THE JOURNAL OF FINANCE
VOL. LIX, NO. 1
How Do Exchanges Select Stocks
for Option Listing?
STEWART MAYHEW and VASSIL MIHOV
We investigate the factors influencing the selection of stocks for option listing.
Exchanges tend to list options on stocks with high trading volume, volatility, and
market capitalization, but the relative effect of these factors has changed over time as
markets have evolved. We observe a shift from volume toward volatility after the mora-
torium on new listings ended in 1980. Using control sample methodology designed to
correct for the endogeneity of option listing, we find no evidence that volatility de-
clines with option introduction, in contrast to previous studies that do not use control
EGINNING WITH A HANDFUL
of options listed on the Chicago Board Options
Exchange (CBOE) in April 1973, the exchange-traded option market has since
matured into a thriving industry. In the United States, options trade on five
exchanges, with contracts on stock indices, exchange-traded funds, currencies,
interest rates, and over 3,000 stocks. Total equities options volume traded on
U.S. exchanges has risen from 5.7 million contracts in 1974 to over 722 million
contracts in 2001 (Options Clearing Corporation, http://www.optionsclearing.
com). Option markets have also thrived in Western Europe and other economies
with well-developed capital markets.
In this paper, we study the listing choices made by option exchanges in the
United States, in an effort to better understand what determines the success
of financial innovation, and how derivative markets develop. Understanding
this process has important implications for the continuing development of new
securities markets domestically and globally. In the new century, innovation
in equity derivative markets has continued, if not accelerated. For example,
Mayhew is at the U.S. Securities and Exchange Commission and the University of Georgia
and Mihov is at Texas Christian University. For their helpful comments, we would like to thank
an anonymous referee; Chris Barry; Rick Green; Steve Mann; Anand Srinivasan; Andy Waisburd;
and seminar participants at the University of Cincinnati, the 2000 Frank Batten Young Scholars
Conference at the College of William and Mary, and the 2000 meetings of the Financial Manage-
ment Association. We would like to thank Seoungpil Ahn and Eric Rincones for valuable research
assistance. Mayhew thanks the Institute for Quantitative Research in Finance (the Q group) for
financial support. Mihov thanks the Charles Tandy American Enterprise Center and the Luther
King Capital Management Center for Financial Studies at TCU for financial support. The U.S.
Securities and Exchange Commission disclaims responsibility for any private publication or state-
ment of any SEC employee or Commissioner. This study expresses the authors’ views and does not
necessarily reflect those of the Commission, the Commissioners, or other members of the staff.