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How Black–Scholes and the CBOE Influenced Listed Options

Article Quant Q&A · Author: Jan Stuller
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Summary

The document asks whether the publication of the Black–Scholes option-pricing paper in 1973 was directly connected to the founding and launch of the Chicago Board Options Exchange that year. The cited historical account says the formula was not developed to enable the exchange’s launch; its original purpose was to help corporations value options granted to executives. This challenges the assumption that the pricing paper caused the exchange to open.

The account also describes a broader relationship: traders adopted the model quickly, and its development helped the listed-options industry grow. The growth of that industry, in turn, likely increased the model’s visibility. The material therefore distinguishes a direct causal link to the exchange launch from later mutual reinforcement between an influential valuation method and a developing market. It provides a brief historical explanation based on a cited essay, rather than a detailed chronology or primary-source analysis, and does not establish exactly when the model’s development began relative to exchange planning.

Key ideas

  • The cited historical account says Black–Scholes was not created to prompt the CBOE launch.
  • The model was originally intended to help corporations value employee options.
  • Traders adopted the model, which helped support the growth of listed options.
  • The expanding listed-options industry likely helped make the model more widely known.

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OptionsDerivatives pricing
Full text
# Is publication of Black-Scholes in 1973 and founding of CBEO in 1973 coincidental?


# Is publication of Black-Scholes in 1973 and founding of CBEO in 1973 coincidental?












Apparently, CBOE was founded in 1973 and opened on 1st January that year (source = Google), to start trading listed options.

The famous Black-Scholes paper was published also in 1973.

I am wondering if there is any direct link there?

When I first saw this, my initial thoughts were that the paper was published first and the CBOE opening and option trading followed as a reaction (my rationale for thinking this is that once the paper had been published, there finally was an "official" way to price options, and so it probably would have seemed a good business to come up with an options exchange).

However, seeing that CBOE was apparently opened on 1st January 1973 invalidates my thinking above: seems like CBOE was first with the B-S paper thereafter: although could it be that the B-S paper was in the making in 1972 already and somehow the opening of CBOE was timed for the paper release?

Does anyone know the story of CBOE and whether there is any link to Merton, Black & Scholes and their paper?

## Answer by fes (score 4)

https://quant.stackexchange.com/a/66374

In the essay "Futures and Options Markets in the Evolution of Stock Exchanges" William Brodsky (CBOE head) writes "The formula (Black-Scholes) had no relation to the launch of the CBOE. It was intended to assist corporations in valuing options they had granted to their executives".

However, he continues that the development of the model, which was quickly adopted by traders, fostered the development of the listed options industry. Presumably the growth of this industry also helped popularize the model.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.