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bjbjLULU TK_Q10 Hello, my name is Brian Overby. I am the Senior Options Analyst at TradeKing,
and author of The Options Playbook. I have a very straightforward question today: How
did option trading evolve? As far as option trading is concerned, it s been around for
many, many years. As a matter of fact, actually one of the first documented uses was way back
in the 16th century. The Dutch aristocracy actually made it very vogue to own tulip bulbs.
The Dutch economy was rocking rolling back then, and there was a great demand for these
beautiful tulips. Well, as with most bubbles, they have a tendency to burst, and this also
happened in the Dutch economy. So what had happened prior to that was, there was a great
run-up in tulip bulb prices, and it started to make sense to actually protect the downward
price, or the valuation, of the tulip bulb. So people actually started to sell put options
on tulips, and this would assure a price that the owner of the tulip bulb would receive
over a period of time. Well, after the bubble burst this actually wasn t a very good thing
for option trading after the bubble burst, the market tanked across the board on tulip
bulb prices, and a lot of those people that sold those option contracts headed for the
hills and didn t make good on their obligations. But, bottom line is, a lot of people don t
realize that option trading, or a form of it, has been around for years and years. Now,
after that happened, it took a while for the options marketplace to resurface again. But
even before the Chicago Board Option Exchange first traded listed option on the floor of
the actual Board of Trade, the first place that they actually started trading options
is, they converted the smokers lounge at the Board of Trade into a trading crowd, or a
trading pit. Now, prior to that, options traded all the time in what was called the over-the-counter
marketplace. And I just want to talk to you a little bit about what the over-the-counter
marketplace meant. It meant you would call up a put-call broker/dealer, and that s what
they called them back then, they didn t call them BDs or anything, or brokerage firms,
they called them put-call broker/dealers. So let s make up a fake put-call broker/dealer,
and let s go through the process of how you might have set up an option contract prior
to the listed options marketplace. So you might call up Bob s Put-Call Broker/Dealer,
and you d say hey, is Bob there? And Bob says yup, this is Bob, what can I do for you? Well,
I would like
to trade a then they traded in fractions, so that s how the quote would be. I would
then say, well great, Bob, I think GE is going to go up so I would like to buy a call option
which will give me the right to buy the underlying stock at dada-dada-da. Okay, most , let s
go out four weeks from today. Okay, the expiration date is going to be four weeks away, Wednesday,
at the market close, that s four o clock Eastern time. Bob would then write that all up in
the body in the terms and conditions of the option contract, and then Bob and I would
start negotiating a price. Well, Bob, I think this is worth $2. No-no-no, it s $2.50. All
right, $2.25. And, sold, that s the way it would work. Bob would write all this up, on
the dotted line; I would sign the end of the contract, and bottom line is, I would have
my own option contract. Now, that was all fine and dandy if I wanted to trade an option.
As a matter of fact, it was even more flexible than the listed options marketplace, because
I could choose the number of underlying shares that I wanted the contract to represent, I
could choose the strike price very easily, and I could choose the expiration date that
best suited my forecast for the underlying stock. Now, here s where the issue came in,
though. So let s say the stock has gone up, the stock is now trading around 26 , and I
call up Bob and say, hey Bob, my forecast is looking pretty good on my underlying stock.
I would like to sell my option contract. And what does Bob say? Oh, I don t want that.
But, I can help you out, let s see what I can do. And so Bob would go on out and actually
open up an advertisement in the Wall Street Journal most likely, or some other financial
newspaper or magazine, and say hey, I have a now let s say that took two weeks, so I
have two weeks to expiration, expiration date is Wednesday such-and-such, and this contract
represents 100 shares of the underlying stock, which in our case was GE, and if you are interested
in buying this, please call Bob at Bob s Put-Call Broker/Dealer. And this was actually the start
of the quote pages in most of the financial journals, the quote pages for options I should
say. But, bottom line is, the only way that you could really find a buyer is to go on
out and look for them in advertising. So now, in comes the Chicago Board Option Exchange,
or basically the Chicago Board of Trade and all the traders that are there and they say,
well, we think that we can do better. So what we re going to do is actually go out, and
we re going to standardize the terms and conditions of the contracts. This makes it easier for
buyers and sellers to get together. So we re going to go out and look at the strike
price, and we re going to standardize that. Instead o oing to say that they ordinarily
will represent 100 shares of stock. And as far as expirations, we re going to pick a
time when all option contracts are going to expire. We ll have different expiration periods,
but bottom line is, is you have to trade in one of these time periods. And that expiration
date, we re going to try to figure out a good time, let s just make it the third Friday
of the month. So as far as May is concerned, let s look at the third Friday in May, as
far as April is concerned, let s look at the third Friday in April, dada-dada-dada. And,
they said, these are the general terms and conditions. Now, when I go to sell that, well
there might be somebody on the other side that might actually take my trade, and hence,
when all of this evolved and everything came together, we finally had a listed options
marketplace that made sense for buyers and sellers to get together and trade option contracts.
Well, my name is Brian Overby. I am TradeKing s Options Analyst, and also the author of
The Options Playbook. If you d like to learn more, please check us out at tradeking.com,
and check out our Trader Network, where traders network and share actual trades and performance.
Also, there s an education center there where you can check out a plethora of information
on all aspects of investing. TK_Q10 jstewart Normal.dot jstewart Microsoft Office Word
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