There is another kind of transaction on the Stock Exchange, as to which there may some day be a question how far it is a gaming contract within the statute. These are called “Options.” |Options.| Options are described by a witness giving evidence before the Stock Exchange Commission of 1878,[[259]] as the purchase of the right to buy or sell particular stock on a particular day at a fixed price, e.g., the price of Russian Stock is 83 to-day, and a person wishes to acquire the right to buy that stock on some future day, |Calls.| believing that the price will then be higher, and is desirous of not risking more than a certain sum of money in a transaction, say 2 per cent. He would probably be obliged to give 85 for the stock for the end of March, upon the condition, that if he did not wish to take up the stock, he must pay 2 per cent., the difference between the day’s price and the price at which he bought: that is in effect paying 2 per cent. for the right of saying at the end of March whether he will or will not buy the stock at 83. If he does not buy he loses 2 per cent., and the stock must rise 3 per cent. by the time before he can make 1 per cent. profit. |Puts.| Then there is the converse case of a put, which is payment of a premium for the right to sell, or call upon a man to take delivery of, so much stock at a fixed price. This is akin to a Bear transaction, and of course the option will only be exercised in the event of a fall in the price. The person who would accept this obligation would be an intending purchaser, who is willing to give a price equal to the price of the day, minus the premium. Suppose the price of stock be at 90, A is desirous of purchasing, but does not wish to give more than 88. B, believing they are about to fall, wishes to “bear” them without incurring the risk of heavy loss. So B gives A 2 per cent. for the right on a future day of calling on A to take delivery of so much, at the price of the day—90. If they fall to 87, B will exercise the option and make 1 per cent. profit, while A has got the stock virtually for 88, which he was willing to give. If B does not exercise the option, A secures his 2 per cent.
Double options.
There are also double options, which give the right of either buying or selling at a fixed time, that is to call it if it goes up, to put it if it goes down, for which a double premium is charged.
Are options in the nature of wagers.
It has been suggested that these transactions would be held void at law, as being in the nature of wagers. It was remarked by the Chairman of the Stock Exchange Commission, that they were very much in the nature of a “bet.”[[260]] It will be remembered, moreover, that Barnard’s Act places all agreements for “puts and refusals” in the same category as wager-contracts, which are all made illegal thereby. It is, however, submitted that in all bargains for opinions the great element of a wager is wanting. It does not seem to be the essence of the bargain, to use the words of Cotton, L.J., in Thacker v. Hardy, “that one party should win and the other should lose.”
Suppose A gives B £2 for the option to buy of him so much stock at a future date, at, say £80, the market price of the day. The result to be must be the same in all cases. He secures his £2. So far as this transaction goes, it is immaterial to him whether the stock rises or falls in price; he will in neither case be a loser as between himself and A. Of course if the price rises 3 per cent., in which event A will exercise the option, B may be called a loser in the sense that he might have sold his stock at the increased price instead of the price stipulated for, or that he may have to give increased price for it in the market; but this seems to be only an indirect loss, not a loss on the actual agreement with A. He is in no event called on to make a payment to A. He is only a loser in the sense as suggested by Cotton, L.J., in Thacker v. Hardy,[[261]] that any party to an ordinary contract of sale may be so described according as the bargain turns out in his favour or the reverse. No doubt, as stated by the witnesses before the Stock Exchange Commission, in many cases these options are purchased without the slightest intention on the purchaser’s part of holding the stock; but still, as in the case of an ordinary sale of stock, it is impossible for the vendor to know what the purchaser’s ultimate intentions are, which, according to cases cited above, takes the case out of the category of a wager.
Continuations.
There is a class of transaction very common upon the Stock Exchange called in general “Continuations,” which, it seems, may be made a mere cover for wagering. But here the operation of the buyer and the seller must again be distinguished. Suppose a buyer has purchased, for the next account day, more stock than he can take up, he has to arrange for the bargain being continued or carried over to the next account day. If he be an outsider and not a member of the Stock Exchange, he must of course get it arranged through his broker. Application is then made to a dealer who has money to lend, and perhaps, wants the stock. This dealer may be the same person as the original vendor, or he may not. In either case, the form of the transaction is a purchase of the stock (in the former case it will of course be a repurchase by the dealer); the price of this purchase or repurchase is fixed by the clerk of the house, by the instructions of the committee, as the price at which the continuation is to be effected, and is called “the making-up price.” The stock is then, by a collateral agreement, repurchased from the dealer at the same price, only with an addition as premium for the accommodation. |Contango.| This premium is called a “Contango;” and in cases where the bargain is arranged with the original vendor of the stock, it is simply the consideration for the vendor’s agreeing to postpone delivery of the stock until the next account day; but where it is done with another dealer, it is in substance an advance of money on the security of the stock, and is called “taking in” by way of continuation. It may be, however, that this “bull” or speculative purchaser, may be in a position to demand a “backwardation” (see post) instead of having to pay a “contango,” that is, if the market is largely oversold and the demand for the particular stock is greater than the demand for money.
Where the price has fallen so that the making-up price is less than the original price, the purchaser in effect pays the difference. Suppose A has bought £1,000 Railway Stock at par for the current account, when the settling day arrives he does not want to take it; he then agrees with his vendor to carry it over to the next account. Say the price has fallen to 98, and that is the making-up price. The jobber repurchases of him at 98 for the current account, thus leaving a difference of 2 per cent. payable by the original purchaser to the vendor, and this difference is payable on the current account day. By a collateral agreement, the jobber resells to him for the ensuing account at 98, plus the contango; so that in the result he pays the original price, viz., par, plus the contango as the price of the continuation. It comes to the same thing if the purchaser gets another jobber to “take in” the stock for him. He pays £100 to his vendor, receiving £98, the “making-up price,” from the other jobber, which is in effect an immediate payment out of his pocket of 2 per cent. If, on the other hand, the price has risen 2 per cent., so that the making-up price is £102, he would receive £2 from his Vendor on the current account day, but on the ensuing account he would have to pay £102, the making-up price, plus contango. Sometimes these continuations are effected over several accounts, the purchaser paying or receiving differences according as the price falls or rises. Such a transaction seems something like a loan of money on the security of stock, the amount of the loan being by the payment of the differences from time to time kept just equal to the market price of the security.
“Taking in” distinguished from loans.