Chicago Board Options Exchange

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Chicago Board Options Exchange
Image:cboe_logo.gif
Founded April 26, 1973
Headquarters Chicago, Illinois
Key People William J. Brodsky, Chairman and CEO; Edward T. Tilly, Executive Vice Chairman; Bradley Griffith, Vice Chairman; Edward Joyce, President and COO
Products Options on equities, equity indexes, ETFs (+futures and stock exchange)
Web site www.cboe.com

The Chicago Board Options Exchange was founded in April 1973 as the first U.S. options exchange offering standardized, listed options. CBOE, where in 2007 almost one billion contracts were traded, is the largest of the seven U.S. options exchanges in total volume and market share.

CBOE offers options on 2,200+ equities, on 22 broad-based and sector-based indexes (see CBOE index options), and on 140 ETFs, (as of March 2008), among other products.


Contents

Hybrid Model

About 95 percent of CBOE contracts are traded electronically. The remaining transactions, traded via open outcry as part of the exchange's Hybrid system (which enables customers to choose how their orders are handled – either electronically or through open outcry), are normally very large or complex orders emanating from institutions that use floor brokers to "work the order" to gain price improvement.

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CBOE Business Model

The CBOE's business model focusses on new product development and seeks new business opportunities, which over the last few years have incorporated the scalability of its electronic trading platform, CBOEdirect. This technology platform was built and is maintained in-house by CBOE, and it supports multiple trading models, configurable by product.

Besides using CBOEdirect for its electronic options trades, CBOE has launched two new fully electronic exchanges using the platform:

In addition, CBOEdirect is the trading platform for OneChicago, the electronic single stock futures exchange owned jointly by CBOE, Interactive Brokers and CME Group.

Demutualization

In January 2006, in anticipation of future demutualization, CBOE shifted its corporate business model to a for-profit approach. In February 2007, the exchange filed an S-4 with the SEC, which subsequently was amended (updated) in May 2007 and May 2008). Demutualization would require regulatory approval and a vote of CBOE membership.

If a demutualization is completed, one plan considered is to go public. An issue facing demutualization remains, however, and that is the issue of CBOT members’ exercise right privileges. Though the SEC in January 2008 agreed with CBOE's contention that the CME/CBOT merger effectively voided exercise rights, the Delaware court, where the issue now resides, has not issued a decision.[1]

In the midst of these legal proceedings, the CBOE memberships continue to appreciate in value and set new records.[2]

Products

Options on Equities

More than 2,200 equity options are listed at CBOE [3].

Options on indexes

CBOE as early as 1982 began to establish exclusive licensing agreements with Standard & Poor's to offer security index options based on the S&P 500 (SPX) and S&P 100 (OEX), and later with Dow Jones on the Dow Jones Industial Average. In addition, the CBOE has created proprietary indexes and index mothodologies, e.g., the VIX and a long list of volatility products for tracking market volatility and investor sentiment. Both sets of innovation have earned the exchange the reputation of being the leading index options exchange and home of volatility products.

A few, but not all, of the 22 indexes (as of March 2008) on which CBOE offers options, are:

Large-cap indexes

Small-cap indexes

  • Options on Russell 1000 Index (RUI)
  • Options on Russell 2000 Index (RUT)

Micro-cap indexes

  • Options on iShares Russell 2000 Index Fund (IWM)
  • Options on iShares Russell Microcap


FULL LISTING OF CBOE index options

FULL LISTING OF CBOE ETFs and HOLDRS

Indexes Calculated by CBOE

CBOE calculates a number of proprietary indexes, including the indexes in the list below. CBOE has won numerous innovation awards as a result of the development of these unique indexes:

  • CBOE Volatility Index (VIX)
  • CBOE S&P 500 BuyWrite Index (BXM)
  • CBOE S&P 500 PutWrite Index (PUT)
  • CBOE S&P 500 2% OTM BuyWrite Index (BXY)
  • CBOE DJIA BuyWrite Index (BXD)
  • CBOE NASDAQ-100 BuyWrite Index (BXN)
  • CBOE Russell 2000 BuyWrite Index (BXR)
  • CBOE DJIA Volatility Index (VXD)
  • CBOE NASDAQ-100 Volatility Index (VXN)
  • CBOE Russell 2000 Volatility Index (RVX)
  • CBOE S&P 100 Volatility Index (VXO)
  • CBOE S&P 500 3-Month Volatility Index (VXV)
  • CBOE VIX Premium Strategy Index (VPD)
  • CBOE Capped VIX Premium Strategy Index (VPN)
  • CBOE S&P 500 VARB-XTM Strategy Benchmark (VTY)
  • CBOE Exchange Index (EXQ)
  • CBOE China Index (CYX)

Senior executives


CBOE Educational Efforts

The Options Institute, the educational arm of CBOE, debuted in 1985 to educate investors about options. With the advent of technology, Options Institute has added a comprehensive listing of online curricula to its live seminars. Curricula is produced and courses are taught by CBOE trading industry professionals; these are created not just for individual investors, but institutional investors, market regulators and a wide variety of other market participants and observers.

