History of Options Trading

History of Options Trading By Viktoriya Cherkassova Overview      Ancient history of options Early Options in America History of Chicago Board Option Exchange The Option Clearing Corporation Summary Definition  Options are generally defined as a contract between two parties in which one party has the right but not the obligation to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time. Ancient history of options  Romans and Phoenicians  used contracts similar to options in shipping  Thales of Miletus (624BC-547BC)  Greece mathematician and philosopher used options to secure a low price for olive presses in advance of the harvest History of options  The Tulip-Bulb Craze  1634-1637 Holland  tulip dealers used call options to secure a reasonable price to meet the demand  tulip growers used put options to ensure an adequate selling price History of options  1650 - Yodoya rice market in Osaka, Japan  Royal Exchange in London permitted forward contracting  United Kingdom in 1711-1720  The South Sea Company purchased the "rights" to all trade in the South Seas. Early Options in America  In the early 19th Century, call and put "privileges" were trade over-the-counter  wasn't much in the way of a secondary market  all option contracts had to be exercised in person  the terms were differed for each contract  In the mid 1800s, New York financier Russell Sage began creating synthetic loans using the principle of put-call parity History of Chicago Board Option Exchange  In the late 60th Joseph W. Sullivan, Vice President of Planning for the CBOT proposed:  standardizing the strike price, expiration, size, and other relevant contract terms  create a mediator to issue contracts and guarantee settlement and performance (Options Clearing Corporation ) History of Chicago Board Option Exchange  April 26, 1973 CBOE began trading on standardized, listed options.  the first day of trading:  only call option  911 contracts traded on 16 underlying stocks.  By the end of 1974, average daily volume exceeded 200,000 contracts  In 1975 the American Stock Exchange, Inc. (Amex) and the Philadelphia Stock Exchange, Inc. (PHLX) begin trading equity options. Both become OCC participant exchanges Option Clearing Corporation  founded in 1973, is the world's largest equity derivatives clearing organization  operates under the jurisdiction of both the SEC and the CFTC  clears transactions for put and call options on common stocks and other equity issues  equally owned by five participant exchanges that trade options: American Stock Exchange, Chicago Board Options Exchange, International Securities Exchange, Pacific Exchange and the Philadelphia Stock Exchange Options Trading  The Black-Scholes model  1983 the CBOE created an option on an index of stocks.  S&P 100, which remains the most actively traded exchange-listed option.  1985, The New York Stock Exchange begins listing equity options. Options on NASDAQ stocks are listed  October 1987, stock market crash Summary  http://www.cboe.com/data/AvgDailyVol.aspx