Mathematically, trading options is a zero-sum game. What the buyer gains the seller loses, or vice versa. However, as Phil says, this is not necessarily relevant. Both players can acheive their objectives, even the one that loses. An an example, take a covered call seller. If the underlying goes up above the strike price, he will acheive his goal and make money on the covered call, even though he or she probably lost money on the call alone. So even though the call transaction itself is zero-sum game, it may be part of a larger strategy, so that even the 'loser' considers that he has 'won'.
--- On Fri, 4/16/10, newbie_candy <candy.chiu.ad@ gmail.com> wrote:
From: newbie_candy <candy.chiu.ad@ gmail.com>
Subject: [TheOptionClub. com] Re: are options a zero sum game?
To: OptionClub@yahoogro ups.com
Date: Friday, April 16, 2010, 2:10 AM
Hi, I am new to the club. I realize that this thread is already 6 years old, but I still want to chip in my 2 cents to the discussion.
I break up option trading into two phases. The first phase is limited to the actual initiation of the trade. If after the initial execution, both the buyer and the seller are restricted by rules that no further actions can be taken, then option trading'd have been a zero sum game. In reality, both traders have the liberty to adjust their position, and their course of actions are never mirror images of each other. Accounting for this second phase (position management), option trading is not a zero sum game. I'd liken option trading with hedging to trading a stock (call it A) and hedging it with a similar stock. If we view the transaction of trading A only, it is a zero sum game. However, by allowing other opportunities for decision making and combining the initial trade with the adjustments, the original transaction is no longer a game played solely by its buyer and seller.
In my opinion, transaction cost is the cost for entering the game. A single transaction is a zero sum game even with transaction cost. It is equivalent to a casino charging an entrance fee for letting gamblers play at a fair slot machine.
Candy
--- In OptionClub@yahoogro ups.com, Michael Catolico <mcatolico@. ..> wrote:
>
> Phil, you're right. in the grand scheme of things this is a trivial
> question. and the real issue should be about finding ways to make money
> with options. i came about asking the question because of the real
> experience of seeing traders stand side by side in a pit selling or
> buying to each other and both ending up smiling about the transaction -
> not because of egotism, but because both knew that they were likely to
> make money on that particular trade. if the game is truly zero sum then
> somehow they have to shift the losses to others. i ventured that the
> reason for their individual successes has to do with hedging practice
> and consequently how each trader rides volatility in that endeavor.
>
> the zero sum question is relevant to actual trading and especially
> toward what i think you are alluding to as trader psychology. yet, no
> matter how mentally prepared an individual is, you cannot fight the
> inevitable wall of a zero sum game. you can hone your abilities to try
> to be in the 50% (less transaction cost) winners camp - which in reality
> is probably more like 20% long term. but ignoring that inevitability can
> lead to disastrous consequences. it can be akin to gambling, in that
> the odds are always stacked against most traders (50% chance that you
> will lose, less additional transaction costs just to play the game).
>
> now this begs the question of whether or not options trading is a game
> of skill or luck. we all wish that we are or will become skilled
> traders. but if it is a game of luck, that wishing is hubris.
>
> michael
>
> Phil wrote:
>
> >I do not understand what you are after. Whether options are or ar
> >enot a zero sum game has nothing do to with you r ability to make
> >money in the long run using options. If you can make money trading
> >stocks in the long run you can make monye using options because you
> >can take similar positions. Options actually offer even more
> >choices in ways to invest so there is no grand theory out there
> >preventing you from making money in options.
> >
> >PLenty of people make money trading options and a lot of people lose
> >money. No different than stocks, futures, small businesses,
> >commodities, or any other business venture. Whether something is a
> >zero sum game or not has no affect on your ability to make money.
> >
> >So the answer to make money or not really lies within you. If you
> >leanr options and study them and apply good principles of risk and
> >trade management you can make money regularly. I am not saying you
> >can quit your job and trade full time because it takes lot of money
> >to begin with to do this.
> >
> >Bottom line, I appreciate you questions, but in the big scheme it
> >has no bearing whatsoever on your trading ability, experience,
> >background, skills, knowledge, or portfolio management. Focus on
> >what matter to trading and you will do fine.
> >
> >Trading is just like law school. SOme of the students will be great
> >lawyers most will be average and some will just not cut it no matter
> >how smart they were going in. It is not for everyone and requires
> >unique skills.
> >
> >Phil
> >
> >
> >
> |
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