FOOTNOTES
[1] In speaking of taking profits, the question arises, what is a profit? Some people might say a profit is ½ per cent., and others 10 per cent. Now, of course, it is impossible to give an exact answer to this question. As a general rule, a transaction should not be made unless the chances of a gain are greater than the chances of a loss, but there may occasions occur when it would be advisable to take a small profit. All depends on the condition and temper of the market; but one rule I found to work well, and would recommend to every speculator, namely, that at the moment when a doubt arises in your mind, and you begin to ask yourself whether you ought to take your profit or not, then do not lose one moment’s time, but take your profit, because you can never make a very serious mistake by doing so, while you might possibly make a very serious one by refusing it.
[2] Where it says “for the account,” it applies to the custom of the London Stock Exchange, where all the buying and selling is for the account, say generally the middle or end of the month.
H. W. R.
[3] According to this principle, operations conducted on options are more certain to result in profits in the long run than margin operations. If I assume to make a profit in only one out of every three operations, and each option costs me 1¼ per cent., I will make a profit, if the third option only yields me a profit of more than 3¾ per cent., which is nothing unusual.
H. W. R.
[4] This depends whether it is a bull or a bear market.
H. W. R.
[5] See definitions of these terms, page 20.
[6] Operators means here, what is called in New York, “Insiders” and members of the Stock Exchange.
H. W. R.
[7] I consider this most important, and maintain that “options enable the operator to hold out for the event, or at least for a long time, especially if the process is once or oftener repeated.”
H. W. R.
[8] Very important.
H. W. R.
[9] This hardly applies to the New York market. The so-called larger operators and traders take here the place of the London jobber.
[10] The settlement does not exist in the New York market.
[11] Contango is equal to New York carrying charges—in New York so much per cent. per annum, fixed daily; in London a certain sum from one settling day until the next.
H. W. R.
[12] Equal here to borrowing stock flat, or even paying for the use of it.
H. W. R.
[13] Backwardation is equal to the paying for the use of borrowed stock at the New York Stock Exchange.
H. W. R.
[14] In New York, “flat.”
H. W. R.
[15] Called “straddle” in New York.
H. W. R.
[16] In London all options are for a fixed date; at New York they are generally made so that the option can be exercised at any time during the pending of the contract.
[17] This may be true in a certain sense, but if options are considered as an insurance feature, it is generally expected and hoped that they may not have to be exercised, and will simply answer the purpose of insurance and margin.
[18] This does not apply to the New York market.
H. W. R.
[19] In London all options are made at about the current market price, and the premium paid varies with the character of the stock and length of time, while in New York puts, calls, or spreads are generally so much above or below the market price, and the premium consequently much smaller than at London. The only exception here is the “straddle.”
H. W. R.
[20] This is not considered so in New York, where we generally expect a so-called “January rise,” which, however, sometimes does not come; and also sometimes expect a bear market in the fall of the year, when money is employed to move crops, which, however, also very often disappoints the operator.
[21] Somewhat superstitious. I have often observed it just the other way, although generally a very dull market is expected during the hot summer months.
H. W. R.
[22] This about corresponds with our spring and fall trade, when the newspapers teem with interviews with prominent merchants and bankers.
H. W. R.
[23] Of course, this applies, in a general way, more to the London than to the New York Stock Exchange.
H. W. R.
[24] This applies also to the New York market in so far as that after a large bull speculation there will be heavy realizations, and after a bear campaign or attack the covering process will take place.
[25] This applies to the so-called “lottery loans.”
H. W. R.
[26] Letter to “Spectator,” of October 4th, 1873, Saxon-les-Bains: a Study in the Psychology of Gambling.
[27] In New York we have now any number of “bucket shops,” which certainly deserve the name of “gambling hells.”
H. W. R.
[28] To a certain degree the agricultural industry of the United States takes the place of the manufacturing industries in England. Our manufacturing industries, however, are not unworthy of serious consideration.
H. W. R.
[29] I do not think that this has been done yet in this country, principally because the necessary charter cannot be obtained, unless companies similar to the Oregon Transcontinental may be classed as such.
H. W. R.
[30] The generally large increase in speculation in the United States and all the incidents connected therewith are too well known, and too fresh in the minds of the reader, to need enumeration here.
H. W. R.
[31] This is now generally done for the customer by his broker, who endeavors to collect, as far as possible, reliable information and statistics for the benefit of his clients.
H. W. R.
[32] This also applies to important changes or other matters affecting all kinds of corporate property, &c.
H. W. R.
[33] These remarks apply with the same force, if not more so, to grain, provisions, cotton, petroleum, &c.
H. W. R.
[34] I think his remark is worthy of serious consideration.
H. W. R.
[35] At the New York Exchange nothing less than ⅛.
H. W. R.
[36] Even such fluctuations are considered as unworthy of consideration in American railroad stocks, where fluctuations of 10 per cent, and even more, within a comparatively short time, are of frequent occurrence.
H. W. R.
[37] Or through Options at least insure himself against loss.
H. W. R.
[38] In Options, however, the poorer speculator virtually borrows, for a fair consideration, the capital and credit of the rich operator.
