Looking at the History of Options Trading

The basic mechanics of the stock market are rather simple. Owning a stock means owning a small portion of a company. When the company succeeds, the stock succeeds. When the company fails, so does the stock. Due to its simplicity, stocks have always been more popular to traditional investors. Stocks are easy. Therefore, that must make them the smarter investment choice compared to other securities, like options, right?

That’s not necessarily the case. Throughout history, the options market has proven a consistently reliable way to turn a little money into financial stability. Indeed, trading in options, or futures, is one of the foundations of industry. The history of options trading stretches back hundreds of years, long before companies began dealing in stocks. Over the course of that thousand-plus-year history, studying and speculating on options has changed the fortunes of countless individuals. All it takes is some ingenuity and information.

When Did Options Trading Start?

The story of stock trading begins in the early 1600s, when Dutch sailors, eager to get to the Americas, pooled their resources into ventures wherein each was an equal shareholder. This allowed the enterprising seamen to raise the money they needed to buy supplies and merchandise to sell in their destinations abroad without sacrificing their personal profits. That was nearly 500 years ago. It’s a pretty impressive lifespan, to be sure.

But, stocks have nothing on the storied past of options trading. To answer the question of when did options trading start, one has to go all the way back to ancient Greece and a man called Thales.

In the year 350 BCE, writer and philosopher Aristotle wrote a book called Politics. At the time it was all the rage (mostly because there were only like three other books, so competition wasn’t exactly fierce). Today, Politics has stood the test of time. The missive is seen as one of the first and most extensive explorations of how to build and conduct an “ideal” society. In the midst of this dense work, Aristotle points to one of the first moments in the history of options trading, the story of his philosopher buddy, a man named Thales.

In Politics, Book 1, Part 11, Aristotle explains that Thales was constantly picked on because of his poverty. Greeks at the time assumed that if Thales was poor then he couldn’t be that smart. And, if he wasn’t that smart, then there was no use listening to the philosopher when he started talking about the nature of the Universe (or whatever philosophers yammered on about at that time). It’s an oddly circular mindset that hasn’t changed much in the two thousand years since Aristotle first told this story.

At any rate, fed up with all the insults about being broke, and determined to prove his intelligence to his detractors, Thales set about to make some money, and inadvertently kickstarted the history of options trading. The philosopher applied his extensive knowledge of meteorology and discovered that the incoming olive harvest would be something for the record books. Thales also discovered that he’d had his epiphany months in advance of the outcome, even prior to the people tending the olive fields on a daily basis.

In this discovery, Thales knew he’d found his money-making strategy. He immediately pooled what few resources he could muster and set about purchasing all of the rights to the olive presses in the area. Because he acted on his information months in advance, he was able to purchase or reserve nearly all of the rights to the region’s presses for a relatively tiny sum.

When the olive harvest rolled in, it indeed proved to be exceptional. Suddenly, Thales proudly owned the rights to the one machine that could turn those olives into highly-sought after olive oil. He was the one setting the price of renting presses and olive producers were forced to pay what he demanded. The result was a small fortune and an early exercise in the history of options trading.

In the Middle Ages, options trading continued in medieval markets. Traders would contract a local farmer’s goods early in the year, paying a nominal fee for the right to purchase the farmer’s crops at harvest. When the crops were delivered, the trader exercised the right to purchase the final product or not, depending on their quality, the amount, and a variety of other factors.

Risk Management and Tulip Bulb Mania

The history of options trading is filled with highs and lows. Countless people have made and lost fortunes in equal measure from the beginning of options trading until today. Finding yourself on the winning side of that equation means staying wise, protecting your money, and being wary of the ever-looming bubble burst.

During the early 17th Century, the Dutch were doing quite well for themselves. The Dutch East India Company was the gateway to exotic lands and goods. Not only did the merchant empire make good money transporting products from country to country, they also possessed some of the world’s most coveted homegrown merchandise. One of the most popular Dutch exports (and certainly one of the most popular domestic goods) was the tulip.

If you’re still curious about the answer to that question — When did options trading start? — the answer is: right around here. See, tulips were so rare in the 16th and 17th century that the Netherlands could count on selling thousands of tulip bulbs around the world every year. This level of consistency gave rise to a market that focused not on buying and selling tulips, but on the speculation of the futures of the tulip harvests and sales.

Sometimes florists sold puts to have some insurance against potential losses at the end of the season. Sometimes merchants bought calls to double down on their potential profits. Mostly, though, investors sat around in informal “colleges” and exchanged money on the potential outcome of the tulip harvest. No goods exchanged hands, just the promise of payouts when the time came due.

Then, something happened that influenced the history of options trading forever. People around the world went tulip crazy. The price of tulips began to rise to astronomical heights. Tulips were more popular than pogs. In the 1630s, people were spending extravagant sums of money just to procure rare tulip breeds. The type and number of tulips someone owned became a status symbol among the elite.

One story tells of Adriaen Pauw, a Dutch leader who set up a complicated series of mirrors in his garden to make his tiny tulip collection appear as a multitude. Of course, that’s a secret Pauw would have preferred left buried. While the landowner would host lavish parties, guests were discouraged from examining the tulip bed too closely.

By 1636, the tulip speculation market had become a beast unto itself. One source claims that in early 1637, someone paid 5,200 guilders for a single bulb. That’s three times the salary of a carpenter in the 1600s. It’s also about three times more than would pay a few years later for Dutch artist Rembrandt’s “The Night Watch” (a painting now valued at more than $500 million).

