What is the Cboe Options Exchange (Cboe)?
– The Cboe Options Exchange is a major marketplace where standardized options contracts are listed and traded. An options contract gives its buyer the right (but not the obligation) to buy or sell an underlying asset at a specified price before or at a specified date.
– Founded in 1973 as the Chicago Board Options Exchange, it later rebranded under its holding company Cboe Global Markets. It is the largest U.S. options exchange and operates a broad global markets franchise that includes equities, ETFs, futures, foreign exchange and volatility products.
Key definitions
– Option: a financial derivative that gives the holder the right to buy (call) or sell (put) an underlying asset at a fixed strike price before or at expiration.
– Call option: gives the buyer the right to purchase the underlying at the strike price.
– Put option: gives the buyer the right to sell the underlying at the strike price.
– LEAP (Long-Term Equity AnticiPation Security): a long-dated option with expiration more than one year (often up to three years or more).
– VIX (Cboe Volatility Index): a market index derived from S&P 500 option prices intended to represent the market’s expectation of 30-day volatility. Traders often use it as a gauge of market uncertainty.
Quick historical milestones
– 1973: Exchange founded; initially listed only call options.
– 1977: Put options were added.
– 1990: LEAPs (long-term listed options) appeared on the exchange.
– 1993: Cboe introduced the VIX as a measure of expected S&P 500 volatility.
– 2017: Corporate rebranding to Cboe Global Markets; exchange commonly called “Cboe.”
– Q1 2022: Cboe reported record options volume — about 830.3 million contracts for the quarter and an average daily volume near 13.4 million contracts.
What the exchange lists and why traders use it
– Underlyings: individual stocks, ETFs and ETNs, domestic and international indexes (S&P 500, Dow Jones, Nasdaq, Russell, MSCI, FTSE series, etc.), commodity and specialty indexes, and some FX and multi-asset volatility products.
– Common uses: hedging (protecting a position), income generation (e.g., selling covered calls or cash-secured puts), directional speculation, and volatility trading (using VIX-related products).
– Clearing: Cboe’s early clearing activities helped lead to the industry central clearinghouse, the Options Clearing Corporation (OCC), which now clears U.S. listed options.
Checklist — things to confirm before trading on Cboe-listed options
1. Underlying security and symbol — confirm the exact ticker and series (stock, ETF, or index).
2. Option type — call or put.
3. Strike price and expiration date — confirm month and day for short-dated vs. LEAPs.
4. Contract multiplier — standard equity options represent 100 shares per contract.
5. Premium and total cost/credit — premium × contracts × multiplier, plus fees/commissions.
6. Liquidity — check bid-ask spreads and open interest to assess execution risk.
7. Margin and account permissions — ensure your brokerage account is approved for the intended strategy (e.g., selling naked options requires higher approvals).
8. Clearing and settlement rules — understand exercise, assignment, and settlement conventions (cash vs. physical) for the product.
9. Volatility considerations — know implied vs. realized volatility and how VIX may affect pricing.
10. Tax and regulatory implications — check tax treatment and any exchange-specific rules.
Small worked example — buying a call option
Scenario: You expect stock XYZ (currently trading at $50) to rise over the next two months.
– Trade: Buy 1 XYZ call option with a $55 strike expiring in two months. Premium = $2.00.
– Contract economics:
– Each option contract controls 100 shares, so total premium paid = $2.00 × 100 = $200.
– Break-even at expiration = strike + premium = $55 + $2 = $57 per share.
– Outcomes at expiration:
– If XYZ = $60: intrinsic value = $5 per share → option value $500. Profit = $500 − $200 = $300 (ignoring commissions/fees).
– If XYZ = $56: intrinsic value = $1 → option value $100. Loss = $200 − $100 = $100.
– If XYZ ≤ $55: option expires worthless. Loss = premium paid = $200.
Notes on the VIX (brief)
– The VIX is calculated from prices of near-the-money S&P 500 options and is designed to represent the market’s expectation of 30-day volatility. It is widely used as a volatility benchmark; higher VIX values generally reflect greater expected near-term price swings.
Practical considerations
– Options involve leverage, so small moves in the underlying can produce large percentage changes in option value.
– Selling options exposes you to potentially large losses unless positions are covered or otherwise hedged.
– Liquidity and execution quality vary across strikes and expirations; narrow bid-ask spreads and higher open interest typically reduce trading friction.
Selected reputable sources
– Cboe Global Markets — About: https://www.cboe.com/about/
– Cboe — VIX Volatility Index overview: https://www.cboe.com/tradable_products/vix/
– Options Clearing Corporation (OCC) — About OCC: https://www.theocc.com/
– U.S. Securities and Exchange Commission (
https://www.sec.gov/ – U.S. Securities and Exchange Commission
– Investopedia — Cboe (CBOE) overview: https://www.investopedia.com/terms/c/cboe.asp
Educational disclaimer: This content is for general educational purposes only and does not constitute individualized investment advice, tax guidance, or a recommendation to buy or sell any security. Consider consulting a licensed financial professional before making investment decisions.