The History of Options Trading

The History of Options Trading

The current system of options markets traces its origins to the nineteenth century, then
puts and calls were offered on shares of stock. Little is known about the options world
of the 1800s other than it was fraught with corruption.

Then in the early 1900s, a group of firms calling itself the Put and Call Brokers and
Dealers Association created an options market. Although this over the counter options
market was viable, it suffered from deficiencies relating to liquidity, transaction costs
and guarantee of the writers performance (i.e. the credit risk of the writer).

In 1973, a revolutionary change occurred in the options world. The Chicago Board of
Trade - the world's oldest and largest exchange for the trading of commodity futures
contracts -- organized an exchange exclusively for trading options on stocks. The
exchange was named the Chicago Board Options Exchange (CBOE). It opened its
doors for call option trading on April 26, 1972, and the first puts were added in June
1977.

The CBOE created a central marketplace for options. By standardizing the terms and
conditions of options contracts, it added liquidity. Most importantly, however, the
CBOE added a clearing house that guaranteed to the buyer that the writer would fulfil
his or her end of the contract.