RE: [TheOptionClub.com] Re: are options a zero sum game?

You realize posting something like this is going to cause a stir.... :-)

 

Can you elaborate a little?  Because I do not understand your point of view.

 

I would think that zero sum by definition means zero.. so splitting hairs options are negative sum

and not zero sum like everyone talks about (you mentioned this before).  With stocks if you focus

on a single transaction buyer and seller then yes we have cash paid - cash received = zero sum (not counting commissions and SEC fees, etc which makes it negative sum); but if you focus on the bigger picture (many transactions) you have an IPO price as a starting point and as long as the stocks price stays above that starting point then it is positive sum (not clouding this with number of shares changes).  Then if it goes below the IPO price then it is a negative sum.. but this 'value' is constantly changing and will continue to change as long as the company is public and people want to buy and sell the stock.  The point is it really depends on your time frame.

On April 23, 2010 at 3:00 AM mcatolico <mcatolico@mindspring.com> wrote:

 

 

I don’t wish to prolong or belabor this but I would argue that stocks are also zero sum instruments. A finite beginning or ending has little to do with zero sum, it just adds definitive closure to the process for at least one party.

 

From:OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Jeannie
Sent: Wednesday, April 21, 2010 10:11 PM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] Re: are options a zero sum game?

 

As mentioned before, options ARE an even sum game because there is a finite beginning and a finite end (expiration).  And a buyer and a seller.

As you point out... on the other hand, stocks can't be calculated to be either way, because it is difficult to define the beginning (would have to include private equity pre-IPO and IPO pricing), and furthermore, most have not had an end yet.  Secondly, not all stocks are evenly shorted.  Thirdly, the market maker on the other side of your stock trade will hedge with not only shorts but also options, so other instruments are also involved.  One might try to argue that gaps cause magical creations or wipe-outs of market cap, but there is another side to the trade (market maker or short), and as explained, that side involves too many variables to define.

On Wed, Apr 21, 2010 at 8:37 PM, mcatolico <mcatolico@mindspring.com> wrote:

 

In this case you are discussing fictive gains and losses. If the market goes from 11,000 to 6,500 or vice versa and you never do anything to your holdings you’ve neither gained or lost though you may have a psychological “wealth” or “loss” affect. Since all stocks are synthetic options, there is no question that someone gains and someone loses.  (of course if you never sell something that has lost 99% of it’s value in the hopes that it will one day recover, you are suffering from another form of psychological delusion.)

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Dave
Sent: Tuesday, April 20, 2010 3:36 PM
To: OptionClub@yahoogroups.com

Subject: RE: [TheOptionClub.com] Re: are options a zero sum game?

 

 

My two cents worth ……

 

A rising tide raises all ships, and vice versa.

 

When the market dropped to 6500 and stockholders saw their assets drop by billions of dollars, there wasn’t someone “on the opposite side” that made the same amount of money – not a zero sum game. 

 

When the market recovered back up to 11,000 and stockholders saw their assets rise by billions of dollars, there wasn’t someone “on the opposite side” that made the same amount of money – not a zero sum game.

 

When some writes a covered call and the value of the stock soars, the writer makes as much money as he planned, and the buyer of the call makes money.  No one “on the opposite side” lost money – not a zero sum game.

 

I know some would say that people who sold something, and the price went up, lost money.  That’s opportunity cost – not real loss.  If you equate opportunity cost to real loss, just imagine how much we’re all in the hole financially since we didn’t all take second mortgages on our houses and use it to buy Google in 1996 – LOL.

 

Good trading -- Dave

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Jack
Sent: Tuesday, April 20, 2010 6:07 AM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] Re: are options a zero sum game?

 

 

I had never thought about a poker game having and ‘ending’ but that is true of all sports betting AND of options.  In fact, all derivatives.  Granted you can roll your position out to the next month, but that’s like starting a hand in another poker game before you finish the one you are in. J

While it is true I have no effect over whose call is exercised against, in the example, I was using an underlying with only 1 open contract. J  Course, the seller could always buy his was out from the market maker – or another investor. J

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Ricky Jimenez
Sent: Monday, April 19, 2010 8:20 PM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] Re: are options a zero sum game?

 

 

The difference between options and poker is that there is a definite
beginning and end of a poker game and that beginning and end applies
to all players so it is easy to total the profits and loses for the
individual players at the end of the game and get zero. There might
be a precise analogy for options but I have never seen it written
down.

By the way Jack, you can exercise a call you own but you certainly
can't specify that the person who sold you the call is also the one
who sells you the stock.

On Mon, 19 Apr 2010 16:28:10 -0500, "Jack" <jack@jackcpa.com> wrote:

>It’s like a poker game. If you win, someone has to lose (and the house takes a cut).
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>Look at an individual option. If I buy a call for $1, the seller gets $1 (plus/minus our commissions). If the stock drops, he gets to keep the $1 and I am out $1. If it goes up and expires $2 ITM, I’d make $2 ($1 profit) either by closing before expiration OR calling his stock and selling it for a $2 more than the strike price. Now, I make a $1 profit and the seller loses a $1.
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