A Short History of Trading as a Business

On 26 April 1973 a new exchange opened in Chicago in what had been a smokers' lounge of the Chicago Board of Trade's building. The Chicago Board Options Exchange listed call options on 16 stocks and nothing else: no puts, no indices. Its founders were members of the world's largest grain futures market, and they had spent years persuading the Securities and Exchange Commission, which approved the plan in October 1971, that options, associated in many minds with the pools and "puts and calls" of the 1920s, could be traded safely on an exchange. The exchange was incorporated in February 1972. Before it opened, American stock options were arranged one at a time by a few New York dealers, each contract with its own strike and expiry and little chance of being resold (Cboe company history, as summarised in the companion).

The founders made three choices that every options trader still depends on. Contracts were standard: fixed strikes, a few expiry months and 100 shares per contract, so that one option was interchangeable with another of the same series. Prices were set by competing market makers on a trading floor, in open outcry, as in the futures pits. And a clearing corporation stood between buyer and seller, so that a trader who bought a call never had to care who wrote it. That clearing corporation became the industry-wide Options Clearing Corporation, which in 2025 cleared more than 15.2 billion options contracts.

A month after the opening, Fischer Black and Myron Scholes published "The Pricing of Options and Corporate Liabilities" in the Journal of Political Economy (vol. 81, pp. 637–654), and Robert Merton's "Theory of Rational Option Pricing" appeared in the Bell Journal of Economics and Management Science the same year. The formula told a market maker how to hedge: hold a calculated number of shares against each option and adjust as the price moves, and the option's value is pinned by the cost of replicating it. Scholes and Merton received the Nobel prize in economics in 1997. A mathematician in California had been doing something similar for six years. Edward Thorp's Beat the Market (1967, with Sheen Kassouf) set out a method for hedging warrants against their stock in a ratio that left the position nearly insensitive to the stock price, and the fund he founded with Jay Regan in November 1969 had been trading it ever since.