The Standardisation Of Option Contracts


The standardisation of option contracts

By the 1960’s and 1970’s although options trading became more popular as when compared to the 1930s and before, options trading still did not take off quite as expected. In addition to that, commodities trading volume also declined. Then, the Vice President for the Chicago Board Of Trade initiated a study to create a vibrant options market. This led to several findings. Options trading had to be liquid and transparent. Dealers who dealt over the phone had to be replaced with market makers who provided transparency of information and facilitated the two sides of the market by providing the best possible bid and ask prices. The best possible bid and ask prices was only possible if there was a healthy competition among market makers. In this way, bid and ask spreads eventually became narrower and this caused the volume of traded option contracts to increase.

On top of that, contract terms such as expiration dates, strike prices and quantity of underlying were predetermined by the Chicago Board Of Trade. Now, option contracts became standardised. This in turn facilitated trading.

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