It doesn’t take an active imagination to figure out that such inflated prices can’t sustain themselves. Just a few months after that buyer paid a premium for a flower, the tulip market crashed, wiping out any profits made by investing in tulip speculation.

Today, Tulip Bulb Mania is considered one of the first options bubbles in the history of options trading. It also serves as a prime example of the ways that poor risk management is an ever-present danger in the world of investment.

Say Hello to the CBOE

Interest in trading futures continued to grow over the next several hundred years. Speculating on a wide variety of commodities became the norm. Unfortunately, the regulation behind these trades was often lax. Until the mid-1900s, trading in futures was something akin to staking a financial claim in the Wild West. When you set out to speculate, you couldn’t be totally assured that you’d get your money when the time came.

In 1973, however, an organization was established that would forever alter the history of options trading. When it was founded, the Chicago Board Options Exchange (CBOE) served as the first modern-day marketplace for trading options. The CBOE began in a limited form. On that first day of trading, only 16 securities were listed and only call options were available for trading. Put options wouldn’t be allowed until 1977, the same year the SEC would prohibit the addition of any more listings to the CBOE until it could monitor the expansion of the options industry.

When did options trading start? For all intents and purposes, the answer is: this precise moment, in the days when Wall Street first noticed the possibility in trading futures.

In those early years, the undeniable growth was closely measured and monitored. In 1974, the CBOE opened a “deck floor” overlooking the main trading space of the Chicago Board of Trade. The following year, the CBOE embraced technology with the advent of computerized price reporting. Those initial advancements were just the beginning. They would set a pattern for innovation that would see the trading of options grow to levels previously unimagined.

Clearing the Trades

The modern history of options trading centers around the Chicago Board Options Exchange, just like the momentous events in the trading of stocks tends (or tended) to take place on the floor of the New York Stock Exchange. However, none of the trades made through the CBOE would be possible without the help of the Options Clearing Corporation (OCC).

The OCC was founded alongside the CBOE. In fact, at its inception the OCC was known as the CBOE Clearing Corp. The name was changed two years later, in 1975. In the organization’s own words, the goal of the OCC is to “[promote] stability and financial integrity in the marketplaces that it serves by focusing on sound risk management principles.”

Essentially, that means that the OCC is the entity responsible for ensuring that every options trade is backed financially. In the tumultuous history of options trading, the existence of the OCC is exceptional. This move ensures that when people interact with the options marketplace, they can rest easy knowing that they’ll get their payout when the time comes. With the backing of the OCC, the CBOE can expand its reach every year as the exchange adds new products to trade and entices new investors to take advantage of the money-making opportunities available.

How Will Options Investing Change in the Future?

Since the CBOE was founded, the speculation and trading of options has only grown more and more popular and accessible. In the 1970s and 1980s, options trading was reserved for a particularly wealthy or tenacious breed of investor. However, with the democratization of Wall Street, investors at all financial levels are jumping in to accumulate wealth for themselves.

In years past, options investors faced several gates that have since become easy enough to walk through provided you have the right knowledge base. Then came the Internet. In the history of options trading, it’s impossible to understate the critical importance of the Internet.

Before the advent of online trading, potential investors needed to make an actual phone call to a broker, who, in turn, needed to place an order with a third party. Even more aggravating, most brokers were incentivized to push their clients toward specific stocks. This equated to more time wasted, because investors were forced to sit through a hard sell from someone trying to push their own financial agenda. In one fell swoop, the internet enabled average investors to leap over two pressing hurdles with online brokerages that let them take direct control of their financial future.

That’s a profound achievement for the everyday investor. However, the freedom offered by the Internet brings with it an issue that will color the face of options investment into the future. It’s the Information Age, and that means we have access to more facts than ever before in the history of options investment.

In the past, the information available to options investors was restricted to previous earnings reports, company history, and not much more. As a result, financial literacy among investors was extremely low. Thanks to the Internet, the information needed to make educated investment decisions is more accessible than ever before.

Thanks to rapid technological advancement, the future of options investors is bright. All you need is the education and an advisor to block out the superfluous information and shine a light on what’s worthwhile.

The ROI Perspective

The history of options trading is a story of democratization, of providing increased access and improved information to more potential investors. It’s a story about looking toward the future. For everyday people wanting to improve their financial situation, that promising future begins now.

We've looked at the history of options. Now it's time to set our sights on the opportunities to come. With the deluge of possibilities on the horizon, there is also the increased chance for risk and, ultimately, loss. What retail investors require is the specific knowledge needed to reduce their financial risk while still investing capital to accumulate wealth.

That financial education begins by signing up for 14-Day Option Investor course. We’re committed to teaching everyone, from retirees to recent graduates, concrete strategies for growing your IRA and generating income week over week, not year over year.

Throughout this piece, we’ve been asking, “When did options trading start?” The real question an investor should ask themselves is: When can my options trading history begin?

Throughout the history of options trading, the industry has been marked by peerless innovation, expansion, and growth. That promise has never been easier to achieve than it is at this moment. Those investors who come to the table equipped with the right strategies in place can start generating real returns on their market investment after a few easy-to-understand lessons.

The opportunity awaits. Let ROI provide the investment education you need to turn that opportunity into success.