History
Introduction
Shares, bonds and other securities are traded on the stock exchange. Anyone can buy or sell such securities.
Options are a kind of equity instruments: they are rights to buy or sell certain underlying assets. The underlying asset can be, for instance, a share, but also a basket of shares. With options, therefore, one does not trade in shares themselves, but in the rights to the securities to buy or sell them.
Source: L. Rijnhout & M. Van Oostvoorn, Beleggen met opties, 2011.
The first option trader in history
History tells us that the pre-Socratic Greek philosopher Thales of Miletus (born c. 624–620 bce —died c. 548–545 bce) was the first options trader.
Thales of Miletus was a poor but intelligent man with a love for science. Thanks to his meteorological knowledge, he foresaw that there would be an abundant olive harvest. So he decided to use the little money he had to pay a deposit (option premium) to rent all the oil presses of Milet and Chios and leased them at a low price. But when the olive harvesting season came, many oil presses were sought at the same time because olives must be pressed within a few days after harvesting. If not, the olives will ferment and the quality of the olive oil deteriorates. Thales of Miletus anticipated this and rented the olive presses at the price he wanted.
History of securities trading
Trading in securities goes through a stock exchange. The Amsterdam Stock Exchange, founded in the early 17th century, was one of the oldest stock exchanges in the world. The Brussels Stock Exchange was not established until the second half of the 19th century. In 2000, the Amsterdam stock exchange merged with the Paris and Brussels stock exchanges and got a new name: Euronext.
The VOC (United East India Company) was founded in 1602. It was the Netherlands' first joint-stock company. Shareholders are the owners of the company. Anyone who wants to invest money can buy a share. Shareholders have voting rights over the company's policies and they are entitled to profits (dividends). Thanks to its structure as a joint-stock company, the VOC was able to raise a large amount of money and thus make large investments.
The Amsterdam Exchange Bank was established in 1609. It can be considered the world's first central bank. Thanks to the Amsterdam Exchange Bank and the VOC, Amsterdam became the financial and commercial centre of the world in the 17th century where securities trading took place for the first time. It’s also where the first stock market crashes would take place a bit later in time.
First crash
Surprising perhaps, but the first stock market crash was about tulips. Economists consider the Tulip Mania to be the first comprehensively described bubble (speculative wave) in world history.
Modern history of options
Besides investing in stocks and bonds (among others), you can also invest in derivatives. Derivatives are derived from underlying assets, usually stocks or indexes.
Modern options trading dates back to land trading in the US in the 1920s. Some traders did not buy land itself, but options on land. It was agreed that the land would be bought on a certain date at an agreed price. When the demand for houses increased, the value of the pieces of land increased. As the value of the land increased, so did the value of the options. This allowed traders to sell their options at a big profit.
First options exchange
Later, people in the US got the idea that options on shares could also be an interesting investment opportunity. In 1973, the Chicago Board Options Exchange was opened: the world's first options exchange.