THE CHICAGO BOARD OPTIONS EXCHANGE is the latest investment opportunity to challenge for the title of legitimate Bird Nest On the Ground for investors. Brokers are cheering for the CBOE to make it since the current score is Bird Nests 37, Investors 0.
The CBOE aims to bring trading in options on stock out of the closet and into the light of a central marketplace, and in so doing LaSalle Street has stolen a march on Wall Street. The Chicago Board of Trade fathered the Options Exchange, and that parenthood left the financial community in New York looking slightly impotent. Belatedly, the American Stock Exchange is studying a pilot program of trading options on the Curb, which these days greatly resembles a harvested rice field, much in need of replanting.
Of course, New York is not entirely defenseless in any battle with Chicago. The Wall Street Journal, for instance, carries page after page of stock tables each business day. There are stock tables from the Big Board, the Curb, the Pacific Coast, Toronto, Montreal, all commodity exchanges, and many others. The table on the CBOE transactions, however, appears on the inside back page of the Journal and is clearly labeled an “Advertisement.” Chicago may have stolen the girl, but New York gets the alimony.
No investor can understand the opportunities on the CBOE without first having a rudimentary understanding of options, which are essentially the right to buy or sell a particular stock at a specific price anytime during a defined time. One minute after their expiration time, options aren’t worth the paper they’re written on, but during their brief life they can be as exciting or as disappointing as the Houston Astros, who, it is rumored, are moving to the Philippines to become the Manila Folders.
To own 100 shares of American Telephone and Telegraph, an investor must come up with some $5000 plus commissions, but to control 100 shares of the same stock for a few months through an option on the CBOE costs only a couple of hundred dollars.
While your option is alive, if Telephone went to $60 a share, you could buy the stock at 50, sell it at 60 and keep the difference less commissions and the cost of the option.
Your maximum risk is the total amount you paid for the option. If American Telephone and Telegraph goes bust, the most you can lose is your investment in the option. Limiting the risk is one of the main advantages of options.
“Wouldn’t it have been better to own a call on Levitz Furniture at 60 than to have owned the stock and not sold it?”
A pithy argument, indeed.
Options have been around for a long time, but they have been trading over the counter on a negotiated basis. Apparently, it has been a seller’s game since only about one-fourth of all the options purchased were ever exercised. Three out of four were allowed to die a quiet death with a total loss of the investment to the buyer. Each option needed two parties: the taker and the takee.
Several brokerage firms maintained formal options departments and made an effort to match buyers and sellers within their own systems. But if an investor wanted to buy an option on a particular stock and there were no offers around, the broker had to contact one of the few houses that specialized in trading options. The option house often would have one of its customers write the option. The premium was negotiated, many times to the advantage of the writer and corresponding disadvantage to the buyer. Buyers wanted options on the most volatile stocks in hopes of great rewards, and writers obliged them but made the cost dear.
And then along came the CBOE in 1973 to put the buyers and sellers of options together in one auction market. The CBOE incorporates some of the features of