You’ve heard me say it before — knowing your history is critical in trading and the market.
If you don’t know your history, you can doom yourself to repeating obvious mistakes from the past.
In a recent issue, we covered some of the greatest options trades in history.
But today, I’d like to rewind even further to the early days of options trading history.
You won’t believe how long options contracts have been around — or why they were created. It’s pretty incredible.
So, without further ado, let’s dive into the complete history of options trading in a two-part series, starting at the very beginning…
Sixth Century B.C.: The First Options Trade in History
To uncover where options trading began, we have to go back to the sixth century B.C., on the island of Greece…
During a particularly fruitful olive harvest, a philosopher named Thales made a deal that unintentionally invented the concept of options contracts.
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Thales predicted that the season’s olive harvest would be better than expected. So months ahead of harvest time, he approached the owner of a local olive press with a proposition…
As nobody knew for certain whether the harvest would be good or bad, Thales asked to reserve the press for a relatively low price. He also agreed to pay a premium for this right, so the olive press owner gladly accepted.
Thales’ trade thesis was based on simple supply-and-demand principles. He figured if he was right (and the harvest was above average) he could rent the presses out to a higher bidder during harvest months.
Sure enough, that’s exactly what happened. Thales printed money during that season’s olive harvest — and inadvertently invented the derivatives market in the process.
1630: Tulip Mania Takes Holland by Storm
The next notable event in options trading history occurred in 17th century Holland — tulip mania.
For some reason, tulips were all the rage in 1600s Holland. The Dutch aristocracy viewed the flowers as status symbols, and the trend spread throughout Europe like a plague.
By 1630, tulip mania was nearing a blow-off top. Rapidly increasing demand ate up the global supply of tulip bulbs, driving prices to astronomical levels.
Amid all of this insane speculation, early versions of market makers saw a goldmine of an opportunity.
They set up barbaric options exchanges with zero regulation, selling options on tulips to anyone who wanted to buy them.
As you can probably guess, tulip mania didn’t end well. Many lost their life savings gambling on flowers that became worthless in a matter of days.
But those who sold the calls and puts? They made a fortune.
There’s a lesson we can take away from this tale — the market makers always make money.
1872: Russell Sage Invents Puts and Calls
In 1872, a savvy businessman named Russell Sage had a clairvoyant vision for speeding up the evolution of options trading.
Sage opened up an options exchange, and for the first time, he gave the contracts names — puts and calls.
Additionally, he developed the first system for a pricing relationship between the options contract and the underlying security.
Then, through a series of timely options trades, Sage and his partner Jay Gould leveraged their modest savings into a veritable fortune. Their newfound wealth put them in control of the entire New York City elevated lines railway system.
But as we all know, the fun never lasts forever…
In the infamous stock market panic of 1884, Sage lost $7 million of his fortune on stock options.
After that, he never traded options again.
1920: Jesse Livermore’s ‘Bucket Shops’
By 1920, the options market had come a long way since Thales bet on olive oil.
Exchanges were active all over the world. The U.S. was closing in on the decade that would forever be known as the Roaring 20s.
Meanwhile, a guy named Jesse Livermore was showing the world how options could be used to maximize leverage in a trade.
Livermore was the original maverick options trader. First, he used put options and common shares to short Union Pacific Railway just before the 1906 San Francisco earthquake. Decent trade.
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To Be Continued…
Tomorrow, we’ll fast-forward to the modern era.
You’ll learn about the key contemporary events that led to the massive global derivatives exchange we all trade today.
Until then, my favorite Tim Sykes lesson continues to be as valuable as ever — know your history.