| Dr. | |||
|---|---|---|---|
| £ | s. | d. | |
| 5000 Turks. 5% at 50½ | 2525 | 0 | 0 |
| Int. 6% 15 days | 6 | 4 | 6 |
| Commission | 6 | 5 | 0 |
| 2,537 | 9 | 6 | |
| To Balance | £12 | 9 | 6 |
| Cr. | |||
| £ | s. | d. | |
| By Balance | 18 | 15 | 0 |
| 5000 Turks. 5% at 50⅛ | 2506 | 5 | 0 |
| Balance | 12 | 9 | 6 |
| 2,537 | 9 | 6 | |
It becomes apparent, in examining this account, the extreme danger the speculator was in just at the period immediately preceding the relapse, and forcibly demonstrates the importance of acting upon the soundest of maxims in “time bargain” operations, which is, never to refuse a profit. We have been supposing the speculator to have been “running the stock,” as the saying is, for nearly a month, during which period it had been advancing in price. At the same time he had been incurring expense to have the chance of making a profit by such advance. After carrying over the transaction, he had incurred the certain loss in any case of the two commissions and the contango charge, which make together the sum of £18 14s. 6d. It seems almost incredible that, under such circumstances, he should still hold on when he could close with a profit of £18 15s.; instead of which he closes with a loss of £12 9s. 6d., after having commenced to operate with just as reasonable a prospect of a fall of ½ per cent., and another on the top of it of ¼. On the other hand, everything went as well as can ever be expected on a series of operations, and yet he finishes with a loss. The charges, to begin with, kill the profit, to say nothing of the “turns” of the dealers, and the risks of the fluctuations in price.
Backwardation.
Backwardation[13] is the term for the charge paid by the speculator for the fall. The word itself implies that the charge is for holding back a transaction, as directly opposed to that for which a contango is paid. The one is to carry forward, and the other to carry backward. A speculator who sells for the fall, and thereby makes himself a bear, must pay something if he wishes to keep the transaction open; just as the bull must, unless exceptional circumstances are influencing the market. When the settlement arrives, a bear must either deliver what he has sold, or pay the backwardation demanded for postponing delivery; which, in other words, is the price paid for obtaining the stock elsewhere. If the supply of stock should chance to be large, he will find it very easy to continue his bear account, because the stock he has sold is not wanted. Under such circumstances, the position of the bear speculator comes to be the exact antithesis of that in which the bull finds himself at the settlement when the stock he has bought is scarce. In both cases the charges recede until either the transactions are carried over “even,”[14] that is to say, for nothing, or it may be the speculator receives a consideration. As in all other markets, it is a question of paying or receiving, and the one or the other depends upon the relation which the demand bears to the supply. As we shall have occasion farther on to speak more minutely upon bear speculations, we shall not pursue the subject at any length here; suffice it to say that the public, as speculators, do not understand selling for the fall. It goes against the grain. Speculating at all is associated, in the minds of nearly all people, with fine sunshiny weather, and a settled state of the political atmospheres of one’s own and neighbouring states. The time to speculate for the fall is when growling despatches are being exchanged between nations whose prosperity has reached a zenith where nothing more is to be had, except by quarreling; when the exchanges are adversing, and there is a drain of gold setting in and the biting winds and sleet of chill October fill everybody with pessimist views; when the reports of shipwrecks and hurricanes at sea fill the minds of Oriental merchants with alarm for the safety of their galleons, and there is an uneasy general impression creeping over the public mind that it is perhaps prudent, under the circumstances, to hold less in securities, and to have a larger balance at the bank. Yet, when the very air seems to whisper coming difficulties and disturbances, and the time is ripe for speculating for the fall, such is the weakness of the human character that the opportunity presented is seldom discerned until the return of sunshine, and the blowing over of the storm has shown the inutility of being wise after the event.
Options.
The “Put and Call” Option.
Speculation by “options” is of all methods of speculating the most prudent, as it is the most sensible, for all parties concerned. It resembles in some degree the lottery-ticket mode of gambling. The indefinite mischief that is caused by speculation which allows the operator to incur unlimited risk on credit is prevented by the system of options, inasmuch as a fixed payment must be made by the speculator at the time the option account is opened. There are three kinds of options. First, is the “put and call,”[15] which means to take or to deliver stock at a fixed price at a future date, for which a certain sum is paid on the day the bargain is entered into.
The “Put” Option.
The second is the “put,” which means the option of delivering a specified amount of stock at a fixed date, the price and the day of delivery being agreed upon at the time the money is paid.
The “Call” Option.