Although options trading existed before 1973, Stevens says today's record volumes would not be possible without the Nobel-noticed formula. The genius of the work is its simplicity. Options expert Don Chance, a finance professor at Virginia Tech, says the genius of Scholes and Merton's equation is its relative simplicity. Professor Chance often teaches it to his undergraduate students. What this means to Joe Investor is less volatility and greater liquidity in the securities market.
Options provide investors and companies with a means to reduce risk.
For example, investors who sell options on a stock they own can offset some of their losses if the stock's price dives. Likewise, multinational companies can reduce the impact of foreign-exchange fluctuations with currency options. Less risk equals fewer market jitters, which in turn fuels confidence and growth in the market. Stevens doubts whether the New York Stock Exchange could be posting its current record volumes without the benefits of options. Nobel Bestows Respectability Investor confidence is a touchy topic among the options crowd.