International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

20
Option Markets

ALGER B. (DUKE) CHAPMAN

Trading of equity options has exploded since 1973, when the Chicago Board Options Exchange (CBOE) was born out of the Chicago Board of Trade. At that point, no one had the options business. Options were a byway in the se curities business. They were nonstandardized options and one bought them and held them and waited for them to come full term. It was an over-the-counter business made by a handful of people who wrote those options. The idea behind creating a market was to bring standardization to the options business. It started slowly and continued to explode and grow through the 1970s and into the 1980s. Dramatic growth came when index options were created. The indices on the Standard & Poor's 100 and 500 created a whole new dimension of growth, to the point where, in 1987, the CBOE traded a record 180 million contracts in equity and index options combined. After the crash, 1988, as was the case in most areas of the equity market, was not one of the great years, but we still traded 110 million contracts during that year.

The derivative market has been driven by its use as a tool to manage volatility. As previous chapters have reminisced, back to the freeing of exchange rates and the abandoning of the gold standard, and as we came into an era of higher inflation, volatility entered all of our lives in increasing ways. And, as the exchanges have grown, there has been a dramatic growth in the need to manage that risk. Institutional assets have grown and pools have become so big in the equity side of the business, that managers have had to invest in the derivative market rather than in stock because of the potential market impact of their transactions. Given the size of the investment pools, these instruments have become an essential part of the management of portfolios.

Our market is the one that has remained the least institutional of any derivative market over this development period. At the CBOE, our public volume

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