Hey everyone, Kirk here again and welcome back to the daily call. On today’s daily call, we are going to talk about the Chicago Board of Options Exchange, more formerly known as the CBOE. You probably hear these terms or these letters thrown out all the time, but I want to let you guys know what their role is in the market, what they do and also, why we need them and the products that they offer.
I think the first thing to know is that it is the largest options exchange in the world. The CBOE was started back in 1973 and really, the role of the CBOE is to be just a medium of exchange. They we’re probably one of the first and probably if not, the foremost in standardizing contracts with options. When they started, option contracts had no standard size. Now, we have generally standard sizes, 100 shares per contract, etcetera, standard expiration dates. And so, the CBOE was probably a big part of that in the early days. A lot of the contracts that they trade now are tons and tons of ETF options, stock options, leaps, interest rate options, foreign currencies and they’re also huge on index options. One of their biggest products is the SPX index options, so they manage that as well. And then more recently, they’ve gotten into bitcoin futures which has been a very recent development in the last couple of months that they started trading those as well. Again, the CBOEs role is just to be this big medium of exchange, the standardization in the market which I think is important because it creates some consistency and some framework around how traders can maneuver the markets.
I will say that CBOE, their role in the market is not as important as the OCC which is the Options Clearing Corp. If you’ve listened to the previous videos or watched previous tutorials that we’ve done here at Option Alpha, you know that the OCC is basically the one central clearing corporation that both issues contracts and ensures that they’re going to be legitimate with other buyers and sellers. If somebody issues a contract, even though they might exchange that contract through the CBOE system, it still has to be cleared by the OCC. For me, I think that these two parties work very, very closely together and one cannot really exist without the other. The CBOE’s default risk and their systematic risk in the market would be much, much, much higher if they didn't have somebody like the OCC as a clearing mechanism that protects everyone else behind them and basically ensures that both the buyer and the seller are going to pay up on their obligations.
There’s obviously a lot of different options exchanges out there. The CBOE is not the only one, but they are by far the biggest one and one of the most on the leading edge as far as products and innovations. I know they came up with leaps, non standardized contracts were a big thing, so the introduction of weeklies which actually is more of a recent thing than most people think, weeklies actually haven’t been around that long, but the CBOE was right at the forefront of that and also, their volatility index. We can’t go without saying that CBOE was the first to really launch some sort of market volatility index back in the day and still use today as the fear index or the VIX. And so, that product is like an in-house product for them and obviously a very huge success. Hopefully this helps out. Again, there’s not really too much else to say on this, but if you have any questions on obviously CBOE or any of the other different options exchanges, just let me know. Until next time, happy trading!