1. The History of Options
by Chengdan Zhou
Powerpoint Templates

2. Overview Ancient History of Options Early Option Trading in Europe
Early Option Trading in America
Development of CBOE
Summary

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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Repealed in 1860

9. 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

10. 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

11. 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)

12. 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

13. 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

14. Growth of CBOE con’t

15. 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

16. 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

17. 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

18. Q&A