Years Ago in the Options Market




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But we had a peculiar sense of honor in those days. If I was sick for a time, one of my competitors would answer my calls and do business for me, and upon my return to work, he would give me a list of the trades he had made for me, along with a check for my profits. And though every one of us was a competitor and would try to offer an option better than the next fellow, the broker who took care of the sick fellow's customers would not, on the latter's recovery, solicit business from his fellow broker's customers.

It might be interesting to the reader at this point, after reading so much of the techniques of the option business, to know something of "years ago." When I first came into the option business forty years ago, and up until about the time of the "big break" in 1929, the holder of an option could trade against it with no margin. His broker had to have coverage for just the commissions and interest and any market difference. Often I had Puts on 500 shares against which I would trade, back and forth, as many times as the swings in the market would allow; margin was not necessary because the option, guaranteed by a member firm of the New York Stock Exchange, was sufficient margin. Not so today, however. Today all stock commitments must be covered by the required margin and the option is not a substitute for such margin.

"Years ago," Spreads and Straddles were sold so that the exercise of one side of the option, before expiration, voided the other side of the contract. The Straddle was made out as one contract and the contract was surrendered to exercise one side.

"Years ago," there were no tax stamps required on either the Put or the Call option.

"Years ago," contracts were made out in 500 or 1,000 shares, or even in 5,000-share pieces, instead of in single 100-share pieces as they are today. The largest trades I ever made were some 25,000-share pieces, but 5,000-share trades were common. The largest trade I remember was an order I had for Call options on 5,000 shares each on 22 different stocks. The order was filled without too much trouble in about 3 days.

"Years ago," very few option-dealers had their own offices. The "market" was in a restaurant in New Street, New York City, where most of the option-dealers congregated, and many large writers and buyers of options would come to meet with their special option-dealers and give an order. There were telephone booths and a ticker in the restaurant, and the telephone booths were our offices. All the dealers walked around with a pocketful of nickels, ready to use a phone to call a customer and try to make a trade. (A phone call was still a nickel in those days). Of course, we all ate in that restaurant—we had to, for a customer might call and this was our "office."

"Years ago," we did a very large business in "2-day options." We bought them for $25 or $30 per hundred and sold them for $35 or $37.50. They ran from, say, Monday— that would be at any time Monday that we traded—until Wednesday at 2:45 P.M.—the Exchange closed at 3:00 P.M. in those days. We would buy Calls on some stock 2, 3, 5, 10, or 20 points above the market for 2 days. But the number of points demanded for a Call was in proportion to the way the stocks were moving. And if you knew which pool was going to move which stock in the next 2 days, you could do well. There was a broker in the business who would sell a Call on 100 shares of stock good, for the next day only, for one dollar's worth of cigars (which were seven for a dollar, then). The idea was to buy one of those "seven-cigar Calls" and about noon the next day, if the stock had had a run, to sell it for $25 or more—just for the rest of the day. I saw one of my colleagues make $1,200 on a call like that.

All of the brokers would congregate in the restaurant after the close of the market to "chew the rag." There was one fellow who would sell lists—100-share Calls on, say, seven different stocks at a price above the close with the Calls good for the next day—and he might offer the whole list for $25 or $50, according to the list of stocks. Very often, before noon the next day, the buyer of the list sold one of the Calls for $100. Fluctuations were wide in those days and stocks weren't split so quickly. Some of the leading stocks sold over $300—General Motors, Mexican Petroleum, Texas Company moved 10-20-30 points in a day. I remember selling a man Puts on General Motors and Mexican Petroleum 30 points below the market for 30 days. Those Puts cost $137.50 per hundred shares, but the next day or so those stocks were down 40 points and the next day they were up 30.1 sold a fellow a Call on Radio once for 30 days at 100-the stock was 89 and the Call cost $137.50. There were 100 points in the Call when it was exercised.

