Dave,
I tried to take this off-list.
Here is a copy of the email I sent you off list.
OK, I’m short the May JNJ 65 call @ $.90 and JNJ is at $65. If it stays at/under 65 through expiration, I’ll make .90 and my buyer will lose .90. (NOTE: I can be short the May call naked, covered by stock or another call – above/below [vertical spread], of a later month [calendar].
If it goes to 66, the buyer will make .10. I will lose .10. (If we close the option by offsetting trades.)
He can choose to exercise and he will get the $66 stock for $65.90 (a .10 savings) and I will get to keep my .90 premium but will lose a 1 when my 66 dollar stock is taken for 65. (We are NOT talking ‘opportunity costs’ here. If I have an asset worth $66 but you can force me to sell it to you for $65, that is a loss. I might have bought it for $30 so will have a $35 taxable gain but I am still losing $1 because I have to sell it to you for less than it is worth.)
Either way, the option side was zero-sum. It is disguised by the gain/loss on the stock side.
From: OptionClub@yahoogro
Sent: Friday, April 23, 2010 2:15 PM
To: OptionClub@yahoogro
Subject: RE: [TheOptionClub.
Hi Randy,
OMG. The writer made money from the premium on the option sold, and the buyer made money on increasing value of the option. Both made money on the option transaction, and neither one incurred a real financial loss. For it to be a zero sum game, one of them would have to had lost an amount equal to the amount the other one gained.
Good trading -- Dave
From: OptionClub@yahoogro
Sent: Friday, April 23, 2010 12:46 AM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
OMG. A covered call is NOT an option transaction -- it's a strategy that involves an option transaction. The gain you are talking about is coming from the other part of the strategy. The option transaction itself nets to zero sum between the two individuals, both at initiation and at termination.
If I added lottery tickets to my strategy of selling naked calls, it wouldn't change the nature of the option transactions either. Even if I won the lottery.
If I buy GOOG and use it as margin for selling calls on MMM, it doesn't change the zero-sum nature of the calls either.
The fact that the calls are being covered by the underlying stock is irrelevant to their zero-sum nature.
On Thu, Apr 22, 2010 at 12:40 PM, Dave <trading83@comcast.
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
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