History of Options Trading

Options trading can help you protect your investments against a decline in market prices. It is hard to believe that options trading goes way back to 332BC. Later a market was formed in London to trade in both call and put options. Let’s look at the history of options trading and how it has evolved.

● 332BC – Thales of Miletus was an astronomer and philosopher, who by observing the stars and weather patterns, predicted a huge olive harvest. He understood that olive presses would be in demand after a huge harvest. He put down a small amount of money as a deposit to use the olive presses. This was known as a Call Option. As Thales expected, harvest was plentiful. Thales then sold the rights to using the olive presses to people who needed them.

● Tulip Mania of 1636 – imported tulips became a symbol of affluence. The demand for the tulips caused their prices to skyrocket. As the price of tulip bulbs increased, Dutch dealers started tulip bulb options. Mass speculative interest in the tulip bulbs options meant many people buying options.

February 1637 – the price of tulip bulbs dropped quicker than they rose and almost all options speculators were wiped out as their options fell. The Dutch economy also collapsed and people lost all their financial means. Because options speculators were wiped out, options trading gained a notorious reputation for too risky.

● Options Trading in London in 1700 to 1860 – Towards the end of the 17th century, Put and Call options received an organised market. Trading volumes were low though because traders had the events of tulip mania fresh in their minds. Traders were sill wary of the speculative nature of options. Opposition to options trading grew so much that it ended up with options trading being declared illegal in 1733 and it remained like that for the next 100 years. It was declared legal once again in 1860.

Modern History of Options Trading

● Options Trading in USA in 1872 – An American financier, Russell Sage, created call and put options for trading in the US in 1872. The options he created were the first OTC options in the US. He lost such a huge amount of money in the market crash of 1884 that he gave up options trading entirely. However, the OTC options trading market still functioned without him and options trading continued in an unregulated manner till the establishment of the SEC after the great depression.

● 1973 – OCC and CBOE formed – The Options Clearing Corporation and the Chicago Board of Exchange were formed in 1973 and this set the stage for the way options are traded today. The role of the CBOE is the standardisation of stock options to be publicly traded. By 1977, put options were introduced by the CBOE, and options trading market as we know it today, was created.

The risks and excitement involved with options trading comes from the fact that you can never be sure how a stock will perform. The stock market fluctuates and it is wise to become familiar with the market before venturing into options trading.

*Watch this YouTube video about options trading