subject: The History Of The Options Market Explained [print this page] Contrary to what many people believe, the options market is not just a popular investment fad or an unproven investment instrument attempting to establish itself in today's money markets.
The options market is actually a very well established, mature market that has been around for centuries.
In this article today, I would like to provide a brief outline of the history of the options market, so you can gain a greater appreciation of how well established this market is and why it has become so popular as an investment and trading instrument used by a wide range of investors.
Contracts similar to options are believed to have been used since ancient times.
- In the real estate market, Call Options have long been used to assemble large parcels of land from separate owners, e.g. a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel.
- Film or theatrical producers often buy the right - but not the obligation - to dramatize a specific book or script.
- Lines of credit give the potential borrower the right - but not the obligation - to borrow within a specified time period.
In London, puts and "refusals" (calls) first became well-known trading instruments in the 1690's.
Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the Option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets.
The modern stock option has formally been traded since the late 1960's. The Chicago Board of Trade (CBOT) researched alternatives to the commodities market. There already was an existing options market, but it was very liquid.
Two major problems were identified with the existing options market:
1) There were too many variables as option contract terms were not standardized, and
2) There was no governing body to issue contracts and guarantee settlement and performance.
From this, the Chicago Board Options Exchange (CBOE) was born, and began trading listed call options on April 26 1973. Put Option Contracts began trading in late 1977.
Since then, nearly every major stock market in the world has an accompanying options Market.
The concept of an option has been around for much longer however not in the same format with no standardization or formal industry management.
More than 2000 years ago, the Romans and Phoenicians used contracts in the shipping industry. They were not standardized and made between two parties who were obliged to honour the contract.
There is also evidence of similar styled contracts in Ancient Greece. The philosopher and mathematician Thales used an option contract to secure a low price for olive presses before the harvest had been made.
During the off season, Thales negotiated the rights to use the presses for the harvest season, at a low price. When the olive harvest was underway, he then proceeded to rent the presses at a higher price.
In Holland during the 1600's, the bust of the tulip industry was considered the first documented market recession. Call options had been used during this period as well. Tulip buyers used call options to secure a reasonable sell price while growers used put option contracts to establish a sell price.
Options were used for speculative trading at this stage, and when the market collapsed, they failed to honour their contracts. This fuelled the economic collapse that followed.
CBOE
Founded in 1973, the Chicago Board of Options Exchange (CBOE) is an exchange that focuses on options contracts for individual equities, indexes and interest rates. The CBOE is the world's largest options market. It captures a majority of the options traded. It is also a market leader in developing new financial products and technological innovation, particularly with electronic trading.
The CBOE is also referred to as the "see-bo". On the first day of trading in 1973, 911 contracts traded hands on 16 stocks. Today, the CBOE's average daily volume consistently exceeds one million contracts per day.
The CBOE, located at 400 South LaSalle Street in Chicago (United States of America), is one of the world's largest options exchanges with an annual trade of over 450 million options contracts, covering more than 1200 companies, 50 stock indexes, and 50 exchange-traded funds (ETFs).
In 1973 the CBOE created and listed the first exchange-listed standardized stock options. The CBOE is regulated by the Securities and Exchange Commission (SEC) and it's options Contracts are cleared by the Options Clearing Corporation (OCC).
As of approximately April 2007, the Wall Street Journal estimates that globally the market capitalization of the derivatives markets (futures, options, swaps, etc.) exceeds 450 trillion dollars (while U.S. stock exchanges have approximately 30 trillion and the rest of the worlds stock exchanges total to about another 20 trillion, to a total of about 50 trillion, while the global fixed income markets total to roughly 65 trillion).
Other Option Exchanges
1. American Stock Exchange (AMEX)
2. Boston Options Exchange (BOX)
3. International Securities Exchange (ISE)
4. NYSE Arca
5. Philadelphia Stock Exchange (PHLX)
6. Canadian Derivatives Exchange
7. European Derivates Exchange (LIFFE)
8. Sydney Futures Exchange (SFE)
Options Clearing Corporation (OCC)
The Options Clearing Corporation (OCC), founded in 1973, is (as of 2006) the world's largest equity derivatives clearing organization, as well as a clearing firm in commodity futures, commodity options, and security futures. By acting as guarantor they ensure that the obligations of the contracts they clear are fulfilled.
OCC operates under the jurisdiction of both the SEC and the Commodities Futures Trading Commission (CFTC). Under it's SEC jurisdiction, OCC clears transactions for put and call options on common stocks and other equity Issues, stock indexes, foreign currencies, interest rate composites and single-stock futures. As a registered Derivatives Clearing Organization (DCO) under CFTC jurisdiction, they offer clearing and settlement services for transactions in futures and Options on futures.
OCC's participant exchanges include:
- American Stock Exchange,
- Chicago Board Options Exchange,
- International Securities Exchange,
- NYSE Arca,
- Philadelphia Stock Exchange, and
- The Boston Stock Exchange.
Clearing members serve both professional traders and public customers and comprise approximately 130 of the largest U.S. broker-dealers, futures commission merchants and non-U.S. securities firms.
OCC also clears commodity contracts traded on CBOE Futures Exchange and Philadelphia Board of Trade, as well as Security Futures Contracts traded on One Chicago. OCC is also a sponsor of the Options Industry Council.
So in summary, the options market is a very well established, mature market that has been around for centuries.
The great news is that with the availability of the internet and online option brokering platforms these days, options can be readily traded and enjoyed not only by institutions, professional traders and sophisticated investors but also by the everyday retail investors & traders.