Today CBOE also hosts CBOE TV, which features an extensive list of online programs and podcasts on daily market developments, options products and practical strategies.


Options Dictionary

CBOE Options Dictionary

Awards

  • 2008 -- U.S. Options Exchange of the Year, Futures & Options World
  • 2007 & 2008 - Exchange Leader in Fund Innovation for "Most Proactive Exchange for ETF Derivatives—The Americas": Third (and Fourth) Annual Global ETF Awards dinner
  • 2007 Leader in information technology -- CIO 100 award: CIO Magazine for operational and strategic excellence in information technology (IT)
  • 2006 Leader in Exchange Performance Award for World's Best Derivatives Providers: Global Finance magazine
  • Award-winning Web site: Forbes "Best of the Web," five years running


CBOE Volume Highlights

  • In March 2008, CBOE daily volume averaged 4.65 million contracts traded per day, up 23% when compared to the 3.8 million contracts daily during March 2007. Total exchange volume during the month rose 12% to 92,953,594 contracts, up from March 2007 volume of almost 83 million contracts.[4]
  • In February 2008, trading volume totaled 78.7 million contracts, an increase of 28.4 percent over February 2007 volume of 61.3 million contracts. Average daily volume for the month was 3.9 million contracts.[5]
  • In January 2008, trading volume rose 81 percent to 110.8 million contracts (average daily volume - 5.3 million), up from January 2007's volume of 61.3 million contracts (average daily volume - about 3.1 million). This was the busiest month in CBOE's 35-year history, surpassing the previous high of 105.6 million contracts traded in August 2007.[6]
  • 2007 totals - 944.5 million contract volume (3.76 million average daily volume) -- fourth consecutive with record trading volume. This was a 40 percent increase over 2006 when nearly 675 million contracts changed hands. Total volume in equity options during 2007 tallied a new record of greater than 500 million contracts traded (average daily volume of just less than 2 million contracts), an increase of 28 percent over the 391 million contracts traded in 2006. In index and ETF options total volume, a new record of 444 million contracts were traded during 2007, 56 percent over the 284 million contracts traded in 2006.

News

  • The CBOE in early April 2008 reported record revenues and earnings for the three-month period ending March 31, 2008. This was the ninth consecutive quarter of year-over-year, double-digit gains for CBOE. Pre-tax profits totaled $52.8 million for the first quarter, a 74-percent increase over $30.3 million for the same period a year ago. Net income for the first quarter was $30.6 million compared to $17.6 million for first-quarter 2007, also up 74 percent. Record quarterly revenues totaled $104.3 million versus $77.8 million during first-quarter 2007, a 34-percent revenue increase. Higher trading volume during the quarter translated into a 40-percent increase in revenues from transaction fees. Average daily volume for the first three months of 2008 totaled just more than 4.6 million contracts as compared to nearly 3.4 million contracts a year ago, a 37-percent increase[7].
  • On Jan. 30, 2008, CBOE released its fourth-quarter 2007 financials. Revenues for the period totaled $93 million, a 43-percent increase over 2006, on record trading volume of 258.8 million contracts. For the year ended Dec. 31, 2007, total revenues grew 37 percent to a record $352.3 million for the full-year 2007, compared with $258.0 million in the prior year.[8]
  • On Nov. 2, 2007, CBOE reported that a CBOE seat had traded at an all-time high of $3 million, surpassing the previous record $2.9 million set on Oct. 31, 2007. [9] [10]
  • On Oct. 18, 2007, CBOE released its third-quarter 2007 financials. Revenues for the period totaled nearly $97 million, a 53-percent increase over 2006, on record trading volume of 260 million contracts.[11]
  • On Aug. 28, 2007, CBOE began trading Basket Credit Event Binary Options (Basket CEBOs). Two of these are based on specific industry sectors (automobile and homebuilder) and the third as a high-yield composite basket. Basket CEBOs are call options based on a basket of reference entities (the basket components). The options automatically pay out a cash amount each time a credit event is confirmed in any of the basket components during the life of the contract.

Chicago Board Options Exchange History

The Beginning

Launched in April 1973, the Chicago Board Options Exchange was conceived of by the Chicago Board of Trade (CBOT). At the time of conception, futures volume was flagging, and the CBOT looked for new avenues to supplement revenues. Exchange-traded options provided the answer. Shortly after CBOE was launched, grain trading volume took off as grain and oilseed prices rose to record levels on international buying. Were the CBOT to have anticipated this eventual extended market rally and subsequent transactional profits, some question whether CBOE would have made it onto the CBOT’s drawing board.

According to an article which chronicles the introduction of listed options,[12] the “birthing room” for CBOE was in the former smoking lounge of the CBOT, “a windowless, little room at the southeast corner of the then-120-year old grains exchange.”

