22 Part I: Basic Properties of Stock Options 
in a very small percentage of cases, he could be assigned under very illogical cir­
cumstances. 
THE OPTION MARKETS 
The trader of stocks does not have to become very familiar with the details of the way 
the stock market works in order to make money. Stocks don't expire, nor Cal} an 
investor be pulled out of his investment unexpectedly. However, the option trader is 
required to do more homework regarding the operation of the option markets. In 
fact, the option strategist who does not know the details of the working of the option 
markets will likely find that he or she eventually loses some money due to ignorance. 
MARKET-MAKERS 
In at least one respect, stock and listed option markets are similar. Stock markets use 
specialists to do two things: First, they are required to make a market in a stock by 
buying and selling from their own inventory, when public orders to buy or sell the 
stock are absent. Second, they keep the public book of orders, consisting of limit 
orders to buy and sell, as well as stop orders placed by the public. When listed option 
trading began, the Chicago Board Options Exchange (CBOE) introduced a similar 
method of trading, the market-maker and the board broker system. The CBOE 
assigns several market-makers to each optionable stock to provide bids and offers to 
buy and sell options in the absence of public orders. Market-makers cannot handle 
public orders; they buy and sell for their own accounts only. A separate person, the 
board broker, keeps the book of limit orders. The board broker, who cannot do any 
trading, opens the book for traders to see how many orders to buy and sell are placed 
nearest to the current market (consisting of the highest bid and lowest offer). (The 
specialist on the stock exchange keeps a more closed book; he is not required to for­
mally disclose the sizes and prices of the public orders.) 
In theory, the CBOE system is more efficient than the stock exchange system. 
With several market-makers competing to create the market in a particular security, 
the market should be a more efficient one than a single specialist can provide. Also, 
the somewhat open book of public orders should provide a more orderly market. In 
practice, whether the CBOE has a more efficient market is usually a subject for heat­
ed discussion. The strategist need not be concerned with the question. 
The American Stock Exchange uses specialists for its option trading, but it also 
has floor traders who function similarly to market-makers. The regional option 
exchanges use combinations of the two systems; some use market-makers, while oth­
ers use specialists.