When Were Options Invented? A Full History

Options are financial contracts giving a buyer the right, but not the obligation, to buy or sell an underlying asset at a set price within a specific timeframe. While seemingly modern, the concept has ancient roots, evolving from simple agreements to complex market tools.

Ancient Origins

Agreements resembling options contracts can be traced to ancient civilizations. Around 600 BC, the Greek philosopher Thales of Miletus predicted a bountiful olive harvest. He paid a small fee to olive press owners to secure the right to use their presses, profiting by subleasing them at higher rates during peak demand. Similar conceptual precedents existed in ancient Mesopotamian and Roman law, involving contracts for future transactions or goods. These early forms, though not widely traded or standardized, established a foundational understanding for contracts granting rights over future assets.

Pre-Modern Market Evolution

The evolution of option-like instruments continued into medieval and early modern periods, with markets demonstrating more organized, though often speculative, trading. The Dutch Tulip Mania of the 17th century provides a vivid example. During this speculative bubble, “windhandel,” or “wind trading,” emerged, involving contracts for tulip bulbs that had not yet been harvested or delivered. These arrangements allowed trading the right to buy or sell tulip bulbs at a future date without physical possession, similar to modern options. Though highly speculative and unregulated, their widespread use demonstrated a developing market for derivative-like instruments. The market’s collapse in February 1637 left many with worthless contracts, highlighting the risks of informal agreements.

Another development was the Dojima Rice Exchange in Osaka, Japan, established in 1697. It formalized trading “rice bills,” receipts for future rice deliveries. These evolved into futures contracts, and option-like elements such as “nageshi” were traded for rice price speculation with margin payments. The Dojima Rice Exchange was a more structured market, influencing later commodity exchanges.

Emergence of Standardized Options

The modern options market began to take shape in the mid-20th century, addressing challenges of non-standardized instruments. Before standardization, options were traded over-the-counter as customized contracts negotiated directly between parties. This lack of standardization led to illiquidity, valuation difficulty, and limited market participation.

The Chicago Board Options Exchange (CBOE) was established in April 1973. It became the first organized exchange to list standardized options contracts, specifying terms like strike prices and expiration dates. This standardization enhanced market liquidity and transparency, making options more accessible and tradable for investors.

Also in 1973, the Black-Scholes-Merton option pricing model was published. Developed by Fischer Black, Myron Scholes, and Robert Merton, this mathematical model provided a theoretical framework for valuing options based on factors like the underlying asset’s price, volatility, and time to expiration. The model revolutionized options pricing, offering a consistent valuation method that facilitated market growth.