The Creation of Listed Options at Cboe

March 1, 2024

The year is 1973. The financial world is abuzz with activity, but options trading remains a complex and murky affair. Contracts are negotiated over-the-counter, making it difficult for traders to find counterparts and agree on terms. Enter Joe Sullivan, a visionary who saw the immense potential of a standardized options market. Sullivan, along with a team of dedicated individuals, embarked on a groundbreaking mission: the creation of the Chicago Board Options Exchange (Cboe).

Academia and Industry Collaboration: The Birth of a Pricing Model

The groundwork for this revolution was laid years earlier. In the academic community, Fischer Black, Myron Scholes and Robert Merton published research theorizing a method for pricing options contracts. Their Black-Scholes-Merton model, though not specifically designed for stock options, considered factors like time, volatility and the underlying security's risk and expected return. This provided a crucial foundation for efficient options pricing.

Nine-hundred miles away, the Chicago trading community was eager to launch the first listed options exchange. While Black, Scholes and Merton weren't directly involved in creating the exchange, their pricing model offered a scientific and objective alternative to guesswork. It allowed traders to value options contracts based on mathematical calculations, not just intuition.

From Theory to Reality: The Birth of Cboe

On April 26, 1973, their dream became a reality. With regulatory approvals in place, a handful of CRT screens set up in a converted smoking lounge and a team of enthusiastic market makers, the Cboe opened its doors, offering the world's first exchange for listed options trading.

The early days were a whirlwind of excitement and uncertainty. With only eight trading posts and a handful of stocks (carefully selected from the NYSE's most actively traded list), Cboe was a far cry from the behemoth it is today. Even finding experienced market makers proved challenging, with many coming from diverse backgrounds and some being complete rookies.

1973 was a banner year for the coming together of financial theory and practice. The Black-Scholes-Merton pricing model, combined with the increased liquidity and transparency of exchange trading, revolutionized the options market. Investors now had new tools to manage risk in ways never imagined before. Cboe's success wasn't just about innovation; it was also about timing. A cultural shift towards free markets within the SEC, spearheaded by individuals like Bill Casey and Lee Pickard, provided a fertile ground for the exchange's growth.

The Vision for Listed Options

The initial vision of Cboe was simple: bring exchange-traded options to the masses. Unlike over-the-counter options, listed options offered standardized contracts, increased transparency and the potential for reduced volatility through defined-outcome strategies.

The journey, however, didn't stop there. Originally, options contracts only had quarterly expirations. Recognizing the growing market demand, Cboe pioneered monthly expirations, followed by SPX Weeklys options in 2005, Wednesday-expiring SPX Weeklys in 2016 and then by 2023, Cboe listed SPX Weeklys with expirations on each day of the week (M-F).

These advancements transformed the options market, offering traders and investors flexibility and the ability to manage risk with greater precision. Today, SPX 0DTE options trading (options expiring the same day) represents a significant portion of the average daily volume, showcasing the vast opportunities this innovation has opened up.

From its humble beginnings in 1973, Cboe, under the visionary leadership of Joe Sullivan, revolutionized the way options are traded. The introduction of listed options not only transformed the financial landscape but also laid the foundation for the modern options market we know today. Sullivan's legacy serves as a powerful reminder of the transformative power of innovation and entrepreneurship in the world of finance.

Joe Sullivan, Cboe's founding president, wrote a memoir that details the creation of Cboe -- originally the Chicago Board Options Exchange. Read his full memoir, on the SEC Historical Society website. 

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