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Not many years ago, traders who wanted to get involved with buying and selling options faced a lot of obstacles. Many brokers wouldn’t let new account holders trade anything but stocks, bonds, and maybe futures. That was it. If you wanted to do anything else, you had to prove yourself, fill out long application forms, have ample funding at your disposal, and wait for approval. Then, if you were one of the lucky few who gained permission to buy and sell options contracts, your choices were still quite limited. From the 1970s until today, the number of contracts grew from 1.1 million contracts in 1973, to 39 million in 1977, and past the 3 billion-contract mark today. Here are some of the other key moments in the evolution of this unique trading instrument, the option.
Major Growth in the 1980s
Both online and brick-and-mortar brokers typically kept new traders on a tight leash, only allowing them to place the simplest kinds of orders, just going long or short, for example. No straddles, butterflies, or other complex trade setups were on the menu. Then, in the early 1980s, options went mainstream with the introduction of index trading, futures trading, and other variations on the core principle. Chicago and Kansas City’s exchanges were the main focus of all the action from that time period until the late 1990s, when online trading began to grow at a rapid pace.
The Dawn of the Internet Era
Once the internet became a vehicle for traders, the entire investing universe changed forever. Now, virtually anyone who had a few extra dollars could buy and sell anytime they wanted to. No longer were options, futures, and commodities strange, unknown kinds of investments. The at-home investing boom was in full swing by the late 1990s as millions of non-professional investors who had nine-to-five jobs bought and sold everything from foreign currency, gold mining shares, blue chips, and other securities for their personal portfolios.
There was a second wave around the same time when large numbers of brokers began offering their services exclusively online. That meant some medium-sized cities and many small ones had no brick-and-mortar brokerages. Billions of dollars’ worth of investing capital flowed into the online coffers and the entire financial industry began to grow in ways no one could ever have imagined. Ordinary workaday people could take advantage of an options trading platform, stock charts, technical analysis, research reports, and all the things that were once only available to professional brokers and investment advisors.
Today’s Massive Volume
Today’s options traders exist in an environment that is nothing like those early days in the 1970s and 1980s. Automated trading, a wide choice of online platforms, access to highly sophisticated techniques, and the ability to do business around the clock in some markets, like forex. Modern investors are attracted to options for a number of reasons. For example, when you get into a trade as a buyer of a put or a call, you’re not required to buy the underlying asset. Instead, you simply let the contract expire at the set date. Your only loss is the cost of the contract and whatever trading fees you incur with your broker.
Another essential advantage is that traders need not have huge amounts of capital required to control thousands of shares of stock. Puts and calls give you the leverage to either exercise the contract and buy the shares (but only if you want to), sell the contract for a profit or loss, or let the contract expire. So, in addition to the leverage factor and not needing to place vast amounts of capital on the line, you have a lot of flexibility about how to close out the trade when the time comes.
Lingering Myths
As is the case with all kinds of buying and selling of assets, there are plenty of myths associated with options. One is that they are a zero-sum game, in which buyers and sellers are merely exchanging equal gains and losses. In fact, a large number of people use puts and calls as insurance against loss on other trades they’ve made. So, even if you make no profit on a call contract you bought for $200, for example, that doesn’t mean you lost anything. You might have gained a sort of insurance protection against a loss in your stock portfolio.
Perhaps the most persistent myth is that options buying and selling is for elite, wealthy traders. Nothing could be more incorrect. Fifty years ago, that statement had some validity, but today it’s completely false. Anyone can open an online account with as little as a few hundred dollars and start buying puts and calls within the hour. There’s nothing elite or mysterious about that.
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