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
From: OptionClub@yahoogro
Sent: Wednesday, April 21, 2010 11:21 AM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
But the option portion of the covered call WAS a zero sum game. That is:
Zero + Something = Something
Or, more specifically:
((gain/loss of option seller) + (gain/loss of option buyer)) + gain/loss of stock holder = gain/loss of stock holder
For example, suppose NFLX is purchased at $50, then a $55 call for sold for $3:
- If the price goes to $80:
(($3-$25) + ($25-$3)) + $5 = $5
Net: $8 of the $30 gain goes to the covered call seller, $22 of the gain goes to the option buyer. - If the price drops to $40:
(($3) + (-$3)) - $10 = -$10
Net: $7 of the $10 loss goes to the covered call seller, $3 of the loss goes to the option buyer
On Tue, Apr 20, 2010 at 1:35 PM, Dave <trading83@comcast.
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.
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