Hi Randy,
Actually, the call writer didn’t “loose” at expiration – he had made the decision in advance to limit his profits. The amount of money beyond the strike price is the opportunity cost of that decision, not a real or financial loss. Neither the option writer nor the option buyer experienced a real or financial loss. The writer profited from the premium on the option he sold (and also the rise in stock price), and the buyer profited from the increase in option value. Both profited from the option transaction – neither one experienced a real or financial loss -- which violates the rule of a zero sum game.
But again, if you equate opportunity cost to real loss, then most of us are hopelessly in the hole financially since we didn’t mortgage all of our belongings and use the money to buy Google in 1996 – LOL.
Good trading -- Dave
From: OptionClub@yahoogro
Sent: Wednesday, April 21, 2010 7:56 PM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
The TRANSACTION between the writer and the buyer OF THE OPTION was a zero sum game. The profit you mention is coming from stock ownership -- it had nothing to do with the option, except that the stock was used as collateral for the call. It could just as well have been cash that covered the call. Or margin. Who profits and loses ON THE CALL doesn't change because of the nature of the collateral.
That is, the stock holder profited $30 from the stock going up. But $25 of that value is then exchanged between option writer/buyer to settle the call at option expiration. The option writer LOST $25 on the call at expiration. It doesn't matter WHERE that $25 comes from -- the underlying stock, the bank, horse racing, the lottery, whatever. The source of the settlement value has no bearing on the zero sum nature of the option TRANSACTION itself.
As I said, if you add something to zero, you end up with something.
On Wed, Apr 21, 2010 at 11:48 AM, Dave <trading83@comcast.
Hi Randy,
Using my example of a covered call where the price of the underlying rises, you concluded:
“Net: $8 of the $30 gain goes to the covered call seller, $22 of the gain goes to the option buyer.”
However in a zero sum game, a player (or in our case a trader), can only make money if another player looses the exact same amount. In the example above, who lost? The answer is no one. Both the writer and the buyer profited from rising valuation of the underlying asset. The transaction between the writer and the buyer was not a zero sum game.
Good trading -- Dave
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