you exercise the Call,
you pay 70 for the stock, less any dividends or rights that belong
to the contract.
Use of a Call Contract for Speculation
A man thinks that a stock,
now selling in the market at 50, is going to have a substantial
rise. He buys a Call option on 100 shares at 50, good for 90 days,
for $350 plus tax.
The federal and state tax departments demand that tax stamps be
affixed to Call options (but not to Puts). This tax, paid for by
the buyer of the option at the time he buys it, is the same amount
that would be paid by a seller on a sale of the stock at the Call
The maximum is $12 per 100 shares and is fixed according to the
dollar value of the stock involved. When the trader buys the Call
option at 50, good for 90 days, for $350, this amount is the most
he can lose, no matter what happens to the stock. If the trader
is correct in his judgment and the stock rises to, let us say, 70,
before his Call contract expires, he buys the stock by exercising
his Call and sells the stock in the market at 70.
His profit is $2,000 less the cost of the Call contract, and his
call 100 XYZ at 50 for
||Bought 100 shares
at 50 thru Call
||Sold 100 shares
The transaction shows
a profit of almost 500 per cent of the $350 at risk.
In making such a trade, when the stock is Called and sold on the
same day, the holder of the Call contract will be required to deposit
margin of 25 percent of the sale price70with his stock-exchange
broker until the trade clears on the fourth business day following
Please remember that not only does the cost of the option constitute
the total risk to the holder, but the choice of exercising the option
also belongs to the holder of the contract and he will exercise
his option only if it is to his advantage to do so. The seller or
maker of the contract has no choicehe must live up to the terms
of the contract at the option of the holder of the contract.
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