To make a success trading in stocks every man should learn everything he can about the
stock market and the ways to operate in the market in order to make the greatest success. He should d learn to take the smallest risk possible and then try to make the greatest profits possible. The more a man studies and learns, the greater success he will have.
We quote Proverbs 1: 5— “The wise man will hour and will Increase learning.”
Again, Proverbs 2: 11- “Discretion shall preserve these; understanding shall keep thee. “Proverbs 3: 9- “Give instructions-to a wise man and he will become wiser. Teach a just man and he will increase in learning. ,” The “Book of the Lambs” says that the fear of the market is the beginning of knowledge.
Many people do not realize that without preparation and knowledge the stock market is
dangerous and that it is easier to make losses than it is to make profits. However, the risks in stock speculation or investment are no greater than in any other line of business if you
understand and apply the proper rules to speculative trading, and the profits compared to risks art greater than in any other business.
What are puts and calls on stocks
PUTS and CALLS are insurance which provide protection for your profits and permit you to trade in stocks with limited risk. A CALL is a contract between you and the seller whereby he agrees to sell you a stock at a fixed price and deliver it in 30 days. You have the option of calling for delivery at any time during the 30 days. ‘Your loss is limited to the prices you pay for the premium, which is the same as buying insurance with a: Call. For example:
Suppose a man has a house for sale and agrees to sell it to you for $5,000 and deliver it at
that price 60 days later. You pay him $100 for the privilege of buying the house or rejecting it.
If at the end of 30 or 60 days you are able to sell the house ‘for $500 profit or for $1000 profit, then you exercise your option to buy the house for $5,000 and sell it to the man so you can make a profit. But if the option expires and you are unable to sell the house for more than the price, them you loose the $100 and do not have to buy the house.
The same applies in buying Calls on a stock. For example: If you buy a Call when
Chrysler is selling around 105, good for 30 days at 110, you pay $142.50 which includes the
Federal taxes. Suppose before the 30 days are up, Chrysler advances to 115, which
1 would give you a profit of $500, you can sell Chrysler any time it reaches 115 and
demand delivery of the stock at 110. But if Chrysler sells at 115 within 10 days after
you bought the option and you believe that the trend is up and Chrysler is going higher,
then you hold and do not exercise your option or sell the stock. Just before the and of
the 30 days, if Chrysler is selling at 120, you could sell 100 shares of Chrysler at 120
and then call for delivery on your Call at 110 making a profit of’ $1 000, less your
commission and the amount paid for the Call. On the other hand, after you have bought
the Call at 140, if’ at no time it advances above 110 and at the end of 30 days Chrysler
is selling below 110, you, of course, make no profit and are only out the amount of
money that you paid for the Call.
A PUT is an option or an agreement with. a man from whom you buy the Put that
you can deliver to him the stock at a fixed price any time within 30 days after you buy
the Put. A Put costs you $137.50 per 100 shares, We will take this example: When
Chrysler is selling at 105, say, you believe it is going down and buy a Put for 30 days
at 100, for which you pay $137.30. This means that when Chrysler declines below
100, it puts you in a position of being short 100 shares at that price because the man
from whom you bought must take from you 100 shares of Chrysler at 100 any time
that you deliver it to him within the 30-day period. We will assume that Chrysler goes
below 100 and declines to 95. You can buy ,100 shares when it goes to 95 and then
hold it to the end of the 30 days. In the meantime if Chrysler advances to 105, giving
you 10 points profit, you could sell it out. Then at the end of the time the option
expired if Chrysler was still selling above 100; you would have made the profit on the
stock that you bought against the Put and would simply let the option expire and only
be out the price you paid for it. But, on the other hand if you do not trade, against the
Put and the stock declines and, we will say, at the end of 30 days is selling around 90
you then buy 100 shares of Chrysler and your broker delivers 100 shares to the man
that you bought the Put from giving you the profit of $1000less the money you paid
for the option and your commission.
PUTS and CALLS are, perfectly safe because every Put and Call, sold by a reliable
Put and call broker is endorsed by a member of the New York Stock Exchange who is
thoroughly reliable and will deliver you the stock that he agrees to deliver on which he
sold an option or will receive from you any stock that he agrees to buy on an option.
Again, to make it plainer , when you by a Call on a stock you are long of the market
if it goes above the price at which you bought it, just the same as if you had the stock
bought, except that your risk is limited. Again, when you buy a Put on a stock, it means
that you are short at the price at which you bought the Put, but you do not have to put
up any margin or have to stand any loss except the price you paid for the Put. Then as it
declines below the price at which you bought the Put, you ere making money just the
same as if you made a short sale.