35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
6 • The Intelligent Option Investor
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the producer owns the upside potential from the increase in value of your
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story (option characteristic number 3). Again, it is obvious that the right
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to the literary work has value for the entire term of the contract (option
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characteristic number 4).
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Keep these characteristics in mind, and we will go on to look at how
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these defining elements are expressed in financial markets later in this
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chapter. Now that you have an idea of what an option looks like, let’s turn
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briefly to a short history of these financial instruments.
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A Brief History of Options
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Many people believe that options are a new financial invention, but in
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fact, they have been in use for more than two millennia—one of the first
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historically attested uses of options was by a pre-Socratic philosopher
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named Miletus, who lived in ancient Greece. Miletus the philosopher was
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accused of being useless by his fellow citizens because he spent his time
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considering philosophical matters (which at the time included a study of
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natural phenomena as well) rather than putting his nose to the grindstone
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and weaving fishing nets or some such thing.
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Miletus told them that his knowledge was in fact not useless and that
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he could apply it to something people cared about, but he simply chose not
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to. As proof of his contention, when his studies related to weather revealed
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to him that the area would enjoy a bumper crop of olives in the upcoming
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season, he went around to the owners of all the olive presses and paid them
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a fee to reserve the presses (i.e., he entered into a contractual agreement—
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option characteristic number 1) through harvest time (i.e., the contract
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had a prespecified life—option characteristic number 2).
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Indeed, Miletus’s prediction was correct, and the following season
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yielded a bumper crop of olives. The price of olives must have fallen because
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of the huge surge of supply, and demand for olive presses skyrocketed
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(because turning the olive fruit into oil allowed the produce to be stored
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longer). Because Miletus had cornered the olive press market, he was able
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to generate huge profits, turning the low-value olives into high-value oil
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(i.e., he profited from the change in value of an underlying asset—option
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characteristic number 3). His rights to the olive presses ended after the har-
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vest but not before he had become very wealthy thanks to his philosophical |