Definition of Options and origin of options

An option is the right, but not the obligation, to buy or sell something at a predetermined price at anytime within a specified time period.

Origin of Options:

Chicago Board of Options Exchange (CBOE) was created in 1973 and CBOE standardized the option contracts, improving the liquidity and enabling the general public to participate in option trading for the first time. It is interesting to note that the option pricing theory was developed around the same time by Fischer Black and Myron Scholes. The much acclaimed Black-Scholes model uses the various parameters of an option viz., strike price, price of the underlying asset, time to expiration, interest rate and the volatility of the underlying asset to compute the theoretical price of an option contract. The American, Philadelphia and the Pacific stock exchanges began trading call options by 1975-76. Put options were introduced in 1977 and by then all US stock exchanges started trading in options with gradual increase in volumes.

The Cox-Rubinstein formula was developed in 1979 which is a binomial model for pricing the options. Today almost all stock exchanges around the world trade in equity options and the volumes are phenomenally high.

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