When Did Options Trading Start – Learn its Start Date

Journey through financial history as we explore the origins of options trading. From ancient Greece to modern exchanges, this blog unveils the fascinating story of when options trading first took root.

Options trading traces back to ancient Greece. It’s first mention can be found in Aristotle’s “Politics” around 332 B.C. Thales of Miletus pioneered the concept by using call options to speculate on a bountiful olive harvest.

Key Takeaways

  • Options trading has a history that predates its official start date in 1973.
  • The Dojima Rice Exchange in Japan, established by samurai in the late 17th century, was the precursor to modern futures contracts.
  • The Dojima Rice Exchange allowed buyers and sellers to barter for rice, setting the foundation for today’s futures markets.
  • Futures contracts enable the trading of commodities at a specific price over a specific time frame.
  • The Dojima Rice Exchange paved the way for the evolution and development of options trading into a global financial market.

When Did Options Trading Start

Options trading, including stock options and futures contracts, has a long history. One that predates its official trading start date in 1973. The origins can be traced back to the Japanese samurai in the late 17th century. The samurai created the first fully functional commodities exchange known as the “Dojima Rice Exchange.” The Japanese samurai wanted to control the rice markets and established a formal market where buyers and sellers could barter for rice. This was the beginning of futures contracts, which allow the holder to buy or sell a particular quantity of a commodity for a certain price over a specific time frame. The Dojima Rice Exchange laid the foundation for today’s sophisticated futures markets, which are executed electronically and have global reach.

The Roots: Exploring Ancient Origins and Early Innovations in Options Trading

Options trading, an intricate financial practice deeply embedded in history, traces its origins back to ancient Greece. This article delves into the evolution of options, exploring its ancient roots and the subsequent developments that paved the way for modern trading practices

Ancient Origins in Greece

In Aristotle’s “Politics,” written in 332 B.C., the earliest documented mention of options trading is found. The narrative revolves around Thales of Miletus, a prominent astronomer, philosopher, and mathematician. Thales, one of the seven sages of ancient Greece, astutely observed the stars and weather patterns, allowing him to predict a prosperous olive harvest. Faced with the opportunity to profit from the ensuing demand for olive presses, Thales employed a groundbreaking strategy.

Instead of purchasing the presses outright, Thales used a small deposit to secure the exclusive rights to their use. This ingenious move, akin to a call option, enabled him to either operate the presses during the harvest or sell the rights for a handsome profit. Thales, in essence, became the pioneer of a covered call options trading strategy, setting the stage for the millennia-long history of options trading.

Bucket Shops and Jesse Livermore

Fast forward to the 1920s in America, where options trading took a less formal but equally impactful turn in establishments known as “bucket shops.” At the forefront of this era was Jesse Livermore, a legendary figure in trading history. Livermore, known for speculating on stock price movements, played a pivotal role in shaping the early options market.

Livermore’s approach involved acting as a stock option bookie. Essentially, he took the opposite side of trades, speculating against individuals who predicted stock price movements. This unconventional method laid the groundwork for options trading, demonstrating that one could profit without actually owning the underlying securities. While Livermore’s strategy was not foolproof, it marked a significant chapter in the evolution of options trading, paving the way for more structured developments in subsequent years.

This amalgamation of ancient Greek ingenuity and 1920s American innovation represents the nascent stages of options trading, setting the stage for the more formalised approaches that would emerge in the following decades.

The Turn of Historical Events: Tulip Bulb Mania and London’s Options Trading Ban

In the annals of financial history, two distinct yet interconnected events stand out—the Tulip Bulb Mania in 17th Century Holland and the subsequent ban on options trading in London from 1733 to 1860. These episodes, though separated by centuries, share a common thread in shaping the narrative of options trading.

Tulip Bulb Mania in 17th Century Holland

During the 17th century, the Dutch witnessed an unprecedented craze known as Tulip Bulb Mania. Tulips, once considered exotic flowers, became symbols of status and wealth among the Dutch aristocracy. The demand for tulip bulbs soared to unparalleled heights, triggering a speculative frenzy that would eventually lead to an economic downturn.

Harvesters Turned Traders

Tulip growers and wholesalers turned to options contracts as risk management tools in this volatile market. Growers purchased puts to protect their profits in case tulip bulb prices declined, while wholesalers acquired calls to hedge against the risk of escalating prices. However, the options market of that time lacked the sophistication seen today, operating in an informal and unregulated manner.

