A Brief History of Options

It has been close to thirty seven years stock options have been trading on organized exchanges.

In 1973, Chicago board of trade (CBOT) founded Chicago board of options exchange (CBOE) and call options on 16 securities started trading. In 1977, put options began trading.  A decade later, index options appeared on the scene.

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 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. 

Today almost seven different exchanges provide trading these investment vehicles including, Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX), Pacific Stock Exchange (PCX), Boston Stock Exchange (BOX) and others.

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.   

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 25th 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. 

On May 26, 2000, the International Securities Exchange (ISE) opened.  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.  October 24, 2008 - The CBOE Volatility Index (VIX) reaches an intra-day all-time high of 89.53. 1.2 billion contracts during 2008, the busiest year in the Exchange's 35 year history.

In 2010 options symbology or the way they are named was changed from its older coding of simple four- or five-character letter codes that have been in use since the Chicago Board Options Exchange (CBOE) first started trading standardized listed options back in 1973. They now use more-definitive codes containing a combination of up to 22 letters and numbers.

That was a short history of options, with an introduction to the options symbology. More about Calls and Puts I will write in the next posts.

Options 101 -part 1

The definition of an option goes something like this – “a contract that gives the right but not the obligation to buy (call) or sell (put) a certain amount of an underlying commodity or financial instrument by or at a certain date in the future”. An option is a type of derivative, since it’s value is derived from the underlying security (a stock) or commodity. To simplify let me use the word option only in the context of stock prices. The price of an option depends on the underlying stock price movements. For example, value of a call option goes up when underlying stock price goes up and vice versa. Let’s look at in another way. As of today’s closing Apple (AAPL) stock price is $257.81. So, a call purchased for 260 strike September expiration would give the buyer right to buy AAPL for $260.00 no matter how high the stock price goes beyond the 260 strike price before September 17th.  The subject of options is quite complex at times and very confusing more often. Before getting into higher complexity let me explain it in a more common way (following example has been used by many people in many places for easy understanding of how options work).

Let’s say you have come across a house listed on sale for $80K. Your intuition about macro economy tells you that this house would sell for $100K in about 6 months from now. Your intuition gains more strength as an inside source tells you that government will stimulate economy by another $1 T. While you are thinking about that deal you notice a significant increase in new job hires, correlating it to an upcoming healthy economy and start of a housing market boom. As you are more confident about the house should be $100K in near future you want to strike a deal (option) with the seller to buy the house for $80K (strike price) before the price goes up. Then, you realize that you cannot come up with $80K so, you ask the seller for a month’s (expiration) time to come up with the money. At this point the seller asks for a guarantee (option price) that you will come back with money in a month. Since, you think in 6 months the house value will be much more than the offer you agree to pay $2K to the seller for a month’s wait (time value). This is similar to buying a call option on a stock. Within the agreed one month’s time if you cannot come up with the $80K, you will stand to lose $2K paid to the seller (option expired worthless). If, you do come up with the money the seller has to oblige your right to buy the house at $80K (option exercise), even if the market value of the house is higher than $80+2K.

That was a little gist about what options are. I will get to more complex part of the options in the following posts as I don’t want to an information overload here. Somewhere, I will also include a glossary of sort to familiarize with the options trading lingo.

This post was written presuming the reader will have some knowledge about trading stocks but is not yet into the OPTIONS world. As always don’t forget to leave comments and check back for the next post and learn all about options free. If you are already an options trader I honestly welcome your suggestions.

First Post

Hello and Welcome. I wish to provide OPTIONS trading knowledge through this BLOG. I will be posting series of articles about the Structure and Function of Options trading while providing information on what, why, how, when, etc., of OPTIONS. While keeping education as the primary aim of this blog I am trying to experiment to see if a fairly small trading account can really make excellent money.

I am trying to work this out as a challenge. I will be trading "Options" to make money. The idea of this experiment is an attempt to record my real time trades so as to reach a reasonably achievable yet a challenging target. Here is the layout of what this challenge looks like. Initially I will start with a very short trading account value of about $1000 - $1500. My goal is to double the account value each month up to the 4th month. Then review the account and reset the goal again for the next 3-4 months. Since the start-up is so less there is a Day Trade cap on the trading style. Please note that, these claims are certainly not new and I am in no way guaranteeing I will accomplish this goal. However, I strongly believe it is possible and intend to post all the trades ASAP once the orders are filled. Please be advised that the strategies I employ are highly risky and blatantly stupid, meaning none of the trades are any advice for others to trade based on this blog entries.


In the course of various posts I will also provide information on how I learned my trading knowledge, who are the people, the websites and the news letters that I follow to keep up with my education. Keep checking back as I will be updating this blog with more and more posts as we go along. It is also a good idea to bookmark this blog for your further reference.