The History of Options Omar Alsaleh

Introduction: What’s an option? Ancient History of Options. Agenda Introduction: What’s an option? Ancient History of Options. History of the U.S. Options Market. Summery: Quiz (sponsored by ) November 19, 2018

Options Contracts $100 $10K Grant the right The asset Buyer Seller I grant the buyer the right, but not the obligation, to purchase my car at a price $10K and within the next 3 months. Buyer $10K Seller The asset November 19, 2018

the buyer is exercising the option Options Contracts option price or option premium $100 Grant the right I grant the buyer the right, but not the obligation, to purchase my car at a price $10K and within the next 3 months. Buyer $10K Seller the buyer is exercising the option exercise price or strike price The asset expiration date or maturity date the concept of buying the rights to an asset without necessarily buying the asset itself. call option put option “An option is a conrtact in which the writer (also called the seller) of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at the exercise (or strike) price within a specific period of time (until the expiration date)” November 19, 2018

Introduction: What’s an option? Ancient History of Options. Agenda Introduction: What’s an option? Ancient History of Options. History of the U.S. Options Market. Summery: Quiz (sponsored by ) November 19, 2018

The Very First One 322 B.C. As mentioned in Aristotle's book named "Politics", published in 332 B.C. Thales of Miletus : one of the seven sages of ancient Greece. (astronomer, philosopher and mathematician). Predicted a huge olive harvest in the next year  olive presses would be in high demand Owned all of the olive presses? (No cash!). Call option: With small cash as deposit, he secured the use of presses at the harvest season. (Owners wanted to secure the profit). Sold the rights to people who needed them  turning a big fortune November 19, 2018

The First Market: Tulip Mania - 1636 322 B.C. 1636 The tulip rapidly became a luxury item in Europe (demand growing). High demand  extraordinary high price  skyrocket price on tulip bulbs by dealers and growers 1634: investors began to enter the market. 1636: Dutch dealers started options trading market on tulip bulb. "the Viceroy" (1637 Dutch catalog) The tulip rapidly became a coveted luxury item and a symbol of affluence and beauty. November 19, 2018

The First Market: Tulip Mania - 1636 322 B.C. 1636 Contracts to buy bulbs at the end of the season were bought and sold (call options). Traders met in one place and buyers were required to pay a 2.5% fee per trade. Traders met in one place and buyers were required to pay a 2.5% fee per trade.  No deliveries were ever made to fulfill these contracts because of the market collapse in February 1637. The first mass trading of options in recorded history. November 19, 2018

The First Organized Market: London in 1700 to 1860 322 B.C. 1636 1700 - 1860 About the end the 17th century: put and call options were given an organized market in London. The trading volume was very low because of Tulip Mania. 1733: option trading was illegal due to ignorance and fear. 1860: it was declared legal again. Traders met in one place and buyers were required to pay a 2.5% fee per trade. November 19, 2018

Introduction: What’s an option? Ancient History of Options. Agenda Introduction: What’s an option? Ancient History of Options. History of the U.S. Options Market. Summery: Quiz (sponsored by ) November 19, 2018

The First Trading in the US: Russell Sage - 1872 322 B.C. 1636 1700 – 1860 1872 Russell Sage (1816-1906): a well known American Financier born in New York. 1872: he created the first option for trading in the US. The options where the first Over-The-Counter (OTC: un-standardized). This trading started the unregulated option market for the following 100 years. November 19, 2018

The Black and Scholes Options-Pricing Model - 1973 322 B.C. 1636 1700 – 1860 1872 1973 1973: Fischer Black and Myron Scholes published: “The Pricing of Options and Corporate Liabilities”. The paper outlined an analytical model that would determine the fair market value of call options. Today, the model is the most widely pricing model used by options traders. November 19, 2018

A new era has begun - 1973 322 B.C. 1636 1700 – 1860 1872 1973 Russell Sage’s market was highly un-standardized and inefficient  hard to open the market widely for public trading. 1973: Chicago Board Options Exchange (CBOE) has been established. April 26, 1973: first day of trading. CBOE is the first exchange to list standardized, exchange-traded stock options. Only for call options. March 1977: SEC allowed put options. November 19, 2018

1974: CBOE & SEC established Options Clearing Corporations (OCC). A new era has begun - 1974 322 B.C. 1636 1700 – 1860 1872 1973 1974 1974: CBOE & SEC established Options Clearing Corporations (OCC). OCC: issued, guaranteed, registered, cleared and settled all transactions involving listed options on all exchanges. November 19, 2018

1974: the American Stock Exchange [AMEX]. The door was open 322 B.C. 1636 1700 – 1860 1872 1973 1974 1975 1976 1982 1974: the American Stock Exchange [AMEX]. 1975: the Philadelphia Stock Exchange [PHLX]. 1976: the Pacific Stock Exchange [PCX] and the Midwest Stock Exchange. 1982: the New York Stock Exchange [NYSE]. November 19, 2018

Stock index options are “cash settlement contracts”. 1980s – Stock Index Options 322 B.C. 1636 1700 – 1860 1872 1973 1974 1975 1976 1982 1983 1986 Stock index options are “cash settlement contracts”. Dollar value of the underlying index = Cash index value x Contract multiple Early 1980s: CBOE launched the first cash-based index. 1983: CBOE began trading options on the S&P 100 Index. the first index. 1986: The CBOE Volatility Index was introduced. the first real-time volatility index. November 19, 2018

1990s 322 B.C. 1636 1700 – 1860 1872 1973 1974 1975 1976 1982 1983 1986 1992 1999 1992: OCC and the option exchanges created the Options Industry Council [OIC]. To educate the investing public and brokers about the benefits and risks of exchange-traded options. 1999:  the American Stock Exchange [AMEX] began trading options on the Nasdaq 100. November 19, 2018

2000s 322 B.C. 1636 1700 – 1860 1872 1973 1974 1975 1976 1982 1983 1986 1992 1999 2000 May 26, 2000: the International Securities Exchange [ISE] opened for business. The first new US exchange in 27 years. The first all-electronic US options exchange. November 19, 2018

Introduction: What’s an option? Ancient History of Options. Agenda Introduction: What’s an option? Ancient History of Options. History of the U.S. Options Market. Summery: Quiz (sponsored by ) November 19, 2018

Summary: Quiz (Sponsored by ) In the class  November 19, 2018

Wikipedia Thales Tulip mania Russell Sage Fischer Black Chicago Board Options Exchange Frank J. Fabozzi, Franco Modigliani and Frank J. Jones, 2010, Foundations of Financial Markets and Institutions (Prentice Hall, Upper Saddle River, New Jersey). Garber, Peter M., 1989, Tulipmania, Journal of Political Economy 97, 535–560. Joel Bodner, 2002, Introduction to Options, Touro Collage Accounting and Business Society Journal, 117-129. November 19, 2018