History Of Options

The History of Options The first account of options trading can be traced back to 332 BC. Aristotle wrote of a man named Thales of Miletus a mathematician, astronomer and philosopher. Thales predicted a huge olive harvest and wanted to own all of the olive presses in the region, knowing they would be in high demand. Buying them outright was to expensive so he instead used a smaller amount of money to place deposits and secure the right to use them, the first Call Option. His prediction was correct and he was able to sell these rights for much more than he paid for them, making himself a fortune in the process.

The History of Options Tulip Mania: In the early 1600’s tulips were popular status symbols among the Dutch Aristocracy, the popularity of tulips spilled across borders driving up prices -Tulip wholesalers and growers would purchase calls and puts to hedge against poor harvests and to protect profits. The increase in tulip prices made these contracts much more valuable and a secondary market was born. Families began staking their entire fortunes on tulip speculation. When the Dutch economy went into a recession the price of tulips plummeted. Speculators who sold puts were unable to fulfill their obligations and with the options market being completely unregulated there wasn’t much that could be done, even if the government did intervene there was no way speculators could ever pay their obligations

The History of Options London: Tulip Mania gave options a bad name, but investors couldn’t disregard the power that the leverage of options gave to speculators. Puts and Calls began trading in London in 1700. Concerns over another “mania” led to options trading being declared illegal in 1733. Trading of options was illegal in London for over 100 years and was made legal again in 1860. Trading took place in coffee shops and in alleyways in London.

The History of Options The US Market: In 1791 the New York Stock Exchange opened its doors. It didn’t take long for investors to begin trading options. There was no organized options exchange at the time so all contracts were traded over the counter. Broker-Dealers would try and match buyers and sellers of contracts. This wasn’t easy as the strike, premium, and expiration had to be individually negotiated. In the 1800’s brokers would place advertisements in financial journals detailing the terms of a contract hoping to find another interested party. The formation of the Put and Call Brokers and Dealers Association made the matching of buyers and sellers more efficient, but individual terms of contracts still had to be determined, no standardization, no liquidity.

The History of Options The CBOT and the CBOE: The crash of 1929 caused the government to intervene in the financial marketplace. The SEC granted the CBOT a license to register as a securities exchange. Over 30 years later, in 1968, volume in the commodity futures market was dropping so in an effort to expand business the CBOT decided to create an open outcry exchange for equity options, the CBOE. Contracts would now have standardized size, strike, and expiration. In 1973 Fischer Black and Myron Scholes published an article on how to derive a theoretical price for financial instruments with a know expiration date. This formula was immediately adopted in the market and became the standard for evaluating the price of options. This contributed to the growth of the exchange. 1973 The Options Clearing Corporation (OCC) is formed

The History of Options Growth of the Options Market The SEC put a moratorium on listing options for more stocks in 1977. They conducted a review and investigation into the practices and structures of the exchange. In 1980 the moratorium was lifted and the CBOE began listing more stocks. In 1983 index options began to trade the first options listed were the S&P 100 (OEX) and the S&P 500 (SPX). The CBOE now lists options on nearly 50 indices and since their inception almost 1 billion contracts have traded. In 1990 LEAPS were introduced, allowing options traders to take long term views on the market via options.

The History of Options Today With the introduction of computer trading systems the options market is far more liquid than it ever was before. There are listed options on over 3,200 stocks and 200 ETF’s There are several exchanges in the US and abroad. In the US alone there is the CBOE, the Boston Stock Exchange, the ISE, NASDAQ OMX, PHLX, NASDAQ Stock Market, NYSE Arca, and NYSE Amex. Options are now accessible to any investor and placing trades is easier than ever before.

Summary The first recorded options transaction was in 332 BC. Early derivatives were the cause of bubbles like “tulip mania” In 1990 the CBOE introduced LEAPS which allowed options traders to speculate on long term price movements. Today there are options listed on thousands of stocks that trade on multiple exchanges. There are options on equities, indices, and etf’s. - Options are always evolving, with the introduction of weekly options and more stock classes with options, always making a trader being able to create more opportunities.