Option Pricing Methods in the Late 19th Century

Abstract

This paper examines option pricing methods used by investors in the late 19th century. Based on the book called “PUT-AND-CALL” written by Leonard R. Higgins in 1896 it is shown that investors in that period used routinely the put-call parity for option conversion and static replication of option positions and they had developed sophisticated option pricing techniques for determining the prices of at-the-money and slightly out-of-the-money and in-the-money short-term calls and puts. Option traders in the late 19th century understood that the expected return of the underlying does not affect the price of an option and viewed options mainly as instruments to trade volatility.