The Spread and Adoption of Option Pricing Models

Robert C. Merton in the classroom, ca. 1972. Bradford F. Herzog, Photographer. Robert Cox Merton Papers, HBS Archives, Baker Library Historical Collections

News of an elegant and practical solution to the pricing of options and other derivatives spread quickly among receptive audiences. The Black and Scholes working papers, along with Merton's own handwritten notes and derivations of the formula, were required reading for students in Merton's finance classes long before they were published. An equally eager audience of financial advisors, portfolio managers and securities traders awaited the option pricing model.

In the same year that Merton published his article on option pricing theory (1973), the Chicago Board Options Exchange opened and provided the perfect testing ground for the practical implementation of the Black-Scholes model. Within six months of the original publication of the Black-Scholes formula, it had become so widely used by traders at the CBOE that Texas Instruments produced a handheld calculator pre-programmed to produce Black-Scholes option prices and hedge ratios.

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