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+8  •   The Intelligent Option Investor
+risk of default by one’s counterparty, so they are usually only entered into 
+after both parties have fully assessed the creditworthiness of the other. 
+Obviously, individual investors—who might simply want to speculate on 
+the value of an underlying stock or exchange-traded fund (ETF)—cannot 
+spend the time doing a credit check on every counterparty with whom 
+they might do business.
+1 Without a way to make sure that both parties are 
+financially able to keep up their half of the option bargain, public option 
+markets simply could not exist.
+The modern solution to this quandary is that of the central counter -
+party. This is an organization that standardizes the terms of the option con-
+tracts transacted and ensures the financial fulfillment of the participating 
+counterparties. Central counterparties are associated with securities 
+exchanges and regulate the parties with which they deal. They set rules 
+regarding collateral that must be placed in escrow before a transaction 
+can be made and request additional funds if market price changes cause 
+a counterparty’s account to become undercollateralized. In the United 
+States, the central counterparty for options transactions is the Options 
+Clearing Corporation (OCC). The OCC is an offshoot of the oldest option 
+exchange, the Chicago Board Option Exchange (CBOE).
+In the early 1970s, the CBOE itself began as an offshoot of a large 
+futures exchange—the Chicago Mercantile Exchange—and subsequently 
+started the process of standardizing option contracts (i.e., specifying the 
+exact per-contract quantity and quality of the underlying good and the 
+expiration date of the contract) and building the other infrastructure and 
+regulatory framework necessary to create and manage a public market. 
+Although market infrastructure and mechanics are very important for 
+the brokers and other professional participants in the options market, 
+most aspects are not terribly important from an investor’s point of view  
+(the things that are—such as margin—will be discussed in detail later in 
+this book). The one thing an investor must know is simply that the option 
+market is transparent, well regulated, and secure. Those of you who have a 
+bit of extra time and want to learn more about market mechanics should 
+take a look through the information on the CBOE’s and OCC’s websites.
+Listing of option contracts on the CBOE meant that investors needed 
+to have a sense for what a fair price for an option was. Three academics, 
+Fischer Black, Myron Scholes, and Robert Merton, were responsible for