4.2. Trading on the Options Market

Until recently, options trading was conducted entirely over the counter. A few dozen firms located buyers and sellers and sometimes assumed the other side of a transaction. Buyers and sellers negotiated the terms for their transactions, which were highly individualized contracts. For this reason, the market was very illiquid. As late as 1968, the options market in the U.S. totaled 300,000 contracts. In 1973 the creation of the Chicago Board of Options Exchange revolutionized the business.

The Chicago Board of Options Exchange and its companion, the Options Clearing Corporation, standardized all aspects of options contracts, except the price (premium). By doing so, it allowed options on securities to be actively traded on the exchange.

The idea was soon adopted by other exchanges. Options on commodities were legalized in 1982, and commodities options began trading on the Chicago Mercantile Exchange soon after. By 2014, across all products, 11 U.S. exchanges handled over 4 billion options contracts.

While the listing of stock options and all trading would be done on the CBOE, the Options Clearing Corporation would issue and guarantee the option contracts, and it would clear and settle the trades. While other options exchanges h