When pursuing in-depth knowledge of any subject, it is wise to investigate it’s history. Having an understanding of why something is done in a certain way, or why it is perceived in a certain light, can help you gain a better grasp on how to responsibly use your new found knowledge. Here is a brief options trading education to get you closer to understanding how this exciting investment tactic might fit into your portfolio.
When were options first traded?
No options trading education would be complete without an origin story. The first recorded account of what would be considered an option trade today, goes back to 332 BCE. Aristotle’s works mentioned an astronomer named Thales, who predicted that the following year there would be a tremendous olive harvest. Thales realized that if there was in fact a large harvest, there would be a huge demand for olive presses. Owning all of the olive presses in the region would therefore make for a very lucrative investment.
Since Thales could not afford to buy all of the olive presses, he made what was then called a “contingent claim,” and put a deposit down to secure the use of all of the region’s olive presses no matter how the harvest turned out. This was agreeable to the owners of those presses because they would still realize a benefit if the harvest turned out to fail. When Thale’s prediction turned out to be true, the call option meant that he “owned” all of the region’s olive presses. Thales was then able to sell them, at a significant profit, to those that needed the presses.
Why did option trades once have a bad reputation?
Part of what has given option trades a somewhat tarnished name comes down to the tulip craze in Holland during the 1600s. You may remember from history class that in the 1630s, tulips were the most popular and highly valued flower in the world. Dutch tulip dealers started options trading the bulbs so that producers could secure buying prices on future harvests.
The tulip craze truly became crazy when the price of bulbs shot through the roof, and no one could afford to buy the bulbs anymore, which lead to frantic selling, and a plummeting price. Families that had put all of their money and their homes into funding those options lost everything in the subsequent economic collapse. When options trading is not done responsibly, it is a lot like gambling at a roulette table, and putting all of your chips down on just one number. For a period of 100 years, options trading was banned in London due to the fear of repeating the economic devastation that Holland had suffered.
How can I learn options trading?
An options trading education is widely available online. One cannot overstate the importance of finding good stock market investment advice around options trading systems, since they are so speculative and risky. However, more than 3,000 securities are traded every single day through an average of about 11 million stock option contracts, and an economic collapse like the kind seen in Holland has not repeated itself. Options trading is a great way to diversify an investment portfolio, but it is an investment strategy that should be handled carefully to minimize risk. Getting a strong education on different trading systems, and using online resources, is a great place to start.