The Winter Option in Haarlem

Why Turning Tulip Contracts into Penalty-Free Options Sparked the 1637 Frenzy

A quarto pamphlet printed in Haarlem in 1637 by the bookseller Adriaen Roman preserved a tavern dialogue between two weavers named Waermondt and Gaergoedt. Inside his ledger, Gaergoedt recorded tulip trades measured not by the flower or the sack, but by the aas. That unit was a Dutch goldsmith's weight equal to one-twentieth of a gram. Because tulip bulbs remain buried in frozen soil from September until June, winter traders in Haarlem, Alkmaar, and Amsterdam could not hand over physical bulbs. Instead, they met inside smoky tavern rooms in informal trading clubs called colleges. There they drank wine paid for by small transaction fees and signed notarized forward contracts promising delivery the following summer. In Roman's pamphlet, Gaergoedt boasted of the winter trade that a speculator could buy and sell millions of guilders in tulips without holding a single bulb or a single coin in his purse.

For two years after professional speculators entered the bulb trade in 1634, prices rose steadily without turning into a vertical spike. Rare broken-color varieties infected with a mosaic virus, such as Semper Augustus and Viceroy, already commanded high sums among wealthy merchant collectors. Those prized bulbs could only be propagated slowly through vegetative offsets. Ordinary single-colored pound-goods bulbs, by contrast, traded at modest prices until the last week of November 1636. That month, setbacks in the German military campaigns cut off export demand from foreign princes. Dutch growers and tavern wholesalers were left holding forward commitments that suddenly looked underwater.

To rescue the winter trade, an assembly of Dutch florists and tavern dealers proposed a structural change to every contract signed after November 30, 1636. Instead of binding the buyer to pay the full forward price in June, every winter purchase would become a call option. When summer arrived, a buyer who found that market prices had fallen below his contract price could walk away from the deal. He only had to pay the seller a small cancellation fee called rouwgeld, or sorrow money, later standardized by Dutch authorities at 3.5 percent of the strike price.

That single rule change altered the payoff math of every tavern bid. A carpenter or weaver who agreed in December to pay 1,000 guilders for an Admirael van Enckhuysen bulb in June was no longer risking 1,000 guilders of personal ruin. If the bulb rose to 2,000 guilders, he pocketed a 1,000-guilder profit. If the market collapsed, he owed at most 35 guilders in sorrow money, and even that fee could not be collected until summer. Because downside risk was capped at 3.5 percent while upside remained unlimited, rational speculators bid aggressively for common bulbs like Switsers and Witte Croonen. Between December 1, 1636, and February 2, 1637, prices for common bulbs multiplied more than tenfold. A single pound of Switsers leaped from 60 guilders to 1,400 guilders.

Option manias fueled by uncollateralized promises end the moment no new buyer will accept a higher strike price. On February 3, 1637, a tavern seller in Haarlem offered a pound of bulbs at 1,250 guilders. He lowered the ask to 1,100, and then to 1,000, without receiving a single bid. Word spread by canal boat to Alkmaar and Amsterdam within forty-eight hours. On February 24, Dutch growers voted to settle all contracts signed after November 30 for a 3.5 percent fee, a compromise ratified by the Court of Holland in May. When the tulip fever broke at a Haarlem tavern auction on February 3, 1637, not a single bulb had changed hands in the winter taverns and the wider Dutch economy grew without interruption.