An option contract is a contract between two parties where one part has a right and other part has an obligation to buy or sell an underlying security at a specified price within a specified time frame.
The options have started to trade in 19th century, basically at the same time when stock started to trade. However, at that time options buyers had to find options sellers through advertising in newspapers.
1848 is considered an official year when options contracts started to trade in North America. During this year, the Chicago Board of Trade (CBOT) was founded with the first president Thomas Dyer.
The Kansas City Board of Trade, the Minneapolis Grain Exchange and the New York Cotton Exchange started to trade later.
By the middle of the 20th century the options was not a very popular trading vehicle. The annual total trading volume was still below 300,000 options contracts by 1968. It was mainly due to the low liquidity of the options.
Changes came with the opening of the Chicago Board of Options Exchange (CBOE) in 1968. Basically it was the first U.S. options exchange and within several years the daily trading volume increased from 911 options contracts (on April 26, 1968, the fist day of trading) to more then 200,000 options contacts per day in the 1970's. This increase in trading volume was mainly caused by speculators that were attracted by the grooving liquidity of the options.
At that time only call options were available for investments, however on 1977 the put options started to trade on the CBOE by giving the ability to speculators to participate not just in Bull but Bear markets as well. That was additional force that started to attract more and more investors into the options trading.
By 1983 the options contracts were mainly offered on stocks. The first options on the indexes were launched in 1983. The S&P 100 (OEX) index options started to trade on CBOE on March 11, 1983. The S&P 500 (SPX) index options started to trade on CBOE on July 1, 1983.
With growing popularity of the options investing, the other exchanges started to trade options as well. In 1985 the NYSE (New York Stock Exchange) and the NASDAQ Stock Exchange started to trade equity options contracts.
At the current time the options trading is one of the most popular trading vehicles that is available on the market. High liquidity, great leverage, no margin requirements (except for uncovered options trading), wide range of the options on equities, indexes, futures and currencies attract more and more speculators. The development of the hi-tech has brought options trading to a new level. Now, real-time options quotes, options news, charts and indicators can be delivered directly to the trader's desk and are available not just for institutional professional investors, but for retail traders as well. Never the less, the options trading remains to be an extremely high risky type of investment.
Naked options trading is very risky - many people lose money trading them. It is recommended contacting your broker or investment professional to find out about trading risk and margin requirements before getting involved into trading uncovered options.