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The History of Optionsby Chengdan Zhou

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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• Repealed in 1860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

• 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

319 275 270361

468

675

944

1193

Options Trading Volume (in Millions)

2001 2002 2003 2004 2005 2006 2007 2008



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


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