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I recently came across an interesting find during my weekend reading that I was excited to share with readers of my premium options service, Income Trader.
I'd like to share a little bit of what I learned with you today, because it serves as further proof of something I've been saying for years -- that when you "demystify" options and forget what you think you might know, they do not have to be especially complicated or risky.
In this research paper, the author traced the history of options trading all the way back to ancient Greece. He cited boat insurance, or more formally "bottomry loans," as the first example of options contracts.
Bottomry loans were made to merchants and shipowners to finance the transportation of goods between different ports. Lenders would fund the voyage and, if the voyage was successful, the shipowner would repay the lender, with interest. If the ship or its cargo was lost, the money lent to the shipowner would be a 100% loss.
Bottomry loans weren't true loans because the lender accepted 100% of the voyage's risk. They weren't equity either because the return of the loan was fixed and known when the two sides completed the transaction. Technically, this is economically equivalent to an option written by the ship's owner. If the ship returned, the option had value and paid out a fixed amount. If the ship was lost, the option writer (shipowner) kept the premium and the option was worthless.
This type of option has existed for centuries, although options in stocks are a more recent innovation. They date back to the Amsterdam exchange in the 1600s. A market for options in the Dutch East India Company developed, and these contracts spread to other markets.
The fact that these contracts existed means traders had to have some sort of pricing model. It looks like the first formal models were developed in the late 1800s. Amazingly, these models were actually similar to the ones we use today.
Contracts were simpler in the 1800s because they could only be exercised on the expiration date. In practice, modern-day contracts will only be exercised at expiration except in rare instances where it makes economic sense to exercise prior to expiration. However, pricing models we use today must account for the remote possibility of early exercise.
Traders in the 1800s used the average price changes over the recent past to price the option. This was a rough measure of a stock's volatility. They assumed the future, short-term volatility would be similar to the historic volatility.
Options Today: Why Don't More People Use Them?
Our current models use more sophisticated math, relying on variance and standard deviations rather than averages, but the basic idea is the same. We use data from the past to forecast the likely trend in the future.
Given the long history of options, I have often wondered why they aren't more widely used by individual investors. I believe it's because of the math, which is complex but not insurmountable. After all, the math could be done in the nineteenth century, before computers or even digital calculators.
Why Haven't You Tried Options?
Look, options have been around in some form or another for a long, long time. Options have proven they can adapt to changing markets. If they couldn't adapt and continue to serve a need, they would no longer be traded.
My point is this... Don't make the mistake of assuming that options only serve the needs of sophisticated traders and Wall Street gurus. That's exactly what they want you to think. In fact, in my newsletter, we have hundreds of regular folks who use our options trades to safely generate hundreds -- sometimes thousands -- of dollars in extra income each month.
We use one of the safest strategies for options ever devised to trade for income -- that means no wild, risky bets for us over at Income Trader.
I developed the indicator we use to make our trades over at Income Trader in my 20s. Since then, my award-winning research has led to a 93% win-rate with our trades. And if you would have mirrored every single one of the trades we made in 2016, you would have made an average of $1,298 per week. That's $5,408 a month, or $64,896 a year. The beauty of this is that it can be scaled up or down, depending on your portfolio size, too. (You can see a full record of our trades in 2016 here.)
If you've been curious to learn how you can earn more income than you ever thought possible, then I encourage you to learn more about our strategy by visiting this link. If you decide to give Income Trader a no-risk trial, I'll send you a full slate of reports to help you get started -- in addition to the same winning trades we regularly send week after week.
As I'm sure you are all aware, stock prices have been unusually volatile lately...