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History of Option Trading

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  • History of Option Trading

    Options trading has has a long and checkered history that started long ago in ancient civilizations. As we know today, it is the evolution of a system of trading over many centuries from unregulated chaotic that the system is now well regulated and safe today.

    The first known historical record of options trading was in ancient Greece. Aristotle has written of a form of trading performed by a man known as Thales in 332 B.C. Thales bought the option of buying olives before harvest at a fixed price within a specific period of time. The olive prices went up after harvest and Thales sold the olives purchased at a fixed price from farmers for a small fortune. There are also records of Romans and Phoenicians carrying on trade similar to options trading in shipping.

    The first known form of options trading in modern Europe was Tulip trading in Holland. Purchasers bought the options to purchase tulips before harvest in the Netherlands. Towards the end of the 17th century and options market was formed in London. The 'call' and 'put' options methods were devised at this market. While in London was popular for a while after the formation of the market a time came when the markets crashed. The options market crash resulted in widespread economic devastation. After the market crashed it was declared illegal in London.

    In 1872 Russel Sage, a financier and politician from New York introduced, 'call' and 'put' options trading in the United States. At the time options were called privileges and were sold through over the counter sales. Both 'puts' and 'calls' were sold by dealers who were specialists in selling privileges. The fixed strike was the rounded off market price of the underlying asset on the day or week that the privileges were purchased. The period was three months after purchase. Secondary markets did not allow trading of privileges. Though these trade practices had price and period specifications, the trade itself remained unregulated and chaotic until the 1970s in the United States.

    In 1973, the Chicago Board of Options Exchange was set up by the Chicago Board of Trade. Later in 1975, the Options Clearing Corporation was established. In the same year computerized price reporting was introduced by the Chicago Board of Options Exchange. 'Call' options were regulated and standardized at first. In 1977 'Put' options were also regulated and standardized. The Chicago Board of Options exchange listed for the first time standardized exchange traded stock options. In 1981 the Chicago Board of Options Exchange moved to a new custom built 350,000 square foot premises with a 45,000 options trading floor. The regulated options trading exchange inspired greater options investment and in the year 1984 the volume of trade in options exceeded 100 million contracts for the first time in the history of the exchange.

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