History of Options Trading
No one really knows the specifics regarding how options trading began. However, it is believed that the history is similar to that of the forward contract which began in ancient times and was mainly used in farming. A forward contract is an agreement to buy something in the future. For example, a farmer may be growing corn and wishes to guarantee that his investment will be profitable. To do this, he would find a buyer of the corn and write an agreement stating that the corn will be sold in six months at an agreed upon price. Apparently, at some point in the past, it occurred to someone to create an option rather than an obligation to engage in a future transaction.
Options trading formally began in the United States in 1848 with the creation of the Chicago Board of Trade. Soon after, other exchanges opened in the U.S. including the Kansas City Board of Trade, the Minneapolis Grain Exchange, and the New York Cotton Exchange. "Historically the pricing of options was entirely ad hoc. Traders with good intuition about how other traders would price options made money and those without it lost money," (Wikipedia.org). Throughout the 1900's, there were many formal attempts at creating an equation to value options. However, all of these equations made unreasonable assumptions that could not be applied in the real world.
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