V.3:3 (95-99): Stock and Future Option Trading

V.3:3 (95-99): Stock and Future Option Trading
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Stock and Future Option Trading

Trading in stock and futures options is one of the least understood yet potentially most rewarding forms of investing for the individual, professional trader and institutional investor. While trading in stock options can be traced back more than a century in the over-the-counter market, it is only within the last decade that it has become a significant activity in listed stocks. According to Forbes magazine, by 1980 the total volume of options traded measured in terms of their underlying stock exceeded the volume of actual shares traded on the New York Stock Exchange.

The modern stock options industry began in 1973 when the Chicago Board Options Exchange (CBOE) formally started trading options on 16 common stocks. Initially, stock options attracted little interest. Virtually the only participants were institutional investors who used options as a hedge to protect their positions in a particular stock. The CBOE resorted to buying ad space in the Wall Street Journal to inform the investing public of its trading activity. The opportunity for profit in options trading soon became apparent to professional speculative traders who today maintain the liquidity of the market. Many fortunes have been made in stock options and today the CBOE lists options on 156 common stocks.

Four other option markets have since opened: the American-Stock Exchange, the Philadelphia Exchange, the Pacific Exchange and the New York Stock Exchange. Investors can choose from among approximately 425 stock options to trade. The success of the stock options market gave birth to such active investment vehicles as the Standard & Poor's 100 index options market at the CBOE in which more than 200,000 futures contracts are traded daily. The price for a seat on the CBOE - $10,000 in 1973 - is now $200,000, an increase of 2,000 percent. The options market has become an attractive alternative for investors seeking a short-term profit without making a large capital investment.

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