History Of Options Trading – Part 1



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Nov 05 2006
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Ancient Origins
Although it isn’t known exactly when the first option contract traded, it is known that the Romans and Phoenicians used similar contracts in shipping. There is also evidence that Thales, a mathematician and philosopher in ancient Greece used options to secure a low price for olive presses in advance of the harvest. Thales had reason to believe the olive harvest would be particularly strong. During the off-season when demand for olive presses was almost non-existent, he acquired rights-at a very low cost-to use the presses the following spring. Later, when the olive harvest was in full-swing, Thales exercised his option and proceeded to rent the equipment to others at a much higher price.

Meanwhile in Holland, trading in tulip options blossomed during the early 1600s. At first, tulip dealers used call options to make sure they could secure a reasonable price to meet the demand. At the same time, tulip growers used put options to ensure an adequate selling price. However, it wasn’t long before speculators joined the mix and traded the options for profit. Unfortunately, when the market crashed, many speculators failed to honor their agreements. The consequences for the economy were devastating. Not surprisingly, the situation in this unregulated market seriously tainted the view most people had of options. After a similar episode in London one hundred years later, options were even declared illegal.

Early Options in America
In America, options appeared on the scene around the same time as stocks. In the early 19th century, call and put contracts — known as “privileges” — were not traded on an exchange. Because the terms differed for each contract, there wasn’t much in the way of a secondary market. Instead, it was up to the buyers and sellers to find each other. This was typically accomplished when firms offered specific calls and puts in newspaper ads.

Not unlike what happened in Holland and England, options came under heavy scrutiny after the Great Depression. Although the Investment Act of 1934 legitimized options, it also put trading under the watchful eye of the newly formed Securities and Exchange Commission (SEC).

For the next several decades, growth in option trading remained slow. By 1968, annual volume still didn’t exceed 300,000 contracts.

For the most part, early over-the-counter options failed to attract a following because they were cumbersome and illiquid. In the absence of an exchange, all trades were done by phone. To make matters worse, investors had no way of knowing what the real market for a given contract was. Instead, the put-call dealer functioned only to match the buyer and seller. Operating without a fixed commission, the dealer simply kept the spread between the price paid and the price sold. There was no limit to the size of this spread. Worse yet, all option contracts had to be exercised in person. If the holder of the option somehow missed the 3:15 pm deadline, the option would expire worthless regardless of its intrinsic value.

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Comments

The Phoenicians, the ancient civilisation, also created the modern language we use today. When the Syrian army pushed them further into the mediterranean sea, trading with distance cultures for the first became more problematic with the current system of hieroglyphic writing. It was only then that the Phoenicians start to break up the symbols into different sounds and combine them together to produce a universally understood system of words. Intercontinental trading flourished and has continued into globalised trading we know today.

Similar to the flourishing of global trading through a universally understood method of communicating, Binary Options trading, offers a similar ‘crossing the rubicon’ moment in time. Crossing the Rubicon refers to when Julia Caesar crossed the Rubicon river to invade the most powerful city state in the world at the time, Rome. This is famous because it means there is no turning back. “The die is case” Julia Caesar 50 BC. The emerging market of Binary Options trading, which simplifies options trading to such an extent that financial trading has crossed it’s own Rubicon. There is no turning back!

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