H. W. R.
[39] As said before, the settlement in New York is daily.
H. W. R.
[40] All these experiences happen also in the New York Stock market, only in different form, such as railroad wars, law-suits, injunctions, &c.
H. W. R.
[41] Point.
H. W. R.
[42] Sometimes also for the purpose of encouraging first a following, and to unload later on.
H. W. R.
[43] Government Securities.
H. W. R.
[44] The usage at the New York Stock Exchange is different.
H. W. R.
[45] The real type of the London Jobber does not, however, exist in the New York Stock market.
H. W. R.
OPINION AS TO VALIDITY OF “PUTS,” “CALLS,” &c.
Law Offices of Simon Sterne,
29 William Street,
New York, July 24th, 1886.
H. W. Rosenbaum, Esq., 60 Exchange Place, New York,
Dear Sir:
You ask my opinion as to time contracts known as “puts,” “calls,” and “straddles” or “spreads,” in relation to stocks, bonds, etc. The inquiry is prompted by the apprehension that such contracts may be regarded by the law as of a gambling character, and therefore not enforceable.
Contracts partake of the nature of wagers only when there is no intention either to deliver or to receive the goods, stocks, or bonds, which form the subject matter of the contract. That in point of fact and as a matter of local custom, differences are sometimes paid on the settlement of time contracts instead of delivery being actually made, does not affect the original transaction, and does not invalidate it. So long as there was not a clear intention, either express or implied, that the things themselves were not, under any circumstances, either to be called for or to be delivered, and so long as the holder of the “call” has the right to demand the actual delivery of the stocks or bonds mentioned in the contract, or the holder of the “put” has the right to insist upon the actual delivery of the stocks, bonds or merchandise represented by the “put,” the transaction can, in no sense, be considered a gambling one or partake of the nature of a wager, although, instead of the actual delivery, differences may and sometimes are, as a matter of compromise, accepted for convenience, at the time when the contract is to be enforced.
This practice of paying differences is, as I understand it, much rarer, however, than the actual delivery of the stocks or bonds mentioned in the contract. The courts have of late years, with great uniformity, dealt with these contracts with the disposition to uphold and maintain them, and have discredited the defence of their being of the nature of a wager, and have held the contracting parties to their agreements in the same manner as in every other contract for which a reasonable consideration had passed.
The decision of the Courts of this State, of Massachusetts, Pennsylvania and Illinois, and in the Federal tribunals, where, in one form or another, these contracts have been the subject matter of examination, have been so uniform in that direction that we can now regard this as settled law.
It was only in the infancy of those larger and more complicated mercantile transactions incident upon the development of the modern industrial world, that doubts as to the moral aspect of these contracts could arise. Political science proves, and the law has followed the conclusion, that these time contracts now form a necessary part and perform a conservative function in the economy of a fully developed commercial life. They are an as yet undeveloped form of insurance of values to a purchaser, for which the purchaser pays a fair equivalent, and in process of time such insurances must perform a larger and more important function in the purchase of commodities or of representatives of value which have a tendency to fluctuate largely in price.
For a time it was supposed that the ordinary policy of fire insurance partook of the nature of a bet, and there was doubt as to whether the Courts would enforce contracts of insurance, because it looked as though the insurer was saying to a man who wanted to have his house insured against fire, “I will bet you the value of you house that it does not burn down.” But we have long since departed from this infantile mode of looking at the situation and have learned to regard insurance as one of the conservative elements of modern civilized life, by which heavy losses are evenly distributed instead of coming with crushing effect upon the persons suffering the misfortune.
The capitalist who sells a “put” or a “call” performs precisely the same function as an insurer. He receives an equivalent therefor, and it is a means by which he can turn the securities in his hands with an intermediate profit, without serious risk, except that in the case of a “call” he may be compelled to change the character of his securities, or replace the securities which he has called from him, and in the case of a “put” he may be compelled to re-acquire the securities that he has parted with; but, distributed over a very large mass, and through different classes, of securities, these “calls” and “puts” will balance themselves and leave, if intelligently pursued, a resultant profit to the operator in the “puts” and “calls,” with a prevention of disaster to the purchaser of the privileges, as against excessive fluctuations in the market.
Respectfully yours,
SIMON STERNE.
H. W. ROSENBAUM,
60 EXCHANGE PLACE, NEW YORK,
Broker and Dealer in Options on Bonds and Stocks
Besides the usual Options (Puts, Calls and Spreads) with prices fixed at a certain distance from the market price of the Stocks or Bonds, I devote especial attention to the negotiation of Options (Puts, Calls and Straddles), with price fixed at the current market price of the Stocks, etc., which latter class of Options my experience has proven to be the most advantageous and ultimately cheapest.
I will also contract Insurances against loss on purchases or short sales of Stocks or Bonds, made through me, during periods ranging from one week to sixty days, and in quantities of from 100 shares ($10,000 Bonds), upwards.
The Premiums to be paid for such Insurance range from $112.50 per 100 shares upwards, according to length of time and character of security, and cover the whole loss which the speculator may incur on this transaction.
Circulars, Rates and Information furnished on application.
H. W. ROSENBAUM,
60 Exchange Place, New York.