When you buy a Put and a Call an the same Stock it in called s Spread. For example:
Suppose Chrysler is selling at 100 and you are in doubt whether it will go up or
down but you want to take advantage of a move when it gets under way. Therefore
we will say that you buy a Put at 86 and a call at l04. Let us assume that the market
starts to react and declines to 95 , then hesitates and looks like making bottom. Then
you buy 100 shares of Chrysler, knowing that if it continues to decline you cannot
lose anything because you have a Put; at 96. Let us assume that you are right and the
market starts to advance. It continues to advance and before the end of the 30 days
Chrysler advances to 110 and there are 6 points’ profit in the Call that you bought at
104. You also still have the stock that you bought against the Put at 96. Now, you
can sell out 200 shares of stock and call for the 100 shares at 104, which gives you a
profit an the Call and your Put expires because it is of no value.
Often Spreads can be bought very close to the market when you are buying a Put
and a Call from the same man. On some stocks you can often buy Spreads at the
market by paying an additional premium. As a rule it would not pay to buy a Spread
except on very active stocks which have a very wide fluctuation during the 30 days
giving you a chance to operate against both the Put and the Call during the month.
At least when you buy a Spread if the stock moves 10 or 15 points or more in either
direction, you are sure to make some money. However, it is not always advisable to
spend as much as it costs to buy Spreads unless the market looks like it is going to
be very active and you are trading in high-priced stocks.
Put and Call brokers, give those definitions : “A PUT is a negotiable contract by
which the taker may put to the maker a certain lot of securities at a specified price
on/or before a fixed date. A CALL as the opposite. A SPREAD is one PUT and one
CALL. PREMIUM is the money paid for a PUT, CALL or SPEAD. MAKER is he who
writes or sells PUTS, CALLS and SPREADS. ENDORSER is a N.Y. Stock Exchange
firm which guarantees, PUT, CALL or SPREA.D contract by endorsing it like a check.
The insurance feature provided by these privileges is considered valuable.
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