The History of Options

Presented by Yuhang He

History of Options

Ancient

Greece

Japan Holland US

History of Options

• Thales of Miletus, a Greece mathematician and philosopher used options to secure a low price for olive pressers in advance of the harvest.

History of Options

• The Japanese are credited with creating the fully functional commodities exchange in the late 17th century.

History of Options

History of Options

To hedge risk in case of a bad harvest, tulip wholesalers began to buy call options, and tulip growers began to protect profits with put options.

History of Options

But as the price of tulip bulbs continued to rise, the value of existing option contracts increased dramatically.

History of Options

So a secondary market for those option contracts emerged among the general public.

“Bubble Burst”

History of Options

So thousands of ordinary Hollanders lost everything. And options managed to acquire a bad reputation that would last for almost three centuries.

Birth of US Options Market

History of Options

In 1791, the New York Stock Exchange opened.

History of Options

By the late 1800s, broker-dealers began to place advertisements in financial journals on the part of potential option buyers and sellers, in hopes of attracting another interested party.

History of Options

Eventually, the formation of the Put and Call Brokers and Dealers Association, Inc., helped to establish networks that could match option buyers and sellers more efficiently.

History of OptionsAfter the stock market crash of 1929, Congress decided to intervene in the financial marketplace. They created the Securities and Exchange Commission (SEC), which became the regulating authority under the Securities and Exchange Act of 1934.

History of OptionsIn 1935, shortly after the SEC began regulating the over-the-counter options market, it granted the Chicago Board of Trade (CBOT) a license to register as a national securities exchange.

History of OptionsIn 1968, low volume in the commodity futures market forced CBOT to look for other ways of expanding its business. It was decided to create an open-outcry exchange for stock options, modeled after the method for trading futures.

Black and Scholes

Black and Scholes

History of OptionsIt was immediately adopted in the marketplace as the standard for evaluating the price relationships of options, and its publication was of tremendous importance to the evolution of the modern-day options market.

History of OptionsRobert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model and coined the term Black–Scholes options pricing model.

History of Options

Merton and Scholes received the 1997 Nobel Prize in Economics for their work.

History of Options1973 also saw the birth of the Options Clearing Corporation (OCC), which was created to ensure that the obligations associated with options contracts are fulfilled in a timely and reliable manner.

History of Options

And so it was that on April 26 of 1973, the opening bell sounded on the Chicago Board Options Exchange (CBOE).

History of OptionsIn 1975, the Philadelphia Stock Exchange and American Stock Exchange opened their own option trading floors, increasing competition and bringing options to a wider marketplace.

History of Options

Due to the explosive growth of the options market, in 1977 the SEC decided to conduct a complete review of the structure and regulatory practices of all option exchanges.

History of Options

By 1980, the SEC had put in place new regulations regarding market surveillance at exchanges, consumer protection and compliance systems at brokerage houses.

History of Options

In 1982, the exchange introduced Value Line futures, making it the first exchange offering a stock index futures contract. Options on Value Line futures were introduced in 1992.

History of Options

1990 saw another crucial event, the introduction of Long-term Equity AnticiPation Securities (LEAPS).

History of Options

In the mid-90s, web-based online trading started to become popular, making options instantly accessible to members of the general public.

History of Options

There are an average of more than 11 million option contracts traded every day on more than 3,000 securities, and the market just continues to grow.

Q&A

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