In the early days, trading volume averaged around 1,000 calls a day, and puts were not introduced for another four years. A year after launch, however, CBOE trading volume had grown 40-fold, allowing the exchange to move onto its own trading floor. This was facilitated by double-decking the CBOT trading floor at 141 West Jackson, with CBOE on the top floor and CBOT below.

Two years after CBOE launched options,The Options Clearing Corporation was formed, and further standardization was made with the addition of the Black-Scholes pricing model.

In 1984, CBOE moved to its current 10-story building. Annual volume in that year exceeded 100 million contracts for the first time. Also during the year, CBOE launched its Retail Automatic Execution System (RAES) to facilitate electronic order execution.

Product Additions

One of the most noteworthy milestones for CBOE was the launch of stock index options. In March 1983, CBOE introduced its first proprietary index, the CBOE-100 Index, later renamed the S&P 100 Index (OEX). Four months later, options trading on the S&P 500 Index (SPX) was launched.

Options on interest rate products were added at CBOE in 1989, and the next few years saw creation of more new products and indexing tools, such as Long-term Equity AnticiPation Securities (LEAPS) (1990), FLEX options and the VIX volatility index (both in 1993), the Dow Jones Industrial Average index (DJX) in 1997, and the VXN Volatility Index (VXN) in 2001. In 2002, the CBOE S&P 500 BuyWrite Index (BXM) was introduced as the first major benchmark for options performance, stemming from a study by a Duke University professor, and in 2007 the CBOE S&P 500 PutWrite Index (PUT) was launched.

Technology and Linkage

In 2003, in response to expanding technology needs of users, CBOE introduced its CBOE Hybrid Trading System to provide customers a blended solution of both screen-based and open outcry trading models. Also in that year, CBOE and the other options exchanges successfully completed their Option Intermarket Linkage Plan, the culmination of CBOE’s 2000 proposal to the SEC to adopt a plan to link U.S. options markets.

CBOE futures and securities exchanges

With syngeries between all areas of the financial world, CBOE introduced two new affiliated exchanges, a futures exchange and a securities exchange:

Regulation

CBOE is regulated by the Securities and Exchange Commission (SEC), as is the CBOE Stock Exchange (CBSX). A wholly owned futures subsidiary of CBOE, the CBOE Futures Exchange (CFE) is regulated by the Commodity Futures Trading Commission (CFTC).

The CBOE offers information on regulatory and disciplinary process for customers[13] and members[14]on their legal & regulatory web site.[15] Also on the site are recent disciplinary actions.[16]


CBOE Annual Reports and Historical Statistical Data

References

  1. ↑ "In the Catbird Seat". PIonline.com. Retrieved on November 5, 2007.
  2. ↑ CBOE Seat Sells For New High Of $3.05 Million. Chicago Board Options Exchange. Retrieved on December 10, 2007.
  3. ↑ "Symbols Guide for Equity Options”. www.cboe.com. Retrieved on November 26, 2007.
  4. ↑ "CBOE Average Daily Volume Climbs 23% In March; Average Daily Volume Of 4.6 Million, Total Volume Of 92.9 Million Contracts; Trading In Options On Exchange Traded Funds Grows By 42%”. CBOE. Retrieved on April 12, 2008.
  5. ↑ "CBOE February Volume Increases 28% TO 78.7 Million; ETF Volume Increases 72% Average Daily Volume AT 3.9 Million Contracts”. CBOE. Retrieved on April 12, 2008.
  6. ↑ "Total Volume Of 110.8 Million Contracts Rose 81% Over January 2007, Average Daily Volume Of 5.3 Million Contracts During January Is New Record,”. CBOE. Retrieved on February 4, 2008.
  7. ↑ "CBOE Announces Record Financial Results For First Quarter: Pre-tax profits increase 74%, revenues up 34%; Ninth consecutive quarter of double-digit gains”. CBOE. Retrieved on April 21, 2008.
  8. ↑ "CBOE Announces Record Results For 2007". CBOE. Retrieved on January 30, 2008.
  9. ↑ "CBOE Seat Traded Today At A New Record Price $3 Million. Chicago Board Options Exchange. Retrieved on November 2, 2007.
  10. ↑ "CBOE Membership Forms Library". www.cboe.org. Retrieved on November 23, 2007.
  11. ↑ "CBOE Announces 2007 Third Quarter Financial Results". CBOE. Retrieved on November 1, 2007.
  12. ↑ Options at the Crossroads After 30 Years. SFO Magazine, April 2003. Retrieved on May 7, 2008.
  13. ↑ CBOE's Regulatory and Disciplinary Process. Chicago Board Options Exchange. Retrieved on December 10, 2007.
  14. ↑ CBOE's Regulatory and Disciplinary Process Member Pamphlet. Chicago Board Option Exchange. Retrieved on December 10, 2007.
  15. ↑ CBOE Disciplinary Web Site. Chicago Board Options Exchange. Retrieved on December 10, 2007.
  16. ↑ CBOE Disciplinary Actions. Chicago Board Option Exchange. Retrieved on December 10, 2007.

See Also

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