Tulip Mania Fallout: Options Trading’s Impact on Dutch Economy

As the tulip bulb prices continued to surge, a secondary market for options contracts emerged, allowing speculators to participate. Families and individuals invested heavily, leveraging their assets to engage in options trading. When the tulip bubble inevitably burst, those who had risked everything faced severe financial consequences, plunging the Dutch economy into a recession.

The unregulated nature of the options market during Tulip Bulb Mania contributed to a tarnished reputation, as investors couldn’t be compelled to fulfill their obligations under the contracts. This cautionary tale echoes through history, underscoring the importance of regulation in options trading.

London’s Ban on Options Trading (1733-1860)

In the aftermath of Tulip Bulb Mania, options trading faced significant opposition in London. Fears surrounding the speculative nature of options led to a ban in 1733, an era of financial conservatism. For over a century, options trading remained illegal in London, impeding its growth and development.

London’s Options Renaissance: Breaking the Centennial Ban

The ban persisted until 1860 when, finally, a shift in perception occurred. Overcoming ignorance and fear, London lifted the century-long ban on options trading. This milestone marked the resurgence of options in the financial landscape, emphasising the need for a balance between prudence and opportunity.

These historical events, though challenging, laid the groundwork for understanding the risks and rewards associated with options trading. The tulip bulb speculation and London’s ban exemplify the cyclical nature of financial markets and the resilience of options trading in overcoming adversity.

Pioneers and Paradigms: Russell Sage’s Over-the-Counter Options and the Birth of Formal Exchanges

In the rich tapestry of options trading history, two significant chapters unfold—the era of Russell Sage and Over-the-Counter (OTC) options, followed by the pivotal emergence of formal exchanges. These milestones, separated by time yet intricately connected, mark crucial developments in the evolution of options trading.

Russell Sage and Over-the-Counter Options

In the late 19th century, American financier Russell Sage played a pioneering role in shaping options trading with the introduction of Over-the-Counter (OTC) options. While there was no formal exchange market at this point, Sage’s innovative approach signified a breakthrough in the evolution of options.

Sage not only created calls and puts options for trading but also established a pricing relationship between option prices, the underlying security, and interest rates. His astute use of put-call parity allowed him to devise synthetic loans. By buying stock and a related put option from a customer, Sage effectively provided a loan with an interest rate determined by the prices of the contracts and relevant strike prices.

While Sage’s venture eventually faced significant losses, his contributions were instrumental in advancing the complexities of options trading. His efforts paved the way for the formalisation of trading practices and pricing relationships within the options market.

The Emergence of Formal Exchanges

The late 1800s witnessed a gradual transition towards more organised options trading, as brokers and dealers began advertising to attract buyers and sellers of options contracts. This process, albeit somewhat laborious, laid the groundwork for establishing networks that could facilitate more efficient matching of buyers and sellers.

Despite this progress, the absence of standardised pricing and regulatory oversight meant that the options market still faced challenges. The Put and Call Brokers and Dealers Association aimed to address these issues, yet a lack of standardisation and liquidity persisted.

The turning point in the history of options trading occurred in 1973 with the establishment of the Chicago Board of Exchange (CBOE) and the Options Clearing Corporation (OCC). These institutions brought about a paradigm shift by standardising options contracts for public trading. The CBOE’s role in creating a standardised platform, coupled with the OCC’s performance guarantee, ushered in a new era of credibility for options trading.

By 1977, the CBOE introduced put options, solidifying the framework of the modern options trading market. This momentous period marked the culmination of efforts to move options trading from informal, unregulated markets to formalised exchanges with standardised contracts, providing increased liquidity and credibility.

The transition from Russell Sage’s Over-the-Counter options to the establishment of formal exchanges signifies a transformative journey in options trading, reflecting the industry’s resilience and adaptability. Today, these foundations continue to underpin the structured and regulated landscape of options trading.

CBOE’s Role in Standardisation

The CBOE’s formation in 1973 marked a milestone in standardising stock options for public trading. By 1977, put options were introduced, solidifying the structure of the modern options trading market.

Options trading has come a long way, from its ancient roots in Greece to the standardised, regulated markets of today. The journey reflects the resilience and adaptability of this financial practice, making it a crucial component of modern investment strategies.

The Evolution of Stock Options

While futures contracts emerged from the Japanese Dojima Rice Exchange, stock options have their own unique history. The origins of options trading can be traced back to ancient Greece, where the first options were used for speculation on the olive harvest.

