18
$\begingroup$

This may be a very obvious question, but can someone tell me where and when the names call and put originated? And similarly, where do the terms American and European option come from? Aside from the explanation that it has nothing to do with the continents, I have not seen a textbook that says anything about why they are called that way.

Improve this question
$\endgroup$

9 Answers 9

Reset to default
13
$\begingroup$

Regarding the terms 'American' and 'European':

Though primary sources are scarce, it is likely that privilege trading in the US was present from the late 18th century beginnings of trade in securities, perhaps earlier in the produce markets. Over time, this trade developed differently from Europe due to differing settlement practices. In the US, “each day is a settling day and a clearing day for transactions of the day before ... This is a marked difference from European practice” where “trading for the account” (prolongationsgeschäfte) involves monthly or fortnightly settlement periods with allowance for continuation of the position until the next settlement date (Emery 1896, p.82). The continuation process for a buyer seeking to delay delivery involves the immediate sale of the stock being delivered and the simultaneous repurchase for the next settlement date. As this transaction would involve the lending of money, an additional ‘contango’ payment would typically be required. As a consequence of these settlement differences, in the US (American) options developed with fixed exercise prices, possible exercise prior to delivery and premiums paid in advance. In Europe, premiums for (European) options would be due on the scheduled future delivery date which coincided with a regular settlement date, exercise could only take place on the delivery date and the exercise price would be adjusted to determine a market clearing ‘price’ for the option at the time of purchase.

From "The Early History of Options Contracts" by Geoffrey Poitras.

Improve this answer
$\endgroup$
0
7
$\begingroup$

In his article about Paul A. Samuelson, Robert C. Merton gives the following story:

In modern times, the standard terms for options and warrants permit the option holder to exercise on or before the expiration date. Samuelson coined the terms European option to refer to the former and American option to refer to the latter. As he tells the story, to get a practitioner’s perspective in preparation for his research, he went to New York to meet with a well-known put and call dealer (there were no traded options exchanges until 1973) who happened to be Swiss. Upon his identifying himself and explaining what he had in mind, Samuelson was quickly told, “You are wasting your time—it takes a European mind to understand options.” Later on, when writing his paper, Samuelson thus chose the term European for the relatively simple(-minded)-to-value option contract that can only be exercised at expiration and American for the considerably more-(complex)-to-value option contract that could be exercised early, any time on or before its expiration date.

The article can be found in Encyclopedia of Quantitative Finance

Improve this answer
$\endgroup$
4
$\begingroup$

There is a fascinating book from 1904 (yes, published more than 100 years ago) written by S. A. Nelson called "The A B C of Options and Arbitrage" (a reprint of it used to be available on Amazon here, for example)

Quoting from that book:

A CALL gives the owner and holder the right to call upon and buy from the writer of the privilege a certain amount of stock at a specified price, usually above the market, within a limited time. A Wall Street privilege carries with it the right to exercise delivery of the stock within a limited time. The London privilege specifies a certain date. At any time within the life of the Wall Street privilege you can exercise its rights. In London the privilege is confined to a certain day, and before its maturity if it shows you a profit, you are obliged to trade in the open market and then balance the operation on settlement day"

So based on the above, I gather that historically, "European calls" used to trade in London whilst "American calls" used to trade on Wall street: that's where the names apparently originate.

This book is strangely overlooked: I think it was Nassim Taleb who pointed out that in his opinion, the book from Nelson shows that Option trading involved delta hedging already at the end of the 19th / beginning of the 20th century. Nassim further claimed that in his view, the book demonstrates that option traders were able to price options accurately using the delta-hedging technique way before the B-S model.

(I believe Nassim went as far as claiming that the Nobel prize for the B-S model is undeserved, precisely because Nelson's book shows that option pricing worked long before then: the claim was that the knowledge was "forgotten" during the two world wars, and therefore the options market had to basically restart from scratch thereafter).

I do think Nelson's book makes for an interesting read (although I don't take Nassim's view).

Improve this answer
$\endgroup$
2
$\begingroup$

Call and put are more or less obivous. For the expression "European" and "American" I once read that "American" options are more complex and "European" options are easier. So somebody (I just googled the story but didn't find it) thought that "easier" should be called "European". This does not fully answer you question but maybe somebody finds the source.

