It may surprise you to learn that options trading is not a recent development in economics, but in fact has a very long history that goes back nearly to the very beginnings of human economic activity. These early options trades mainly dealt with real estate and the gradual accumulation of land, plot by plot. One more modern example of an “option” might be the decision of a major motion picture studio to purchase the rights to make a movie from a new best-selling novel. The studio has no obligation to actually create the film, but they have the right to do so, and they may sell the rights to the book for a higher price if so desired.
In today’s economic arena Options Trading encompasses a variety of transactions, but to “The Man On The Street”, trading stock options is what typically comes to mind. Stock options are usually traded using standardized options contracts; an easy to work with package as it were that are listed and traded at Options or Futures Exchanges.
The Chicago Board Options Exchange, or CBOE, is perhaps the most well known options exchange and it is one of the last such exchanges to conduct trading via all-outcry marketplaces while most other exchanges have changed to electronic trading. Sometimes stock options are traded over-the-counter without involving using an exchange as the trading forum. Most OTC options trades are conducted between small investors and their preferred investment banker or broker.
Standardized options contracts for stock options are based on the future estimated pricing of traded stocks, such as IBM, Microsoft and so on. It may be said that more than the usual amount of speculation is used when trading options as opposed to trading stocks, as stocks are usually bought for open ended, often long term investments while stock options have varying terms and durations, typically they must be exercised in less than one year. If an investor feels that the stock issued by a company will be more or less than the estimated price at a certain future date, then the investor may purchase Call or Put options and – hopefully – realize a profit deriving from the difference between the actual stock price and the price noted on their standardized options contract.