Chicago Board Options Exchange – Definition

Cite this article as:"Chicago Board Options Exchange – Definition," in The Business Professor, updated March 24, 2019, last accessed October 26, 2020,


Chicago Board Options Exchange (CBOE) Definition

The Chicago Board Options Exchange (CBOE) is a premier exchange holding firm and the largest options exchange in the world. It operates globally and provides services pertaining to equities, indices and interest rates. The CBOE came into being as Chicago Securities in 1973 and continued operating  in private ownership until 2010, when it transitioned into a publicly traded firm as Cboe Global Markets, Inc.

A Little More on What is the Chicago Board Options Exchange

CBOE is based in Chicago, IL and serves various geographical locations, offering trading services in a wide range of assets, such as:

  • Futures
  • Options
  • Equities
  • Exchange Traded Products (ETPs)
  • Foreign exchange
  • Multi-asset funds

CBOE is the largest exchange by volume in Europe, as well as the market leader in options and the second largest exchange operator in the United States. It also leads markets globally in ETP trading. In the United States alone, CBOE boasted annual trading volumes exceeding one billion contracts by the end of 2014. The exchange deals in 22 stock market indices and 140 ETFs and offers options from over 2000 registered firms.

Cboe Global Markets has pioneered several ingenious financial solutions, one of the most popular of them being the Volatility Index (VIX).

The exchange is also credited with creating the Cboe Clearing Corp., subsequently known as the Options Clearing Corporation (OCC), which evolved as the de facto clearing house to facilitate the exchange of options transactions.

Cboe Global Markets is also responsible for setting up The Options Institute in 1985 – an educational establishment that aimed to educate investors about options on a global scale. Presently, The Options Institute conducts seminars and webinars, and offers online courses to investors around the world interested in options trade.

Cboe Global Markets has a wide range of products on offer for investors to employ as hedging instruments. Products include

  • Put and call options
  • Exchange-traded Funds (ETFs)
  • Exchange-traded Notes (ETNs)

Cboe also offers options on stock and sector indexes such as S&P 100, S&P 500, and selected indices from Dow Jones, FTSE, NASDAQ and MSCI. It also offers options in Microsoft, General Electric, Altria and Bitcoin.

The Volatility Index (VIX) is the core product of Cboe Global Markets and is popular as an accurate index of stock market volatility. It focuses on real-time prices of “Close to the money” options listed on the S&P 500. It’s most distinctive feature is a forecast of expected stock market volatility over a period of 30 days in the future. VIX is also an accurate indicator of investor perception of bearish trends in the market – a spike in VIX levels usually denotes perceived instability in the market.

CBOE’s Volatility Index provides volatility indicators for broad-based indices such as the Dow Jones Industrial Average, Exchange-traded Funds, stocks, commodities, and other niche indices. The exchange is regulated by the Securities and Exchange Commission.

References for the Chicago Board Options Exchange

Academic Research on Chicago Board Options Exchange

Tests of market efficiency of the Chicago Board Options Exchange, Galai, D. (1977). The Journal of Business, 50(2), 167-197. Galai scrutinizes the pricing mechanism of call options written on stocks. He goes on to test the efficacy of the newly-formed options market – the Chicago Board Options Exchange (CBOE) by pitting it against the option pricing model developed by Black and Scholes.

Transactions data tests of efficiency of the Chicago Board Options Exchange, Bhattacharya, M. (1983). Bhattacharya’s paper illustrates the lower boundary condition tests that he performs using rational pricing of call options as a basis. Additionally, the author also performs a standard deviation test based on both the bidding and asking prices of options. Results from these lower boundary condition tests typically disregard minute and intermittent profits resulting from market mispricing.

Empirical tests of boundary conditions for CBOE options, Galai, D. (1978). Journal of Financial Economics, 6(2-3), 187-211. Galai’s paper derives the lower boundary conditions for traded options on the Chicago Board Options Exchange (CBOE). Subsequently, he subjects them to empirical testing and formultes two hypotheses: There exists noticeable synchronization between stock and options markets, resulting in simultaneous closing prices that fall within theoretical limits. The markets are efficient.

