are options really ZERO SUM GAME ? i don't think so

chanakya · Sep 10, 2009

yes john is gay and is desperate...so he got some utility for his options from carl ( on top of $5) :-)

BTW, stocks are also zero sum game ...its just that the expiry is too long ( till company dissappears 100 years later)

summershorts · Sep 10, 2009

I don't understand options. I read books and I still don't get it. The call, put and all that terminology is confusing to me.

spindr0 · Sep 10, 2009

Quote from chanakya:

BTW, stocks are also zero sum game ...its just that the expiry is too long ( till company dissappears 100 years later)

In Bizarro World, stocks are a zero sum game and options aren't.

spindr0 · Sep 10, 2009

Quote from summershorts:

I don't understand options. I read books and I still don't get it. The call, put and all that terminology is confusing to me.

Well, you can either keep reading until it makes sense or you can take up bridge

chanakya · Sep 10, 2009

Quote from spindr0:

In Bizarro World, stocks are a zero sum game and options aren't.

In my world,

either both stocks and stock options are Zero sum games or both are not.

MTE · Sep 10, 2009

Quote from chanakya:

If you look at the way its bieng discussed here ,why are stocks not zerosum game then ?

If a company if selling stocks at IPO , lets assume its writing a call with 0 intrinsic value and getting premium for all the future growth.
Any increase in the value of the stock in future would be potential loss for the company as it could have had the profit if it kept the stock ! same for later transactions as well.

This line of thinking is completely wrong. Companies sell stock at IPO to raise capital for investment in their businesses. With those investments they create value. If they don't sell stock then they cannot raise capital and thus cannot invest in their businesses. Any future gain in their stock is not a loss to the company!

Companies can create and destroy value. Derivatives only transfer it from one party to the other.

slickpick · Sep 10, 2009

Quote from chanakya:

If you look at the way its bieng discussed here ,why are stocks not zerosum game then ?

If a company if selling stocks at IPO , lets assume its writing a call with 0 intrinsic value and getting premium for all the future growth.
Any increase in the value of the stock in future would be potential loss for the company as it could have had the profit if it kept the stock ! same for later transactions as well.

If you look at the stock market on a day-to-day basis, it may actually kind of look like a zero-sum game but it's actually not.

Think of it this way, if company xyz is valued at $10 million at IPO and let us say a few decades pass and the company now has a market cap of $100 million. That's actually how much the company is worth, what's more is that you can actually buy the xyz company for $100 million dollars and not lose money - even though it was once worth $10 million.

spindr0 · Sep 10, 2009

Quote from chanakya:

If you look at the way its bieng discussed here ,why are stocks not zerosum game then ?

If a company if selling stocks at IPO , lets assume its writing a call with 0 intrinsic value and getting premium for all the future growth.
Any increase in the value of the stock in future would be potential loss for the company as it could have had the profit if it kept the stock ! same for later transactions as well.

HUH? If the company goes public and raises $10 million from its offering, who lost money on that transaction? If the stock rises $5, everyone owning shares made money. Where's the zero sum in that?

Don't confuse investing and creating wealth with gambling's zero-sum game.

chanakya · Sep 10, 2009

Quote from MTE:

This line of thinking is completely wrong. Companies sell stock at IPO to raise capital for investment in their businesses. With those investments they create value. If they don't sell stock then they cannot raise capital and thus cannot invest in their businesses. Any future gain in their stock is not a loss to the company!

Companies can create and destroy value. Derivatives only transfer it from one party to the other.

Exactly right !

The call option writer is passing on part of the $$ to the option buyer.

lets assume the company has an IPO of $10
john bought the $10 and immediately wrote $1 call which carl bought. now john has invested $9 on the company and carl is ivested $1 in the same company...the option transaction has just passed part of the investment from one party to other.
in normal transaction, the entire stock gets transferred where as here portion of the investment gets transferred as two diffferent players have taken up different parts of investements ( based in risk. John has taken the intrinsic value and the carl the speculative.
If john had sold the $10 stock ( instead of option) to carl, then carl would have been 100% invested in the company having both the instrinsic and speculative part.

white17 · Sep 10, 2009

Quote from chanakya:

yes john is gay and is desperate...so he got some utility for his options from carl ( on top of $5)
BTW, stocks are also zero sum game ...its just that the expiry is too long ( till company dissappears 100 years later)

If John is gay, he is probably long a spread, possibly long a strangle but certainly long a straddle. If the market moves against him he may gag on these positions since he's bitten off more than he can chew.