Chicago's Other Option

Put and call options have long offered knowledgeable investors a chance to bet on the future prices of stocks without risking much money. Their use has been limited, though, because they can be purchased only through option brokers on individually negotiated deals. If the Securities and Exchange Commission grants approval, a new central market for such options will open next fall--not on Wall Street but on Chicago's La Salle Street, the home of the Chicago Board of Trade (CBT), the world's biggest commodities market. This month, CBT organized the Chicago Board Options Exchange to conduct regular daily trading in puts and calls.

That move could cut average investors in on one of the favored speculations of market sophisticates. The options are contracts that give the holder the right to sell (put) or buy (call) a specific stock at a fixed price on or before a set date--say $50 a share after six months. If the price goes to $75, the holder of a call can exercise his option, buy the stock and immediately sell it on the open market for a handsome profit. If it drops to $25, the holder of a put can buy it in the market and sell it under his option for much more money. If price trends go the opposite way from what he expects, the speculator simply lets his option expire and loses only what he paid for it, which is a small percentage--approximately 12% on a six-month contract--of the money required to trade in the stock directly.

Resale Market. For all these advantages, put and call volume has been relatively low: a few hundred thousand option contracts a year. One reason is that there has been no real secondary market for them. An investor who began to fear that he had guessed wrongly about stock trends, or who wanted to take a potential profit quickly and move on to some other deal, would have a very difficult time trying to get rid of his option. If the Chicago Board of Trade is indeed able to provide a daily market for stock options, big volume traders like mutual funds, pension funds and insurance company portfolio managers are expected to be its major customers.

Why did that idea originate in Chicago rather than in Manhattan? Perhaps because "futures" trading is an uncommon technique among stock market specialists, whereas it is the major business of the Board of Trade. An enormous business too: last year futures contracts for $88.4 billion worth of wheat, corn, soybeans and other commodities were bought and sold on the board's cavernous trading floor.

The volume has expanded steadily under Henry Hall Wilson, a former administrative assistant to Presidents Kennedy and Johnson who took over as president of the Board of Trade nearly five years ago. In order to increase trading during periods when speculative activity in farm goods is slack, Wilson has moved the board into making a futures market for such nonagricultural products as plywood and silver.

Trading in the commodity "pits" still has a 19th century flavor. To critics it has long seemed nothing but a gigantic gambling game; in his 1896 Cross of Gold speech, William Jennings Bryan grumbled about "the man who goes on the Board of Trade and bets on the price of grain." In fact, trading is composed not only of outright speculation but of hedging operations by such agribusiness giants as Ralston Purina and Quaker Oats, which trade in future contracts as a means of protecting themselves against possible inventory losses due to the frequently violent price fluctuations of farm goods. To an outsider the buying and selling seem like an explosive quarrel; traders scream at each other and gesture with their hands. They are obeying rules that specify that all bids and offers must be called out publicly, and flashing hand signals to make themselves understood through the din. Palm out means buy, palm in means sell; in grain trading, each finger held up vertically signifies 5,000 bushels.

Put and call trading will be held in a room adjoining but separated from the commodity trading floor. The separation is necessary because trading in stock futures will differ slightly from the commodity operation. Amateur investors can only hope that the results are different too. Three out of four commodity futures trades at the Chicago Board of Trade are money losers.

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