However, contrary to popular belief, options trading or the use of options as a financial instrument how can you make money while sitting at home a new innovation at all.
In fact, options trading has a much longer history than most people knew about, a history that goes way back to the times before Christ was born! Indeed, options trading has come a long long way to become the most versatile trading instrument in the world today.
Yes, option strategy became trading did not just spring from the drawing boards of some financial scientist to become as comprehensive as it is today. Options trading has evolved over thousands of years and understanding the history of options trading gives options traders an appreciation of the depth of this renowned trading instrument.
History of Options Trading - A Timeline There are a few critical events in the history of Options Trading as you can see from the timeline below: Brief History of Options Trading Options trading can be traced back to BC where a man known as Thales bought the rights to buy olive prior to a harvest, reaping a fortune.
Options then turned up again during the tulip mania of where options on tulips were widely bought in order to speculate on the soaring price of tulips.
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A market was then formed towards the end of the seventeenth century in London to trade in both call and put options. That was the first instance of trading both call and put options over an exchange.
ByRussel Sage introduced Over The Counter call and put options trading to the United States which was unstandardized and illiquid. Byput options were also introduced by the CBOE and since then, options trading took on the standardized exchange traded form that we are familiar with today.
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C The very first account of options was mentioned in Aristotle's book named "Politics", published in B. Yes, Before Christ!
option strategy became That's how far back human has used the concept of buying the rights to an asset without necessarily buying the asset itself, yes, an option or what we call in finance option strategy became a "Contingent Claim". Aristotle mentioned a man named Thales of Miletus who was a great astronomer, philosopher and mathematician.
Yes, Thales was one of the seven sages of ancient greece. Trend line how to do observing the stars and weather patterns, Thales predicted a huge olive harvest in the year that follows.
Understanding that olive presses would be in high demand following such a huge harvest, Thales could turn a huge profit if he owned all of the olive presses in the region, however, he didn't have that kind of money.
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Instead, Thales thought of a brilliant idea. As Thales expected, harvest was plentiful and option strategy became sold the rights to using all of these olive presses to people who needed them, turning a big fortune.
By controlling the rights to using the olive presses through an option even though he didn't name it "option" thenThales had the right to either use these olive presses himself when harvest time came exercising the options or to sell that right to people who would pay more for those rights selling the options for a profit.
The owners of the olive presseswho obviously didn't know how the harvest is going to turn out, secured profits through the sale of the "options" to Thales no matter how the harvest turned out. This contingency claim procedure defined how options work since that day and started the long history of options trading. Option strategy became fact, the olive press owners could be deemed to be the first ever human to have used a Covered Call options trading strategy! Yes, they owned the underlying asset olive presses in this case and sold rights to using them, keeping the " premium " on the sale no matter if the presses were eventually used or not!
History of Options Trading - Tulip Mania of The tulip option strategy became of in Europe is a classic economics and finance case study where herding behavior created a surge in demand which cause the price of option strategy became single commodity, tulips in this case, to soar to ridiculous prices.
This surge in price begun the first mass trading of options in recorded history.
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Tulips imported into Europe from Turkey and Holland quickly became a symbol of affluence and beauty in the seventeenth century. Tulips then were like designer cloths and watches which people from all levels of society wanted and the hype created caused tulip prices to skyrocket on the overwhelming demand. Due to the overwhelming demand for tulip, demand for tulip bulbs by growers and dealers also increased exponentially, pushing up the price at the producer level.
As the price of tulip bulbs increased almost on a daily basis, Dutch dealers, which was the biggest producer of tulip bulbs then, started tulip bulb options trading so that producers could own the rights to owning tulip bulbs in advanced and secure a definite buying price.
Yes, Call Options on tulip bulbs.
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What started as a means of hedging producer risk became a speculative frenzy as the price of tulip bulbs skyrocketed between the end of to February of Mass speculative interest in tulip bulbs options led to people from all level of society buying those options with everything they have, including selling or mortgaging their homes. All price bubbles burst.
On February ofthe option strategy became of tulip bulbs had gotten so high that it can no longer find sensible buyers to sell to. The buying frenzy immediately turned into a selling frenzy. Price of tulip bulbs collasped quicker than it rose and almost all options speculators were wiped out as their options fell out of the money and worthless.
The Dutch economy collasped and people lost their money and homes. Since a lot of options speculators were wiped out during the tulip mania, options trading also gained a notorious option strategy became for being a dangerous speculative instrument.
This is also why you should only trade options in a speculative position with money that you can afford to lose.
Maximizing leverage by dumping all your money into a single unhedged call or put options position for the purpose of directional speculation is repeating the history of the tulip mania. History of Options Trading - Options Trading in London in to Even though options trading gained a bad name, it doesn't stop financiers and investors from acknowledging its speculative power through its inherent leverage.
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Put and Option strategy became options were given an organised market towards the end of the seventeenth century in London. With the lessons learnt from the tulip mania still fresh in mind, trading volume was low as investors still feared the "speculative nature" of options. In fact, there was growing opposition to options trading in London which ultimately led to options trading being declared illegal in Sinceoptions trading in London was illegal for more than years until it was declared legal again in Yes, a ban of more than a century due to ignorance and fear.
That didn't stop him from making millions within just a few short years, controlling New York City Elevated transit lines through controlling a large amount of the company's shares through owning options of the company's shares.
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However, Russell Sage lost a fortune in the market crash of which made him give up options trading entirely. Even though Russell Sage gave up options trading, the OTC options trading market that he started continued to function without his participation.
Options continue to trade in an unregulated manner all the way till the establishment of the SEC after the great depression.
History of Options Trading - A Timeline
The formation of both institutions truly is a milestone in the history of options trading and have defined how options are traded over a public exchange the way it is traded today. The most important function of the CBOE is in the standardisation of stock options to option strategy became option strategy became traded.
Yes, prior to the formation of the CBOE, options were traded over the counter and are highly unstandardized, leading to an illiquid and inefficient options trading market. In order for options to be openly traded, all options contracts need to be standardized with the same terms across the board.
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That was what the CBOE did for call options back in For the first time, the general public is able to trade call options under the performance guarantee of the OCC and the liquidity provided by the market maker system.
Option strategy became structure continues to be used today. Byput options were introduced by the CBOE, creating the options trading market that we know today.
Since then, more and more exchanges were set up for options trading and better computational models for the pricing of options were introduced.