Little is known about the options markets in 1800s other than that it was fraught with corruption. In 1900s, a group of firms calling itself the Put and Call Brokers and Dealers Association created an options market.
In April 1973, a revolutionary change occurred in the options world – the Chicago Board of Trade set up a new exchange, the Chicago Board Options Exchange (CBOE), especially for the purpose of trading stock options. Since then options markets have become increasingly popular with investors. It opened its doors for call options trading on April 26, 1973, 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 contract, it added liquidity. In other words, an investor who had previously bought or sold an option could go back into the market place to its expiration and sell or buy the options, thus offsetting the original position. Most critical was the setting up of the clearing house that guaranteed to the buyer that the writer would fulfill his or her end of the contract. Thus, unlike in an over-the counter (OTC) market, option buyer no longer had to worry about the credit risk of the writer. This feature made options market more appealing to the general public.
The American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading options in 1975. The Pacific Stock Exchange (PSE) did the same in 1976. By the early 1980’s, the volume of trading had grown so rapidly that the number of shares underlying the options contracts sold each day exceeded the daily volume of shares traded on the New York Stock Exchange.
In the 1980’s, markets developed for options in foreign exchange, options on stock indices, and options on future contracts. The Philadelphia stock exchange is the premier exchange for trading foreign exchange options. The Chicago Board Options Exchange trades options on the S&P 100 and the S&P 500 stock indices while the American Stock Exchange trades options on the Major Market Stock index, and the New York Stock Exchange trades options on the NYSE index. Most exchanges offering futures contracts now also offer options on these futures contracts. Thus, the Chicago Board of Trade offers options on corn futures, the Chicago Mercantile Exchange offers options on live cattle futures, and the IMM offers options on foreign currency futures, and so on.
Both options in futures markets have been outstandingly successful. One of the reasons for this is that they have attracted many different types of traders. Three broad categories of traders can be identified: hedgers, speculators and arbitragers.