However, the modern form of stock options, as we know them today, originated in the bucket shops of 1920s America. These bucket shops were illegal establishments where individuals could bet on the future prices of stocks without owning the securities. One of the most famous bucket shop operators was Jesse Livermore, who later became recognised as one of the greatest traders in history.

“The illegal activities of bucket shops led to increased scrutiny and regulation, eventually culminating in the establishment of the Chicago Board Options Exchange (CBOE) in 1973. This marked a significant turning point, as standardised exchange-traded call options were introduced, shaping the modern options market we are familiar with today,”

The introduction of put options followed in 1977, further expanding the options market. Since then, options trading has continued to evolve, with new strategies and trading techniques emerging to meet the demands of investors.

Key Points:

  • Ancient Greeks used the first options for speculation on the olive harvest.
  • Stock options, as we know them today, originated in the illegal bucket shops of 1920s America.
  • The establishment of the Chicago Board Options Exchange (CBOE) in 1973 marked a significant milestone for options trading.
  • The introduction of put options in 1977 further shaped the modern options market.
  • Options trading continues to evolve, offering new opportunities for investors and traders.

The Ancient Origins of Options Trading

The concept of options trading has its roots in ancient times. The first recorded account of options is mentioned in Aristotle’s book “Politics,” published in 332 B.C. The book refers to a man named Thales of Miletus, a great astronomer, philosopher, and mathematician. Thales predicted a bountiful olive harvest and realised that controlling the use of olive presses could lead to significant profits. However, he didn’t have enough money to own all the presses, so he used a small deposit to secure the rights to use all the presses, essentially creating a call option. When the olive harvest exceeded expectations, Thales sold the rights to use the presses at a higher price, earning a substantial fortune. This ancient example demonstrates the fundamental concept of options trading that has evolved and developed over time.

Conclusion

Options trading has a fascinating and extensive history that spans centuries. It originated from the Japanese samurai-controlled rice market in the 17th century, where the first commodities exchange, the Dojima Rice Exchange, was established. This laid the foundation for futures contracts, enabling buyers and sellers to trade commodities at predetermined prices and dates.

Fast forward to the 1920s in America, and we see the emergence of stock options in illegal establishments known as bucket shops. Despite the controversy surrounding these establishments, they played a significant role in shaping the modern options market. They introduced the concept of betting on the future prices of stocks without the need to own the underlying securities.

The pivotal moment in options trading history came in 1973 with the establishment of the Chicago Board Options Exchange (CBOE). This marked the introduction of standardised exchange-traded options, which brought transparency and regulation to the market. The options market continued to evolve, accommodating investors’ desire for speculation, hedging, and profit generation. As technology advances, options trading continues to thrive, offering opportunities to investors and traders across global markets.

FAQ

What is the history of options trading?

Options trading has a long history that predates its official trading start date in 1973. The origins can be traced back to the Japanese samurai in the late 17th century, who created the first fully functional commodities exchange known as the “Dojima Rice Exchange.” The concept of stock options as we know them today originated in the bucket shops of 1920s America.

When did options trading start officially?

Options trading started officially in 1973 with the establishment of the Chicago Board Options Exchange (CBOE), where standardised exchange-traded call options were introduced. Put options were introduced in 1977, shaping the modern options market that we are familiar with today.

What was the first recorded account of options trading?

The first recorded account of options trading can be found in Aristotle’s book “Politics,” published in 332 B.C. It refers to a man named Thales of Miletus, who created a call option to control the use of olive presses and profited from a successful olive harvest.

How has options trading evolved over time?

Options trading has evolved from the samurai-controlled rice market in 17th century Japan to the establishment of formal commodities exchanges and the introduction of standardised exchange-traded options in the 20th century. With advancements in technology, options trading has become a global financial market with various opportunities for investors and traders.

What is the significance of the Chicago Board Options Exchange (CBOE)?

The Chicago Board Options Exchange (CBOE), established in 1973, played a significant role in the development of options trading. It introduced standardised exchange-traded call options, bringing more legitimacy and regulation to the options market. The CBOE paved the way for the modern options market structure we know today.

What are the main reasons for engaging in options trading?

Options trading allows investors and traders to speculate on price movements, hedge against potential losses, generate income through premiums, and diversify their portfolios. Options can provide leverage and flexibility in various financial markets, including stocks, commodities, and currencies.

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