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Stock Option History

Nowadays lots of investors who trade on stocks every day, have absolutely no idea about the stock option history. Where did it all start? How did it develop? Who was the founder? etc. If you are one of these people, then this short history of stock options is for you read.

Tulip market

Nowadays trading options is a very smooth and flexible process yet it wasn’t like that all the time. Let’s dive into history – 17th century, Holland. Tulips were and are a symbol of Dutch aristocracy. At some point they became so popular that the price for them was rising and rising with each and every day. Yet there was always a possibility of bad harvest and therefore wholesalers started buying Call Options whereas growers protected (sell) the flowers with the Put option. Trading on a tulip market was becoming more and more popular as prices kept rising year after year. As a result, some families were spending all their money just to speculate on a tulip bulb market. The end wasn’t as bright, as you might have imagined, as in 1638 the economy started fading which brought bad new for the tulip market too.

U.S Options Market

America, New York, first stock exchange, 1791. No longer after that, the best investors started speculatin on the stock options. There wasn’t such a variety of options as we have now, therefore brokers were trading over the counter and broker-dealers were trying to connect sellers with buyers.

About a decade after, trading became so popular that multiple ads started appearing in newspapers hoping to attract even more traders.

Options trading started developing rapidly thanks to Brokers as well as Dealers Association. Both parties were trying to match option-buyers and sellers. Despite all this, there were problems connected with absence of standardized prices. Each contract between the seller and buyer had to have its price.

After some time many regulating authorities were controlling the financial marketplace such as, for example, SEC. Apart from managing the options, SEC has also granted a license to CBOT.  Immediately after that Chicago Board of Trade began searching for different ways of business expansion. As a result, they created an open-outcry exchange and centralized clearing.

Black-Schles Formula

Later in 1973 an article was written by Fischer Black and Myrom Scholes. There was a formula that got a name Black-Scholes based on physics and finances with the help of which a price for options could be calculated.

Having done that, they won a Nobel Prize in Economics for this amazing contribution that keeps working even nowadays.