EDIT: I just read in this German link that American options used to be traded in the US only and European only in Europe ... I wonder whether this is correct ...

Improve this answer
$\endgroup$
6
  • 7
    $\begingroup$ Just a remark: I dont think he would ask why they were called put and call if HE thought it was obvious. $\endgroup$
    – Good Guy Mike
    Apr 29, 2014 at 15:00
  • $\begingroup$ You are right of course. I am not an English native speaker (not hard to guess ;)) but isn't it true that "to call something" and "to put something" can be interpreted as "to buy" or "plan to buy" resp. "plan to sell" ... "plan" is not the right word. $\endgroup$
    – Richi Wa
    Apr 29, 2014 at 15:48
  • $\begingroup$ In the following links they explain that the owner of a call option has the right to "call the stock away" from the writer of the option and the owner of a put option has the right to put it to someone else. $\endgroup$
    – Richi Wa
    Apr 29, 2014 at 15:56
  • $\begingroup$ I do understand why the names are "intuitive". The question was aimed at getting a source where and when the names originated. For example, when the CBOE started option trading (I think in 1973), the names calls and puts was already well established. I am looking for a source, similar to TimHussonSLCG's answer, that discusses the origins of the names. $\endgroup$
    – pbr142
    May 1, 2014 at 13:05
  • $\begingroup$ TimHussonSLCG 's answer is much better, I agree ;) $\endgroup$
    – Richi Wa
    May 2, 2014 at 9:43
1
$\begingroup$

Paul Samuelson in his interview says that he called the simpler one: European option and the complicated one: American. This happened because he was taught that it would be better for him not to start researching option pricing as that research requires "a European kind of mind":)

here is the link to his interview:

https://www.youtube.com/watch?v=RbIzwTGN3Yc&index=5&list=PLjpJ4yrk4-za2KMA84AUiyEa7a97cPcbi

watch from 09:30

Improve this answer
$\endgroup$
1
$\begingroup$

Not as much on origin of this, but some analogy that I find helpful:

Call - think of an open auction when bidders call out their prices for an auctioned item. So with a call option you've got a privilege to call the strike price, effectively having a right to buy the underlying asset.

Put - think that you own a privilege to put the asset for sale at the strike price, effectively having a right to sell the underlying asset.

Mind that for an option buyer this is optional to exercise it, yet for the option writer it's an obligation to transact, should the buyer opt to exercise it.

Improve this answer
$\endgroup$
0
$\begingroup$

My Hull textbook, Options, Futures, and other derivatives, has no etymology for call or put. It introduces the topic with

A call option gives the holder of the option the right to buy an asset by a certain date for a certain price. (p. 194).

The sense of call and put may become clearer if one thinks of the writer of these options. Let's imagine an investor who owns 100 shares of XYZ and has written a call with a strike of \$50. And let's suppose that XYZ is at \$52 on expiration day. What happens?

XYZ gets called away from the investor at \$50.

DEFINITION of 'Called Away': A term used to describe the elimination of a contract due to the obligation of delivery. This occurs if an option is exercised, if a redeemable bond is called before maturity or if a short position held in a security requires delivery. (Investopedia)

Let's further imagine an investor who has written a cash-covered put on stock ABC with a strike of \$25. And let's suppose that ABC falls to \$20.

ABC will be put to the investor at \$25. (Sorry, no link for this use of put as a verb. It's what I've heard AMEX traders use.)

Improve this answer
$\endgroup$
0
$\begingroup$

Before the name was adopted in finance, the Optio was the deputy officer, the second in command after Centurion, in the Roman legion of imperial times. Not sure if he was allowed to carry fasci, but the man was chosen by the centurion, so perhaps this made it appealing for finance.

Improve this answer
$\endgroup$
-1
$\begingroup$

Let's swap the word "call" with "359" and the word "put" with "22190". All the explanations here would make just as much sense using these replacement "words". The words "put" and "call" are so far removed from a rational meaning as to be meaningless, and even distracting. I know what a "call" is and I know what a "put" is. But it's only through rote memory, not by some clues provided by the names themselves.

The word "put" should be replaced with "you are buying the right to sell a stock that you don't own for a specific price by a specific date".

The word "call" should be replaced with "you are buying the right to buy a stock at a specific price by a specific date."

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.