Options Turn 40: A Walk Down Memory Lane

Last Friday, April 26th we celebrated the birthday of options by looking back at the evolution — and game-changing innovation — of an industry.

Forty years ago, in 1973, the Chicago Board Options Exchange (CBOE) was founded. The first options traded on 16 stocks — just 911 contracts, all calls — on April 26, as market makers watched from the “trading floor,” which was actually the 4,300-square-foot smoking lounge of the Chicago Board of Trading (CBOT).

Around the same time as the CBOE debut, the Options Clearing Corporation (OCC) launched to maintain the integrity of the market. Almost simultaneously, the Black-Scholes pricing model was published, which undoubtedly contributed to the fluidity of trading. Before that, “No one really knew what an option was worth. It was just merely supply and demand,” admitted CBOE Chairman and CEO Bill Brodsky in this 40th anniversary video.

Likewise, Schaeffer’s contributor Adam Warner has strong roots in the options game. His father, Henry, was a market maker in the ’70s. “They didn’t shop orders or anything, so I imagine prices were all over the board,” Adam said. “Plus, they only listed options every three months, so you’d go a while between expirations.”

The CBOE introduced computerized price reporting in 1975, and just two years later, put options debuted, once again expanding investors’ ability to gamble and hedge by leaps and bounds. Echoing that, S&P-based index options began trading in 1983, just a year before the exchange moved out of the shadow of the CBOT and into its own 350,000-square-foot building.

After weathering the 1987 crash, traders got even more options — both figuratively and literally. The CBOE launched Long-Term Equity AnticiPation Securities, or LEAPS, in 1990, allowing investors the ability to trade up to three years out. Three years later, the CBOE Market Volatility Index (VIX) first appeared to take the Street’s proverbial pulse, though options on the “fear barometer” didn’t debut until more than a decade later.

Since the millennium, options have progressed even more, with speculators now able to roll the dice with weekly contracts and at a plethora of strikes, and on more stocks, sectors, indexes and exchanges than ever before. Plus, against the backdrop of consistent ingenuity and the birth of electronic trading, “Commissions for investors are lower, the speed is quicker, and in many cases, the markets are tighter than they have ever been,” said 16-year veteran Marty Kearney, Managing Editor of Social Media for the CBOE.

“The growth in the options market has been nothing short of amazing over the past 40 years,” said Schaeffer’s Senior Technical Strategist Ryan Detrick, CMT. “In a world where we continually hear how overall NYSE volume is extremely low, it’s worth noting that option and futures volume have steadily grown over the past four years.”

In fact, in both 2011 and 2012, over 4 billion options traded hands on almost 3,500 underlying products, according to Kearney. “This could be a direct result that investors have realized how important it is to be hedged, and using options is a great way the average trader can do this,” opined Detrick.

Echoing that, “Not only does the [CBOE] provide a means for the world to hedge its financial risk, but where else in this world can one single word – ‘sold!’ — seal a potentially multi-million-dollar deal?” said MarketTaker.com Chief Option Strategist Dan Passarelli. “I’m proud to have been a part of the unique and incredible community that is the CBOE. [Its] existence is proof that American capitalism is strong and honorable.”

Andrea Kramer, Schaeffer’s Investment Research