The earliest recorded examples of options were referred to in a book called “Politics,” written by Aristotle, a Greek philosopher. In this book, he talks about another philosopher, Thales of Miletus, and how he had profited from an olive harvest. Having a great interest in astronomy and mathematics, he combined his knowledge of those two subjects to create what were effectively the first known option contracts. By studying the stars, Thales predicted that there would be a vast upcoming olive harvest in his region. He recognized that with an increased harvest size, there would be significant demand for olive presses, so he set out to profit from his prediction.
However, the problem was that Thales didn’t have sufficient funds to own all the olive presses, so he instead paid the owners a sum of money to secure the rights to use them at harvest. Harvest time came and as he hoped, there was an abundance and the demand for presses skyrocketed. Thales resold his rights back to those who needed them and made a sizable profit! If we are to break it down to its simplest form, he paid for the right, but not the obligation, to use the olive presses at a fixed price. After a period of time passed, demand grew and he was able to exercise his contracts for a profit.
<aside> 💡 Key Takeaway:
Thales paid for the right, but not the obligation, to use the presses. This mirrors the fundamental concept of a modern call option—an agreement to buy an asset at a predetermined price by a specific date, in exchange for a premium.
</aside>
Thales' strategy highlights the basic principles of options trading:
While modern options are more complex, this historical example underscores their simplicity when broken down into their core components.
The options market has evolved significantly from Thales' time. Today’s options trading is characterized by advanced technology, robust regulatory frameworks, and standardized contracts.