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

Quote from chanakya:

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.
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Look at it in a more clear way. Ignore that john and carl knew each other:

If you write an option, over the long haul, your risk-adjusted reward will be near zero. It has not been proven that writing options is a very longterm strategy. People sometimes make money for a few years, and then blow up some month. And you have costs, fees, and slippage.

If you purchase options, over the long haul, your risk adjusted reward will probably be negative, since options depreciate. And you have costs, fees, and slippage.

If you own a stock (here the underlying), it may go up or down. The stock market generally goes up (which has nothing to do with the options), but no guarantee in the short run. And you have costs, fees, and slippage.

The market is very efficient. All these instruments play off each other in their pricing. Naive "what-ifs" make money only for the brokers and exchanges. And you have costs, fees, and slippage.
 
Quote from MTE:

Companies can create and destroy value. Derivatives only transfer it from one party to the other.
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You have a reserved seat on the Merry Go Round

:)
 
Quote from chanakya:

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.
More...

Troll alert anybody? Or is he/she just not getting it?
 
Quote from darwin666:

yup. seems like a troll.

http://www.cboe.com/Advisors/knowledge/myth7.aspx

final explanation. given by the official CBOT site.
lets move on..
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Sorry to prolong the discussion but I think that the CBOE explanation starts with a specious premise and proves nothing about options and a zero sum game:

>> Myth #7: Options are a zero-sum game: in order to make money, the trader on the floor who bought or sold an option has to lose for me to make money. <<

The fact that market makers are hedging their positions only proves that they have a better gig than directional players. The explanation conveniently ignores who's on the other side of the hedge.
 
you have to look at each transaction individually and you can't look at lost opportunity cost.

Start with the company doing an IPO. They sell stock to you at $10. Now you own all the stock and the company has a bunch of cash. There was no losing trader on the other side of the transaction. Now, when you sell the stock to me for $20, you made $10 and no one lost. Therefore, there is no zero sum game. As long as someone is willing to pay a higher price for your piece of paper (stock certificate), you make money.

Options are different. They are a bartered (although standardized) transaction between two parties or people.

If you want to buy a call option on Intel with a $40 strike with the stock at $30, you have to find a seller of that option. So, your friend who owns the stock sells you the option for $1. If the stock goes to $35 at expiration, you lose your $1 (option expires worthless) and the Intel owner keeps the $1 he got for selling you the option.

So, on the option trade, he is +$1 and you are -$1. Summed together, they equal zero. Now, he still owns Intel stock so he made $1 on the stock transaction as well. However, this is not part of the option market or the option trade. Completely different. He may have made money on his gold coins going up as well and his house may have lost value, but those don't count when factoring the options transaction either.

You can carry it out all you want. Let's say Intel goes to $45. The option is worth $5 at expiration. Your friend with the Intel stock has a $4 loss. The option is worth $5 and he shorted it at $1. So, $5 loss minus $1 premium at sale equals a $4 loss. The guy who bought the option paid $1 for it and it's worth $5. So, $5 minus the $1 cost is a $4 gain. Therefore, zero sum on the options. You may also go and calculate how the stock worked out as well but again, that's a different transaction and market.

The stock gained $15 but that has nothing to do with the option "market" being a zero sum game.

Your friend is just using one market to hedge a position in another market. That's how markets operate. Not everyone participating in a zero-sum game is purely a speculator. So, you may wish to buy Oil futures (a speculation) and you may buy it from an oil producer who is willing to sell it to you. He is just hedging his actual production of oil so no speculation on his part. However, within the futures market, it's a zero sum game. People are willing to participate because of outside influence (other markets) which offset any gains and losses they may incur.

Good luck.
 
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