Despite being around for nearly 40 years, options contracts have only recently become really popular. The Chicago Board Options Exchange, the world's largest options market, opened its doors in 1973; on the first day, just over 900 contracts exchanged hands on just 16 stocks. At the turn of the 21st century, the total volume of options contracts on U.S. exchanges was around 500 million, and as of the end of 2017, the Options Clearing Corporation, the world's largest derivatives clearinghouse, reported clearing nearly 4.5 billion contracts for the year. Investors have discovered the huge cost efficiency in using the leveraging power of options to increase their potential returns and hedge their risks.
Popularity notwithstanding, there are additional risks involved in options, so options exchanges have put certain requirements in place before a company's stock can be listed for options contracts. Individual companies have no say on whether or not their stocks are listed on the options exchange; the decision to list equity options for a particular equity is entirely at the discretion of the exchanges themselves.
Under CBOE rules, there are four criteria a publicly company must meet before options on its stock can be traded on the options exchange:
- The underlying equity security must be listed on the NYSE, AMEX or Nasdaq.
- The closing price must have a minimum per-share price for a majority of trading days during the three prior calendar months.
- The company must have at least 7,000,000 publicly held shares.
- The company must have at least 2,000 shareholders.
If a company does not meet any one of these criteria, options exchanges such as the Chicago Board Options Exchange will not allow any options to be traded on the underlying security. Additionally, because of the second condition listed above, a company cannot have options traded on it until at least three months after its initial public offering date.
Options have a reputation for being riskier or more dangerous than regular stock transactions, but the truth is that options, used judiciously, can actually be used to reduce risk. They can even be less risky than equities in certain situations because the financial commitment is lower—and they are a very dependable hedge when a stop-loss order is placed. And for strategic investors, options open up a variety of alternatives to meet their investment goals through the use of synthetic options.