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The History of Options by Chengdan Zhou. Powerpoint Templates. Overview. Ancient History of Options Early Option Trading in Europe Early Option Trading in America Development of CBOE Summary. Definition.

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  1. The History of Options by Chengdan Zhou Powerpoint Templates

  2. Overview • Ancient History of Options • Early Option Trading in Europe • Early Option Trading in America • Development of CBOE • Summary

  3. Definition • A contract between two parties where the holder has the right, but not the obligation, to buy or sell an underlying asset at or within a specified time and for a set price. • Call option vs. Put option • American vs. European

  4. Ancient History of Options • Thales of Miletus • Aristotle (332 BC.) • Predicted olive harvest using astronomy • Bought the right to use olive presses • Exercise the option vs. sell the option • Covered Call option trading strategy Thales

  5. Option in Bible • Genesis Chapter 29 • Laban offered Jacob the option to marry Rachael • 7 years of labor • Possibility of delivery failure • Laban offered Leah • Polygamy permitted the transaction • Another 7 years

  6. Tulip Mania in Holland • Symbol of affluence and beauty in17th century • Price skyrocketed due to demand • Hedge risk of bad harvest • Wholesaler – Call option • Tulip grower – Put option • Became speculative frenzy • Price keeps rising

  7. Tulip Bubble Burst • Buy tulip bulbs with entire fortune • Bubble burst • Price fell dramatically • Speculators unable to fulfill obligation • Unregulated option market • Options trading gained bad name

  8. Early option trading in England • Introduce in the London market in the late 17th century • Did not survive for long • Low trading volume (tulip mania) • Market unregulated • Manipulation • 1733 Barnard’s Act–banned options • Repealed in 1860

  9. Early option trading in America • Russell Sage created options in the US in 1872 • Over-The-Counter trading • Unregulated until the form of SEC in 1934

  10. OTC option trading • Slow in growth • less than 300K contracts by 1968 • Cumbersome and illiquid • Trade on phone • Match sellers with buyers • No commission • Formation of Put and Call Brokers and Dealers Association • More efficient match • Lack of standardized pricing • No liquidity in market

  11. Chicago Board Options Exchange - CBOE • Founded in 1973 • Spin-off from CBOT • Major Functions • Standardization of stock options • Establish Secondary Market • Standard Price • Options Clearing Corporation (1975)

  12. Growth of CBOE • 911 contracts for 16 call options on the first day • Listed options doubled to 32 • Membership doubled to 567 • Banks and insurance companies • Daily volume exceeded 200k by 1974 • Nation’s newspaper voluntarily began to publish quotes

  13. Growth of CBOE con’t • SEC permitted 5 Put options to be listed on 1977 • Moratorium on options expansion to review the rapidly growing market • Lifted in 1980, CBOE added 25 more • Move from smoker’s lounge to a 350k sq. ft. building in 1981

  14. Growth of CBOE con’t

  15. Other Milestones • The Black -Scholes Model (1973) • Index options in 1983 • S&P 100, S&P 500 four months later • Now: 2200 companies, 22 stock indices and 140 exchange-traded funds (ETFs) • Long-term Equity Anticipation Securities (LEAPS) in 1990 • 3-year shelf life, 2500 securities • Online trading became popular in mid-90s • Instant trading

  16. Other exchanges • Starting in 1975, other players join game • American Stock Exchange (AMEX) • Philadelphia Stock Exchange (PHE) • International Security Exchange(ISE) • Boston Options Exchange (BOX) • NYSE Arca • Chicago Mercantile Exchange • CBOT

  17. Summary • Options used for investing and speculating • Regulation important • Jacob –too much in love • Tulip market – little enforcement, no decent model, wild-speculation • Europe – ineffective fines • America – closely monitored by SEC • Today, widely used, better understood and regulated by the public

  18. Q&A

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