Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Stock options have been trading on organized exchanges for nearly thirty years.  In 1973, the first US 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 thirty years, from the early 1970s until now, a great deal has changed in the world of options trading.  What was once domain to 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 1,000,000 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 US-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 US 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 and Scholes Options-Pricing Model.  It is still the most widely used options-pricing model used by traders today.  

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 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 ($OEX).  The OEX was the first index to have listed options.  The CBOE Volatility Index ($VIX) became the market’s first real-time volatility index in 1986.  VIX was, and still is, based on the option prices of the OEX.  The early-1980s saw a growing interest in both stock and index options.  From 1980 until 1987, annual options volume rose from just under 100,000,000 contracts, to just over 300,000,000.  After the market crash in October 1987, however, investor enthusiasm for options trading waned and less than 200,000,000 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 Anticipation Securities [LEAPS] were introduced.  The OCC and the options exchanges created the Options Industry Council [OIC] in 1992.  The OIC is a non-profit 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 25^th anniversary.  In 1999, the AMEX 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 arrives on the scene.  On May 26, 2000, the International Securities Exchange [ISE] opened for business.  It was the first new US exchange in 27 years.  In addition, ISE became the first all-electronic US options exchange. In 2001, the options exchanges converted prices from fractions to decimals.  Additionally, two new implied volatility indices were launched in 2001.  While the Chicago Board Options Exchange created the Nasdaq 100 Volatility Index ($VXN), the American Stock Exchange [AMEX] launched the Nasdaq 100 QQQ Volatility Index ($QQV).  Both were designed to provide option traders with real-time information regarding implied volatility in the technology sector.  At the end of 2001, the options market had a record year in terms of trading volume.  More than 780,000,000 contracts traded and that was nearly four times greater than the decade before.  Therefore, despite the three-year downturn in the US stock market, options trading continued to grow.  In fact, so far this year, nearly 730,000,000 contracts have traded thus far, which puts the options market on pace for another record-setting year in 2002.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Frederic Ruffy, Optionetics.com

• February 25, 2008
  Stock Talk: Visa Proposes Largest IPO Ever
• February 25, 2008
  Morning Watch, Feb. 25
• February 22, 2008
  Sentiment Journal: Boooooooo!
• February 22, 2008
  Morning Watch, Feb. 22
• February 21, 2008
  Morning Watch, Feb. 21