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TheStreet Open House

A Brief History of Stock Options

By Brian Burns, author of Trading Stock Options

Perhaps you are familiar with stock options, or have even traded them, but did you ever wonder how options came about in the first place? Do you know why were they invented and who used them? You may or may not know that an option is a derivative. A derivative is anything that derives its value from an underlying asset. In the case of stock options, the stock is the underlying asset.

Options come in two flavors: calls and puts. Calls give the option buyer the right, but not the obligation, to purchase the underlying stock at a specified price, known as the strike price. Puts give the option buyer the right, but not the obligation, to sell the underlying stock at a specified price. Both types of option contracts are subject to expiration and can expire worthless. The option contract's length of time, also known as the expiration date, is agreed upon at the time of purchase.

Calls can only be exercised when the underlying stock is above the agreed upon strike price. Puts can only be exercised when the underlying stock is below the agreed upon strike price. During the life of the contract, options can be bought and sold through most online brokers.

It's no doubt that options are growing in popularity. Most brokers now offer free option-trading tools, and the commission rates to trade options have continually been on the decline. But when did option trading first originate? Most option historians point to two main examples of how options were first used: Thales the Milesian and the tulip bulb bubble of 1637.

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