Definition
The Chicago Board Options Exchange (CBOE) is one of the largest and oldest options exchanges in the world. Founded in 1973, the CBOE is renowned for introducing listed options contracts, which provide investors with a regulated and transparent way to trade stock options, index options, and Exchange Traded Funds (ETFs) options. The exchange operates a fully electronic trading platform, in addition to offering open-outcry trading. CBOE Global Markets, Inc., the parent company of the CBOE, owns and operates other financial marketplaces, including equities exchanges, futures exchanges, and foreign exchange (FX) markets.
Examples
- Equity Options: These are options derived from individual stocks. For example, an investor might buy a call option for Apple Inc. (AAPL) at CBOE to speculate on the stock’s upward movement.
- Index Options: Options based on indices such as the S&P 500 (SPX) or the CBOE Volatility Index (VIX).
- ETF Options: Options based on ETFs like the SPDR S&P 500 ETF Trust (SPY) which represents a broad market index.
- Customized Products: The CBOE also offers FLEX® options, allowing customization of contract terms such as expiry dates and strike prices to meet specific needs of sophisticated investors.
Frequently Asked Questions (FAQs)
What is the CBOE known for?
The CBOE is famous for pioneering the options market and introducing standardized options contracts. It provides platforms for trading a wide variety of derivative products.
Can individual investors trade on the CBOE?
Yes, individual investors can trade on the CBOE through brokerage accounts that provide access to options trading.
What is the VIX?
The CBOE Volatility Index (VIX) measures expected market volatility and is often referred to as the “fear gauge.” It provides a real-time snapshot of market sentiment.
How does the CBOE ensure market transparency?
The CBOE uses an electronic trading system in conjunction with open-outcry trading to facilitate transparent and efficient transactions.
How can I begin trading options on the CBOE?
You can start trading options on the CBOE by opening an options-enabled brokerage account, getting approval based on your financial situation and trading experience, and then accessing CBOE-listed options through your brokerage platform.
What different types of options can I trade on the CBOE?
On the CBOE, you can trade equity options, index options, ETF options, and customized options such as FLEX options.
Related Terms
Options Contract
An options contract is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predefined price before or on a specified date.
CALL Option
A call option grants the buyer the right to purchase an underlying asset at a specified price within a specific period.
PUT Option
A put option grants the buyer the right to sell an underlying asset at a specified price within a specific period.
Open-Outcry Trading
A method of trading that involves verbal bids and offers in the trading pits of an exchange.
Electronic Trading Platform
A computerized system that allows traders to submit orders to buy and sell financial instruments over a network.
Online References
Suggested Books for Further Studies
- Options as a Strategic Investment by Lawrence G. McMillan
- Option Volatility and Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg
- The Options Playbook by Brian Overby
- Trading Options for Dummies by Joe Duarte
- Option Trading in Your Spare Time by Wendy E. Kirkland
Fundamentals of CBOE: Financial Markets Basics Quiz
Thank you for exploring the mechanics of the Chicago Board Options Exchange with us. By understanding its fundamental framework, you’re better equipped to engage in informed and strategic options trading!