The Chicago board options exchange and market efficiency, Finnerty, J. E. (1978). Journal of financial and quantitative analysis, 13(1), 29-38. This paper highlights the phenomenal rise in investor as well as academic interest regarding the Chicago Board Options Exchange (CBOE), since its inception in 1973. Consequently, trading volume has also increased exponentially, reaching 1.5 million contracts traded on the CBOE and 800,000 contracts traded on the American Stock Exchange within the first three years of its formation.

An empirical reexamination of the impact of CBOE option initiation on the volatility and trading volume of the underlying equities: 1973–1986, Bansal, V. K., Pruitt, S. W., & Wei, K. J. (1989).Financial Review, 24(1), 19-29.  This paper revisits the formative years of the Chicago Board Options Exchange (CBOE) and analyzes its impact on price volatility and trading volume. The study samples exchange data for the period 1973 – 1986 and runs empirical tests on all the listed firms. Based on the test results, the paper concludes that firms can reduce their risks by listing their options in an options exchange.

Trading costs for listed options: The implications for market efficiency, Phillips, S. M., & Smith Jr, C. W. (1980). Journal of financial economics, 8(2), 179-201. Phillips and Smith Jr scrutinize the atypical evidence regarding the effectiveness of the listed options exchanges. Their paper analyzes the composition of trading costs and concludes that abnormal returns are the result of several disregarded costs. Thus, anomalous results can be eliminated by adjusting the published trading rules to calculate corrected estimates of trading costs.

Options markets and stock return volatility, Skinner, D. J. (1989). Journal of Financial Economics, 23(1), 61-78.Skinner’s paper analyzes fluctuations in returns of common stocks at the time of listing of their respective ETFs. The paper concludes that there is a decline in stock return fluctuations after ETF listing. Skinner asserts that movements in market volatility is unable to explain this phenomenon. Moreover, listing options typically results in an increase in trading volume in the stock market.

CBOE options and stock volatility, Trennepohl, G. L., & Dukes, W. P. (1979). Review of Financial Economics, 14(3), 49. This paper illustrates how the initiation of the Chicago Board Options Exchange (CBOE) rekindled public interest in call option contracts. In fact, the rise of options contracts has been phenomenal since 1973, with four other exchanges joining CBOE in calling options contracts. The purpose of Trennepohl and Dukes’ study is to assess the effect of options listed in exchanges on the volatility of the underlying securities.

Options traders exhibit subadditive decision weights, Fox, C. R., Rogers, B. A., & Tversky, A. (1996). Journal of Risk and uncertainty, 13(1), 5-17. This paper follows the activities of options traders and concludes that although options traders price both risky as well as uncertain prospects, it is only the prices of risky prospects that concurred with their anticipated values. On the other hand, uncertain prospects were often priced in violation of expected utility theory.

The impact of listed options on the underlying shares, Hayes III, S. L., & Tennenbaum, M. E. (1979). Financial Management, 72-76. This paper elaborates statistical tests that demonstrate that listed options positively affect trade volume of underlying shares. Options also tend to lower volatility, thus augmenting price continuity. The authors peruse numerous studies originally performed by the Chicago Board Options Exchange (CBOE). They also conduct a survey via mail and analyze the results.

Clearly irrational financial market behavior: Evidence from the early exercise of exchange traded stock options, Poteshman, A. M., & Serbin, V. (2003). The Journal of Finance, 58(1), 37-70. Poteshman and Serbin sample exchange data from the period 1996 – 99 and scrutinize the early exercise of exchange‐traded options by diverse groups of investors.The authors identify several instances of irrational exertions, especially by individual investors acting through brokers. On the other hand, traders acting on behalf of large businesses typically refrained from early exercise.


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