Options A Brief History

Options may be the most lucrative type of investment you’ll ever find. Just a small option investment can turn into massive gains. Why? Because each option contract controls the profit potential of an investment many times the size of the actual amount you have at risk.

In my options trading service, Options Hotline, I’ve been able to show readers various triple and quadruple-digit returns. But just as important as understanding how lucrative options can be is how they came about in the first place…

Options have been around since ancient times. Merchants would pay a small amount of capital on anticipated crops or ocean-bound cargo. When the crop was harvested or the shipment arrived, the merchant had the first opportunity to buy the goods. Aristotle tells of a merchant in ancient Greece who anticipated a good olive harvest and bought options on the use of olive-presses. When the harvest came in better than expected, he took control of the olive-presses and made a fortune.

As investing evolved, so did options trading. Futures trading led to futures options. And as companies began to issue stocks, it was only natural that options would evolve to cover them also.

Formal options trading didn’t come to the United States until 1900. Before this, U.S. option trades were made privately, but the Association made it much easier for common investors to get into the market. Unfortunately, there were some problems with the system that allowed unscrupulous brokers to take advantage of those common investors.

In fact, use of options and related instruments got out of hand in the 1920s, exacerbating some people’s losses when the market crashed. In the 1930s Congress stepped in to try and regulate the options market.

In the 1950s and 1960s, the put and call business grew.  My father, Paul Sarnoff, was one of the first people to recognize, utilize, and teach others about the power options provided for earning exciting profits with a limited risk.  During that time, the burgeoning industry was self regulated by the Put & Call Brokers & Dealers Association.

Options became mainstream again in 1973 when the Chicago Board of Options Exchange opened as the first American options exchange, with member marketmakers ready to serve investors with a two-way option market. Risk-takers who wanted to buy or sell options could now be rapidly accommodated.

The change from over-the-counter options was astounding. Contract terms were standardized, making them more accessible to the average investor, and their popularity skyrocketed. In fact, they became so popular that the Securities and Exchange Commission halted expansion of the industry in 1977 and spent years reviewing it. But finding nothing wrong, more exchanges were opened and more investments were optioned—including futures on the commodity exchanges. Options had come full circle.

Now you can buy options on the American Stock Exchange, the New York Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange. For commodities you can trade on the New York Mercantile Exchange or the Coffee, Sugar, Cocoa Exchange. You can also find index options on the Chicago Board Options Exchange and the Chicago Board of Trade.

The point is, the options world is very big. But it is also regulated to keep everyone honest. Options on stocks and other items classified as securities are the bailiwick of the SEC. And options on futures contracts on U.S. commodity exchanges are under the aegis of the Commodities Futures Trading Commission. The close monitoring helps limit your risks, at the very least giving some fraud protection and recourse. That doesn’t mean you don’t have to be careful when trading, but it does mean that trading options is as safe as trading stocks, bonds or futures.

The most important thing to see is that even though there are so many options to choose from, they all share the same basic fundamentals. Once you understand how options in one investment work, you can apply those principles to investment options in completely unrelated fields. This not only gives you diversity, it offers you unlimited opportunity.

Sincerely,

Steve Sarnoff,
Editor, Options Hotline