HISTORY OF OPTIONS
To help explain option trading
further, the following is a brief outline of the history of options.
Contracts similar to options have
been used since ancient times, approximately 332B.C. where they were used to
secure the rights to olive presses.
Early European Options Trading
In London, in as early as the 1690s,
puts and ‘refusals’ (calls) first became well-known trading instruments during
the reign of William and Mary.
The Origin of American Stock Options
Privileges (or stock options as we
know them) were options sold over the counter (OTC) in 19th Century America.
Both puts and calls on shares were offered by specialized dealers. American
financier, Russell Sage, created these options in 1872. They were not
standardized contracts, and had no real pricing model or terms.
The exercise price was fixed at a
rounded-off market price on the day or the week that the option was bought.
This pricing system was based on sellers simply charging a price they felt was
reasonable, and resulted in very inefficient markets. The expiry date was
generally three months after purchase.
It was not until 1973 that, with the
creation of the Chicago Board of Options Exchange (CBOE), and the invention of
the Black-Scholes Option Pricing Model, that call and put options finally
became standardized, and available to the general public.
The Options Clearing Corporation
(OCC) was also created as a guarantor for all stock options contracts. The OCC
guarantees the performance and delivery of every stock option contract.
The American Stock Exchange (AMEX), Philadelphia
Stock Exchange (PHLX), and the Pacific Exchange (PCX) all began trading stock
options by 1976. (The PCX was demutualized in 2002).