Lesson 1 – History of Options

The US options exchange started with the founding of the CBOE (Chicago Board Options Exchange) in 1973.  At the beginning there were a total of 16 equities that had only call options.  In 1977 they began to trade put options.  There are now over 5 different exchanges actively trading options.

In 1975 the SEC (Securities and Exchange Commission) approved the OCC (Options Clearing Corporation) with the sole purpose of clearing all US based options.  A clearing firm’s job is to facilitate execution by transferring funds, assigning deliveries, and guaranteeing the contracts.

Options were a hit when they first appeared.  In 1975 18 million contracts traded.  By 1978 that number had more than tripled to 60 million contracts.  The increase in contracts continued to climb until the 1987 stock market crash.  After the stock market crash investors were still uneasy.  In 1991 only 2/3 of the peak level contracts were traded.  In 1983 we saw the first options traded on an index, the S&P 500.  This was a big development since it was from this that led to the formation of the VIX.  The VIX is the volatility index, fear index, based on the prices of S&P 500 options.

Enthusiasm for the options market didn’t return until the 1990s.  During these times we saw the introduction of LEAPS (Long-term Anticipation Securities) which allowed investors to buy options that expired over a year.  We also saw the formation of the OIC (Options Industry Council) which is a non-profit organization developed to educate people on the risk and benefits of options.