"Years ago," there were two individuals in the street— not Put and Call brokers exactly—who traded for their own account. They bought Spreads—they would buy a Spread on 500 Studebaker selling at 80-Puts at 72, and Calls at 90, for 30 days for $200 per 100-share Spread. If the stock went up in a few days, they sold the Call for $200, and then if the stock declined they sold the Put for $100 or $200, according to the price of the stock. But one partner wouldn't sell a contract unless the other partner agreed, and it was funny to watch one partner run up and down New Street looking for the other to O.K. a contemplated sale of a contract. Sometimes a broker would ask to have the contract "in hand" for a few minutes to see if he could sell it. He'd disappear into a nearby brokerage office and wait to see if the stock moved and then come out to say, "O.K., I sold it."

"Years ago," I remember trading a Call on 10,000 shares of Pan American Pete at 11:00 P.M. at night. When I first started, I did the trading, I made out the contracts in ink—who owned a typewriter?—I made out the checks, I delivered the contract, I picked up the checks and made the deposits, I opened the shop and closed the shop; I was the business. But all of the option-dealers did very well. After a while I chipped in with another broker and we hired a boy for $15 a week to stand at some phone booths in a nearby building (these phone booths were our branch office), and if we were wanted on the phones down the street our boy would come running after one of us "big shots" and whoever was wanted would run up to answer "his" phone. What fun if the restaurant phone wanted you at the same time!

But we had a peculiar sense of honor in those days. If I was sick for a time, one of my competitors would answer my calls and do business for me, and upon my return to work, he would give me a list of the trades he had made for me, along with a check for my profits. And though every one of us was a competitor and would try to offer an option better than the next fellow, the broker who took care of the sick fellow's customers would not, on the latter's recovery, solicit business from his fellow broker's customers. It just wasn't cricket. I had pneumonia once after I had been in business about four years. At the time I was trying to follow a buying pool—only I didn't know that it was selling in another place. I lost my money and worried about my wife and kid, and got sick and contracted pneumonia. I was home for about four weeks, but one of my competitors took care of my business and wouldn't take more than a "thank you" for it.

While I still had my office in my hat—I mean the restaurant—I made a trade in 500 shares with an English fellow I had seen around "the shop," and as he said, "I'll take it," he winked his eye. Trying to be careful because I couldn't afford to make a mistake, I asked him again if it was a trade and again he said, "I'll take it," but gave another wink. I went over to one of the boys and asked him about this fellow, who, every time he said, "I'll take it," winked at me. They reassured me that the sale was O.K.—he just had a nervous twitch—but I was scared.

Despite the length of time I've been in this business, I can remember almost all of the mistakes that were made in trading, they were that few. It's amazing because of the millions of shares of options that are traded: a Put is a Put and not a Call; 100 is 100 and not 500; and Steel is Steel and not Studebaker. I hope I don't jinx it, but I can't remember a serious mistake in our office in almost 10 years.

Just to show how mistakes were not made—often we would call a certain seller of options at his home at 7 P.M. (he was a fellow who had quite a thirst—so much so, that his tongue thickened) and we'd trade a thousand or two with him, and next morning our contracts would come in 100 per cent perfect—just as they had been traded. I don't think there is another business in the whole wide world that has had as few errors in the last forty years as the option business. And it's fast—we've over 50 phones on our trading table, and on a fast day the twelve ears and twelve hands that our six traders have can't stop for a minute; still, I think it should get an "Oscar" for being the least understood of all Wall Street businesses.

And speaking of "years ago," the following pages are reproductions of a few pages of a book that was given to me. The book fascinated me so much that I had a limited number of copies made, not only because it tells of the option business and the stock-exchange of those days, but because I felt it was a museum piece. The frontispiece is dated 1875. One of the sketches shows the Sub-Treasury Building at Wall and Broad Streets, New York, but there was no statue of George Washington in the picture, as there is now. I investigated and found out why: George was put there eight years after this little book was published. I have added these few pages of this little book to mine because I thought that the reader would be interested in it. I hold the original in my Wall Street "Put and Call Library" for posterity.

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