Options trading, as the name suggests, offers the trader an option either to stay in the trade or to exit the trade. With options trading, traders have a right, not an obligation, to buy and sell options. There are many types of options that can be traded, but one common feature with all options is that there is a contract, which details such things as the expiration date and the value of the underlying asset. In Australia, there are options that pay off 1000 times the value of the underlying asset. In the United States, the best paying options are those paying 100 times the value of the option.
Options trading has been going on for many decades in one form or the other. The original name for options trading was ‘over the counter’ trading. This was because, as the name implies, the trade was done over the counter and only traders with particular needs were involved in the trade. The original options did not have the regulations that today’s options have. Traders usually had a ‘gentleman’s agreement’, meaning there were many problems. With the original options, there were no secondary markets and there was no defined way of determining the value of the options and the underlying asset.
The modern financial options trading, as we know it, came into existence in 1973. This was when CBOE or the Chicago Board Options Exchange was opened by the CBOT or the Chicago Board of Trade. Chicago Board Options Exchange was therefore the first organization to do the modern options trading and it remains the largest platform for options trading in the United States. The first day of the modern options trading was on 26 April in 1973. On that day, 911 contracts were traded under the current rules and regulations.
Today, it is not necessary for traders to argue over terms and conditions of options trading. The Chicago Board Options Exchange and other organizations in other countries now publish quoted options prices for traders or their brokers. These organizations have also established rules and regulations, effectively making options trading safe for traders. Government regulations have also played a big part in making options trading safe through such agencies such as the Securities and Exchange Commission in the United States.
As the Chicago Board Options Exchange was being established, so was the OCC or the Options Clearing Corporation. This was established to make sure that all members would honor the contracts. The OCC is still operational and failure to honor the contract results in bans for traders from options trading for a certain period or even for life. OCC also has powers to freeze assets and to start court proceedings aimed at getting money that is owed to another party.
There has been an impressive development in options trading ever since in mid 70s. The OCC has cleared 2.8 billion contracts to date and there is growth everyday. In the recent past, traders started trading in binary options. These have attracted huge numbers because digital options trading is not as speculative as trade in traditional options, meaning all savvy traders will make a profit.
Tags: Options Trading