The point to me is that if you grasp the zero sum concept you break out of the typical failed reasoning most traders fall prey to. To stick with the poker analogy, the sucker thinks that if he learns how to just play the cards correctly he can win but he doesn't realize that the game is not about playing cards, it's about playing an opponent or opponents. Yes you need to understand basic probabilities (or you will surely give away all your money very quickly) but understanding the probabilities does not turn you into a winner. In trading the opponent is essentially anonymous but yet there our tendencies that make the market have "personalities" much like a poker table is filled with rocks and maniacs and donks and so on. If you learn to recognize the "weak hands" in the market then it can vastly tilt the probabilities in your favor.
From: OptionClub@yahoogro
Sent: Tuesday, April 20, 2010 6:42 PM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
I mean no disrespect, but what is the point of the question?
Are Options a zero sum game - sure I guess -- does that make it a bad trading vehicle?
Can Option traders learn from reading books on poker -- you bet. Risk Management,
Probabilities and Statistics are all inherent skills of a successful poker player/gambler,
in fact one of the corner stones of successful money management is an anti-martingale
concept first introduced in gambling literature. You may have heard of VanTharpe's paper
on positions sizing, "R" multiples, trading systems, and expected returns, a discipline
practiced by countless successful investors first gleaned from a book on black jack.
Also recall when you pay for , or receive credit for an option(s), it's not a zero sum between
buyer and seller. Market makers get the spread, clearing house gets a cut, exchange fees take a bite,
exchanges compete for order flow which can be folded into additional fees, some brokers
take the other side of the trade, etc....
Are trading options like poker - maybe, is trading stock a gamble? sure...not many rewards are
without risk. The responsibly trader will quantify that risk and manage it throughout the trade.
On Tue, Apr 20, 2010 at 9:43 AM, Ricky Jimenez <rickyjim@bestweb.
It is much better to discuss the situation without numerical examples,
which distract from the obvious. Both a poker game and a particular
INDEX option issue have a definite start and end of their existence.
Thus the total credits and debits received by the participating
players during that time have to net out to zero. There are no
residuals in these forms of bartering so the analogy between the two,
in that superficial respect, is OK. Stock and futures options beget
residual short and long positions at the end of their lives so the
poker analogy is not as good here. Also buying and selling rare
coins, works of art and stocks during a fixed time period have
credits and debits net out to zero but the residual at the end of the
period would make a poker analogy at least as weak at it is for
options.
So just what is the point with the poker/options analogy? Will
options traders get better by reading books on poker?
On Mon, 19 Apr 2010 21:58:51 -0500, "mcatolico"
<mcatolico@mindsprin
>No, pick any expiration price and the net result is the same. For every open
>long position there is an open short position (hence the term "open
>interest"). In an alternate example where mary's option goes to say $20 she
>makes $17 and the market maker loses $19 (the original open short position
>less the $20 expiration minus initial $1 credit). I still make $1 and jack
>still makes $1 thus 1+1+17=19.
>
>-----Original Message-----
>From: OptionClub@yahoogro
>Behalf Of Ricky Jimenez
>Sent: Monday, April 19, 2010 9:45 PM
>To: OptionClub@yahoogro
>Subject: Re: [TheOptionClub.
>
>Maybe you are saying that for a fixed particular underlying, strike,
>put or call, and month, the total of the debits and credits for an
>option that expires unexercised are zero. Now take your example and
>assume that the option expires ITM. Then the transactions are the
>same but in that case, are you also insisting that Mary lost $3? She
>might have made a fortune.
>
>On Mon, 19 Apr 2010 20:57:13 -0500, "mcatolico"
><mcatolico@mindsprin
>
>>Ricky I don't know why you have a hard time with this. If I buy abcde 80
>>strike from a market maker for $1 as a new contract and sell it to jack for
>>$2 and he sells it to mary for $3 and it expires worthless, it all adds up
>>to zero net: market maker makes $1, I make a dollar, jack makes a dollar
>and
>>mary loses $3. That's zero sum. Show some other way for this to end that
>>doesn't wind up in net zero and I will give you the difference.
>>
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