Derivatives: Markets, Valuation, and Risk Management

CHAPTER 11

Stock Products

Options on common stocks have been traded in the United States since the 1790s. Originally, trading took place in the over-the-counter market. Put/call dealers would advertise their prices in the financial press, and interested buyers would call a dealer. These contracts were not standardized with respect to exercise prices or expiration dates. Without standardization, option positions were often difficult to unwind prior to expiration. An investor wanting to reverse his option position was forced to negotiate with the dealer with whom the original trade was made.

On April 26, 1973, the Chicago Board Options Exchange (CBOE) became the world's first organized secondary market for stock options. The beginnings were modest. The “exchange” was in a small smokers' lounge off the main floor of the Chicago Board of Trade. The only options traded were calls,¹ and calls were available only on 16 New York Stock Exchange (NYSE) stocks. The market was an immediate success. By 1975, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began listing stock options, followed shortly thereafter by the Pacific Coast Exchange (PCE) and the NYSE. Today, calls and puts trade in the United States on over 2,200 hundred different stocks and on five exchanges. Worldwide, stock options trade on over 50 exchanges in 38 different countries. Futures contracts on individual stocks also trade on a handful of exchanges worldwide, but their popularity pales by ...