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Stock options have been trading on organized exchanges for more than 30 yearsHISTORY OF OPTIONS Stock options have been trading on organized exchanges for more than 30 years. In 1973, the first U.S. options exchange was founded and call options on 16 securities started trading. A few years later, put options began trading. A decade later, index options appeared on the scene. Today, five exchanges are active in trading options, and annual options trading volumes continue to set records. Indeed, over the course of 30 years, from the early 1970s until now, a great deal has changed in the world of options trading. What was once the domain of mostly sophisticated professional investors has turned into a vibrant and dynamic marketplace for investors of all shapes and sizes. The history of organized options trading dates back to the founding of the Chicago Board Options Exchange (CBOE) in 1973. By the end of that year, options had traded on a total of 32 different issues and a little over 1 million contracts traded hands. In 1975, the Securities and Exchange Commission (SEC) approved the Options Clearing Corporation (OCC), which is still the clearing agent for all U.S.-based options exchanges. As clearing agent, the OCC facilitates the execution of options trades by transferring funds, assigning deliveries, and guaranteeing the performance of all obligations. The Securities and Exchange Commission approved the OCC roughly two years after the founding of the first U.S.based options exchange. The early 1970s also witnessed other important events related to options trading. For instance, in 1973, Fischer Black and Myron Scholes prepared a research paper that outlined an analytic model that would determine the fair market value of call options. Their findings were published in the Journal of Political Economy and the model became known as the Black-Scholes option pricing model. Today it is still the option pricing model most widely used by traders. As more investors began to embrace the use of stock options, other exchanges started trading these investment vehicles. In 1975, both the Philadelphia Stock Exchange (PHLX) and the American Stock Exchange (AMEX) began trading stock options. In 1976, the Pacific Stock Exchange (PCX) entered the options-trading scene. All three became members of the OCC, and all three still trade options today. In addition, in 1977, the SEC permitted the trading of put options for the first time. In 1975, 18 million option contracts were traded. By 1978, the number had soared to nearly 60 million. The 1980s also saw an explosion in the use of options, which eventually peaked with the great stock market crash of 1987. The Chicago Board Options Exchange launched the first cash-based index in the early 1980s. In 1983, the exchange began trading options on the S&P 100 index (OEX). The OEX was the first index to have listed options. In 1986, the CBOE Volatility Index (VIX) became the markets first real-time volatility index. VIX was based on the option prices of the OEX. In 2003, it was modified and is now based on S&P 500 Index (SPX) options. The early 1980s saw a growing interest in both stock and index options. From 1980 until 1987, annual options volume rose from just under 100 million contracts to just over 300 million. After the market crash in October 1987, however, investor enthusiasm for options trading waned and less than 200 million contracts traded in the year 1991, or roughly two-thirds of the peak levels witnessed in 1987. Throughout most of the 1990s, trading activity in the options market improved. In 1990, long-term equity anticipation securities (LEAPS) were introduced. The OCC and the options exchanges created the Options Industry Council (OIC) in 1992. The OIC is a nonprofit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options. In 1998, the options industry celebrated its 25th anniversary. In 1999, the American Stock Exchange began trading options on the Nasdaq 100 QQQ (QQQ)an exchange-traded fund that is among the most actively traded in the marketplace today. That same year, total options volume surpassed one-half million contracts for the first time ever. In the year 2000, a new options exchange arrived on the scene. On May 26, 2000, the International Securities Exchange (ISE) opened for business. It was the first new U.S. exchange in 27 years. In addition, ISE became the first all-electronic U.S. options exchange. In 2001, the options exchanges converted prices from fractions to decimals. In 2003, more than 900 million contracts traded, nearly four times greater than 10 years before. Therefore, despite the three-year downturn in the U.S. stock market, options trading continued to grow. On February 6, 2004, the Boston Options Exchange (BOX) made its debut as the sixth options exchange and began trading a handful of options contracts. The exchange was the second all-electronic exchange and is already another key player in the burgeoning options market. EVOLUTION OF THE CHICAGO BOARD OPTIONS EXCHANGE The CBOE has had quite an impact on the financial world over the past 31 years. Formed on April 26, 1973, the CBOE changed this countrys and the worlds approach to the markets forever. This new organization introduced the trading universe to standardized options contracts. The contract represented 100 shares of stocks with expiration dates attached using various months as their basis. Today the CBOE is the largest options exchange in the United States, trading more than half of all U.S. options and accounting for over 90 percent of all index trading. To get to this point, the CBOE has been through many changes and has had a very interesting historical time line. When the Chicago Board of Trade first opened the CBOE, it traded only call options on 16 equities. After four years of operation, put options were finally offered. This caused quite an explosion in option trading activity in 1977 and moved the SEC to bring to a halt any further options expansion until a formal review could take place. The review, which was designed to protect the customer, lasted until March of 1980. From there the CBOE quickly added option coverage to include 120 equities. Later in that same year (1980) the CBOE and the Midwest Stock Exchange merged their options operations. In March 1983, one of the biggest developments in the CBOEs history took place. This involved introducing the trading public to options on broad-based stock indexes. The impact was enormous, with the first such index traded being the Standard & Poors 100 Index (OEX). This proved to be a very active index, trading an average of more than 130,000 contracts per day in 1983. This surge in trading volume prompted the CBOE to move into its own facilities in 1984, leaving the CBOT behind. The move allowed the CBOE to implement key trading floor technologies enhancing customer service. The major innovation was what was known as the Retail Automatic Execution System that facilitated the filling of customer orders at the current bid or ask and reported back all within a matter of seconds. The CBOE launched the Options Institute in 1985 to educate its major customers such as retail account executives and institutional money managers. In 1989 options on Treasury securities were introduced. The option values were pegged to changes in the U.S. Treasury yield curve. In 1990, the needs of the conservative options investor were addressed by introducing long-term equity anticipation securities (LEAPS) to the trading public. LEAPS allow investors to create positions that have up to three years until expiration, which makes them particularly attractive to the traditional buy-and-hold investor. In 1992 the CBOE expanded its coverage to include various sectors and foreign markets. This new development helped customers to better hedge their exposure to these areas as well as allowing investors to participate in different market spaces and the continued globalization of the markets. The growth continued in 1997, adding another cash-settled index based on the Dow Jones Industrial Average, which quickly became the CBOEs most popular new product. At the same time options on the Dow Jones Transportation Average and Dow Jones Utility Average were introduced. Of course, there are indeed other option exchanges that do exist in the United States such as the American Stock Exchange, the Philadelphia Stock Exchange, and the Pacific Exchange. However, by far the CBOE is the options-trading king when one just looks at sheer volume. Going forward, the CBOE will continue to innovate and bring even more products to the investment community, especially given the continued and growing popularity of options. |
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