History of Options Trading By Viktoriya Cherkassova

Overview  Ancient history of options  Early Options in America  History of Chicago Board Option Exchange  The Option Clearing Corporation  Summary

Definition  Options are generally defined as a contract between two parties in which one party has the right but not the obligation to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time.

Ancient history of options  Romans and Phoenicians used contracts similar to options in shipping used contracts similar to options in shipping  Thales of Miletus (624BC-547BC ) Greece mathematician and philosopher used options to secure a low price for olive presses in advance of the harvest Greece mathematician and philosopher used options to secure a low price for olive presses in advance of the harvest

History of options  The Tulip-Bulb Craze Holland Holland tulip dealers used call options to secure a reasonable price to meet the demand tulip dealers used call options to secure a reasonable price to meet the demand tulip growers used put options to ensure an adequate selling price tulip growers used put options to ensure an adequate selling price

History of options  Yodoya rice market in Osaka, Japan  Royal Exchange in London permitted forward contracting United Kingdom in The South Sea Company purchased the "rights" to all trade in the South Seas.

Early Options in America  In the early 19th Century, call and put "privileges" were trade over-the-counter  wasn't much in the way of a secondary market all option contracts had to be exercised in person the terms were differed for each contract  In the mid 1800s, New York financier Russell Sage began creating synthetic loans using the principle of put-call parity

History of Chicago Board Option Exchange  In the late 60 th Joseph W. Sullivan, Vice President of Planning for the CBOT proposed: standardizing the strike price, expiration, size, and other relevant contract terms create a mediator to issue contracts and guarantee settlement and performance (Options Clearing Corporation )

History of Chicago Board Option Exchange  April 26, 1973 CBOE began trading on standardized, listed options.  the first day of trading: only call option 911 contracts traded on 16 underlying stocks.  By the end of 1974, average daily volume exceeded 200,000 contracts  In 1975 the American Stock Exchange, Inc. (Amex) and the Philadelphia Stock Exchange, Inc. (PHLX) begin trading equity options. Both become OCC participant exchanges

Option Clearing Corporation  founded in 1973, is the world's largest equity derivatives clearing organization operates under the jurisdiction of both the SEC and the CFTC clears transactions for put and call options on common stocks and other equity issues equally owned by five participant exchanges that trade options: American Stock Exchange, Chicago Board Options Exchange, International Securities Exchange, Pacific Exchange and the Philadelphia Stock Exchange

Options Trading  The Black-Scholes model  1983 the CBOE created an option on an index of stocks. S&P 100, which remains the most actively traded exchange-listed option.  1985, The New York Stock Exchange begins listing equity options. Options on NASDAQ stocks are listed  October 1987, stock market crash

Summary 