Methods for pricing options in the 19th century..

Prof George Dotsis of University of Athens has a piece on how options were priced in 19th century.He builds his research from a book by an option trader: Higgins, L (1906), The put-and-call, Aberdeen: Aberdeen University Press.

As expected, traders back then had figured a way to price options without much jazz as today:

Modern theories of option pricing are based on continuous-time stochastic processes, deductive reasoning and a hypothesis of frictionless and perfect markets and provide a pricing mechanism that fits the full cross-section of call and put option prices. From Higgins’s book, it appears that option traders in the late 19th century used inductive reasoning, interpolation techniques and empirical methods and were able to determine quite accurately the prices of at-of-the-money and slightly out-of-the-money and in-the-money short-term calls and puts.

Option traders in the late 19th century priced at-the-money-forward straddles the same way option traders in the 21st century price them – as risk-adjusted estimates of future stock fluctuation. The difference is that modern option traders measure stock return fluctuation using the concept of variance and standard deviation while option traders in the late 19th century measured stock return fluctuation using the mean absolute deviation. Higgins’s book shows that practitioners in the late 19th century had developed sophisticated methods for determining option prices almost a century before the seminal work of Black and Scholes (1973) and Merton (1973) and the advent of computer power.

Hmm..

India has been a traditional market for all kinds of commodities where one is told that all kinds of financial instruments were traded. But there is hardly anything known about them..

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