OPTIONS and FIITURES.—An option is a mode of speculation in stocks and shares very frequently met with on the London Stock Exchange, and even more frequently perhaps on the Buis Bourse and the New York Exchange. And the principle of operation by option is not by any means restricted to dealings in stocks and shares. It is also found, especially in the United States, in connection with wheat and other produce transactions. An option is a contract whereby one of the parties is privileged to call upon the other to conclude a purchase or sale of a special article on or before a certain future date, at a price aareed at the time the contract is entered into. A contract of this nature, tied confers a right upon one of the parties to require the other to sell to him, is known as a " call or a buying option ; and a like contract that confers a right..upon one party to require the other to buy from him, is called a " put" or selling option. The consideration for the contract is generally the payment, at the time it is entered into, of some comparatively small sum then agreed between the parties. Neither party to the contract is bound to exercise his right or option thereby created, but when he does so, and the bargain is concluded, the price fixed by the contract must be paid. The speculator finds his chief reason for adopting the method of an option in the fact that for a small present payment he obtains the right and the certainty of buying or selling, as the case may be, a specified commodity at any time within a future period, during which Ur: e the market price of the commodity may so move as to render the exercise of his option, at the arranged price, a very profitable transaction. Contracts are sometimes entered into for both the " put and call," in which case the speculator has the right either to sell or buy while the option lasts, but the consideration payable for such a "double option" is ordinarily greater than that required for a single option. The loss possible to a speculator in an option is there fore necessarily limited to the amount he pays as the consideration therefor; but in order to discover his net profit on the whole transaction, this pay ment should be set off against any profit he makes upon an exercise of the. option. And a large net profit on a deal by option cannot generally be expected, for the possibilities thereof arc naturally discounted by the parties when they arrange the sum to be paid as a consideration. While the
speculator who sells the option—or "takes" the put or call—assumes that there will be little movement in price during its currency, the buyer of the option—who "gives" the put or call—believes that there will be some material movement in his favour. On the London Stock Exchange the money payable for an option is paid to the jobber on the settling day in the same manner as an ordinary difference on stock or shares, and whether the option is exercised or not. There are also special rules as to when optional bargains shall be declared.
Futures.—Dealings in "futures" are based upon somewhat similar prin ciples to those upon which optional bargains rest, and are most generally met with in this country in the Stock Exchange, the London Produce Clearing House, the Liverpool Cotton Market, and the various metal exchanges. The principle in such a deal of this class is that the seller and buyer contract that on a specified future date the former will deliver certain goods to the latter, who will then take delivery thereof and pay for them at a price agreed at the time of the contract. The buyer pays at the time of the contract a margin (say 5 per cent.) of the price ; or, on a day fixed in each week by the market in which the operation is conducted, the parties pay from time to time until the bargain is finally concluded the differences between the agreed price and that for the time being ruling in the market. But the actual practice differs according to the goods and market dealt in, and according to the special arrangements between the parties themselves. By this method of dealing a considerable convenience and advantage may accrue to both seller and buyer. Many circumstances may conspire, speedily and unexpectedly, to disorganise the supply and price of such commodities as wheat, cotton, tea, coffee, sugar, tin, and others too numerous to mention. An unexpected change of circumstances must therefore be provided against as far as possible, and perhaps the most practicable method of insurance against the evil results of such a change is found in dealings in futures. The producer can ensure the sale of his produce in the near future at a price which compensates him for his expenditure of capital ; a manufacturer, on the other hand, can ensure that he will receive the material necessary for the execution of his contracts and at a price anticipated when the contracts were entered into.