The History of Options by Chengdan Zhou Powerpoint Templates
Overview Ancient History of Options Early Option Trading in Europe Early Option Trading in America Development of CBOE Summary
Definition A contract between two parties where the holder has the right, but not the obligation, to buy or sell an underlying asset at or within a specified time and for a set price. Call option vs. Put option American vs. European
Ancient History of Options Thales of Miletus Aristotle (332 BC.) Predicted olive harvest using astronomy Bought the right to use olive presses Exercise the option vs. sell the option Covered Call option trading strategy Thales
Option in Bible Genesis Chapter 29 Laban offered Jacob the option to marry Rachael 7 years of labor Possibility of delivery failure Laban offered Leah Polygamy permitted the transaction Another 7 years
Tulip Mania in Holland Symbol of affluence and beauty in17th century Price skyrocketed due to demand Hedge risk of bad harvest Wholesaler – Call option Tulip grower – Put option Became speculative frenzy Price keeps rising
Tulip Bubble Burst Buy tulip bulbs with entire fortune Bubble burst Price fell dramatically Speculators unable to fulfill obligation Unregulated option market Options trading gained bad name
Early option trading in England Introduce in the London market in the late 17th century Did not survive for long Low trading volume (tulip mania) Market unregulated Manipulation 1733 Barnard’s Act–banned options Repealed in 1860
Early option trading in America Russell Sage created options in the US in 1872 Over-The-Counter trading Unregulated until the form of SEC in 1934
OTC option trading Slow in growth Cumbersome and illiquid less than 300K contracts by 1968 Cumbersome and illiquid Trade on phone Match sellers with buyers No commission Formation of Put and Call Brokers and Dealers Association More efficient match Lack of standardized pricing No liquidity in market
Chicago Board Options Exchange - CBOE Founded in 1973 Spin-off from CBOT Major Functions Standardization of stock options Establish Secondary Market Standard Price Options Clearing Corporation (1975)
Growth of CBOE 911 contracts for 16 call options on the first day Listed options doubled to 32 Membership doubled to 567 Banks and insurance companies Daily volume exceeded 200k by 1974 Nation’s newspaper voluntarily began to publish quotes
Growth of CBOE con’t SEC permitted 5 Put options to be listed on 1977 Moratorium on options expansion to review the rapidly growing market Lifted in 1980, CBOE added 25 more Move from smoker’s lounge to a 350k sq. ft. building in 1981
Growth of CBOE con’t
Other Milestones The Black -Scholes Model (1973) Index options in 1983 S&P 100, S&P 500 four months later Now: 2200 companies, 22 stock indices and 140 exchange-traded funds (ETFs) Long-term Equity Anticipation Securities (LEAPS) in 1990 3-year shelf life, 2500 securities Online trading became popular in mid-90s Instant trading
Other exchanges Starting in 1975, other players join game American Stock Exchange (AMEX) Philadelphia Stock Exchange (PHE) International Security Exchange(ISE) Boston Options Exchange (BOX) NYSE Arca Chicago Mercantile Exchange CBOT
Summary Options used for investing and speculating Regulation important Jacob –too much in love Tulip market – little enforcement, no decent model, wild-speculation Europe – ineffective fines America – closely monitored by SEC Today, widely used, better understood and regulated by the public
Q&A