- Finish the story! Here’s Part II of the complete history of options trading…
- From the open outcry pits to modern online trading…
- How the GME short squeeze changed the game forever…
You’ve heard me say it before — knowing your market history is critical.
On Tuesday, we went over part one of options trading history.
Today, we’ll bring the story up to the present day. Grab your popcorn and let’s get to it.
April 26, 1973: Chicago Board Options Exchange Opens
April 27, 1973, might be the single most important day in the history of options trading. It was when the Chicago Board Options Exchange (CBOE) first opened its doors.
Located at 400 South LaSalle Street in Chicago, the CBOE is the largest options exchange in the world.
And back then, the CBOE “pit” was to options trading what the Colosseum once was to gladiator fighting…
Every day, hundreds of traders stormed the pit, yelling and screaming their orders in a process known as “open outcry” trading.
Fortunes were made and lost in the CBOE pit throughout the 70s and 80s. The derivatives market grew exponentially as a result, giving birth to options trading as we know it today.
Of course, now almost all trading takes place online — but we’ll get to that later…
May 1973: The ‘Black-Scholes Formula’
As the CBOE was changing the options market in person, two mathematicians were working on changing the way options prices were calculated.
Fischer Black and Myron Scholes created an equation — now known as the Black-Scholes Formula.
Their formula showed how to determine a stock option’s price. It included the underlying stock’s price, the stock’s volatility, the exercise price and maturity of the option, and the interest rate.
The constantly shifting options prices that we see today are a product of this very formula.
1982–1985: Online Trading Begins
In the early 1980s, the stock market would change forever with the invention of online trading platforms.
The very first online trading platform, NAICO-NET, came out in 1982. However, the program came with some drawbacks…
The software was clunky and expensive. Plus, online trading wasn’t liquid enough at the time to support the high cost to run the software.
In 1985, Trade*Plus was released as the first consumer-facing trading platform.
As more Americans began owning personal computers with internet access, online trading grew exponentially.
In 1991, Trade*Plus spun off a new version known as E-Trade…
Today, E-trade remains a powerhouse as online trading dominates the global equities market.
In the 21st century, online trading has risen to new heights, leading to some infamous moves in stocks…
January 2020: The GME Gamma Squeeze
January 2021 brought one of the most incredible trading events in recent history — the short squeeze in Gamestop Corp. (NYSE: GME).
Reddit’s WallStreetBets (WSB) forum joined together to sway an army of retail traders to storm Wall Street.
These traders had one goal — to take on billionaire hedge funds that were shorting stocks like GME.
That flood of traders squeezed the stock, forcing the hedge funds to close their positions out for a loss. GME’s share price exploded to almost $500!
The price action made headlines worldwide. But the fact that options played such a big role in the squeeze proved more notable for Evolvers.
WSB traders used call options to create a gamma squeeze — where options amplify a short squeeze by 100 times. It’s like a short squeeze on steroids.
The GME gamma squeeze sent ripples through the entire market, and in my opinion, changed options trading forever.
I hope this short history lesson has given you some valuable perspective.
We only scratched the surface. But this historical context can help you understand the wildly complex options market we trade today.
In turn, my favorite bit of wisdom from Tim Sykes still holds true — know your history.
Until next week,
Editor, Evolved Trader Daily
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