Options and futures: the law.—The following is an example of an option in stocks and shares. Assume that the price of Consols is 93 to-day, say 1st January, and that some person wishes to acquire the right to buy that stock on some future day, believing that the price will then be higher, and is desirous of not risking more than a certain sum of money in a trans action, say 2 per cent. Ile would probably be obliged to give 95 for the stock for the end of March, upon the condition that if lie 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 93. If he does not buy he loses 2 per cent., and the stock must rise cent. by the time before he can make 1 per cent. profit. Such is a " call" option, the converse case being a " put" option. A combination of both is called a "double" option, or, in America, a " straddle" or "spread eagle." A "future" may be best illustrated by reproducing an actual American contract (illegal).
Bought of the E 0. Stannard Milling Co., 3000 barrels of Eagle steam flour, at 3.85-100, f.o.b. St. Louis, for shipment at my option during the month of March 1803. It is further agreed and understood that if I do not want to receive the flour in March, settlement may be made as follows, viz. : E. 0. Stannard Milling Co. paying me any difference that may be an advance in value, or my paying E. 0. Stannard Milling Co. the difference between the purchase price and the market price at the time of settlement, provided the value then is less than the purchase price. Settling prices to be based on St. Louis Merchants' Exchange quotations on extra fancy flour at date of settlement.
Very few if any authoritative cases have been brought before the English courts in respect of options and futures. The reason is that the contracts are generally made between members of particular markets or exchanges which practically guarantee and assume responsibility for the parties duly performing their contracts. 13ut should one conic before a court of law the essential issue will be whether it is or is not a gaming contract, and so illegal and unenforceable against the parties them eto. For it has been decided, in Hibblachite v. Meilorine, that a contract for the sale of goods, to be delivered at a future day, is not invalidated by the mere circumstance that at the time of the contract the vendor neither has the goods in his possession nor has entered into any contract to buy them, nor has any reasonable expectation of becoming possessed of them by the time appointed for delivering them, otherwise than by purchasing them after making the contract [see further hereon below Future Goods]. Accordingly " futures " are not necessarily illegal, for they are consistent is ith a bond fide in tention on the part of both parties to perform then,. " The vendor of goods," said an American judge, "may expect to produce or seguire them in time for a future delivery, and while wishing to make a make: for them, is unwilling to cuter into an absolute obligation to deliver, and therefore bargains for an option which, while it relieves hills from liability, assures bins of a sale in case he is able to deliver ; and the purchaser may in the same way guard himself against loss beyond the consideration paid for the option, ill case of his inability to take the goods. There is no inherent vice in such
a contract." There is not necessarily any gaming or wagering in an optional or future contract. " A time bargain," said Lord Justice Bramwell in the stock and share case of Thacker v. Hardy, "is not necessarily invalid ; there may be a good sell next year crop of the apple trees growing in a specified orchard, and what is this but a time bargain ? But if the term • time bargain' is understood to mean an agreement to pay the difference between the price at the time when the bargain is made and the price at a subsequent time, that agreement is perhaps in the nature of a wager, but it is not a thne bargain ' in the ordinary sense of the word." In the same case Lord Justice Cotton laid it down that the essence of gaming and wagering is that one party is to win and the other to lose upon a future event, which at the time of' the contract is of an uncertain nature—that is to say, if the event turns out one way A. will lose, but if it turns out the other way he will win. This is not necessarily the state of facts in an optional or future bargain. But where an optional contract for the sale of property is made, and there is no intention on the one side to sell or deliver the pro perty, or on the other to buy or take it, but merely that the difference should be paid according to the fluctuation in market values, then, without doubt, the contract is a gaming one and illegal. Accordingly the flour bar gain set out above is a good example of an illegal and unenfbrceable contract, for the Court (American) before which it came found as a fact that all the parties clearly understood it to be "a wagering, speculating, future contract," in which an actual delivery of the flour was not contemplated under any contingency. Had that contract been one of sale, and a valid future bargain, it would have created a right to delivery of the flour. "But," in the lan guage of the Court, " the agreement bears on its face that the parties were not contracting on the basis of the after-execution by either of the legal obligations springing from a contract of sale, but expressly cab initio upon the fact of the non-execution of such obligations.'' Apart, however, from the question of gaming, the courts in some of the United States have decided against the validity of optional and future bargains on the ground that they are against public policy. It is urged that they tend to unsettle the natural course of trade, ancl tempt the parties to them to work for a rise or fall in the prices of the commodities in respect of which they have an interest, with out regard to actual values, and by methods calculated to promote their own profit at the expense or ruin of others, without reciprocity of benefit.