Option Market Overview
Options are one of the most important investment instruments in the international monetary market. The Chicago Board Options Exchange (CBOE) began trading listed call options on 16 stocks on April 26, 1973. The first day trades were 911 contracts. Call Options were the only options available until 1977 when Securities and Exchange Commission (SEC) permitted Put options trading on the CBOE. Today, more than ever, option volumes continue to grow worldwide and the daily volumes at the CBOE reach US$ 25 billion in notional value.
Exchange traded options (also called “listed options”) did not exist in the Middle East Stock Exchanges or in the Arab Stock Exchanges until Kuwait Financial Centre “Markaz” initiated a proposal in 2002 to provide the first options service in the Kuwait Stock Exchange. Markaz suggested establishing a system for trading in options through a Fund namely, "Forsa Fund" and to work as a market maker for traded options. The market’s management formed a committee to study the proposal for providing a complete system for option trading. After analyzing the characteristics of the Kuwait Stock Exchange (KSE), its nature of risks and the needs of investors, a suggested mechanism for option trading was created. The study took into consideration the trading mechanisms prevalent in international derivative markets and the characteristics of the KSE. System compatibility tests with the KSE and comprehensive risk measurements were then carried out using historical data.
Testing and measurements continued until early March 2005 when the KSE allowed initiation of providing call options services on the exchange. On March 28, 2005, Markaz became the first writer of standardized exchange traded American style equity options on select stocks listed in the Kuwait Stock Exchange. A total of 75 contracts with a total strike value of KD 2,378,150 were traded on the first day over 13 underlying stocks.