Buying calls for a living and arguing with derivman

[GTS]

Quote from Derivman:

Thanks GTS. Maybe if I post my two questions again we may now have a clearer picture of what the differences may be.

Question 1. One Option trader wins $1,000 and five Option traders lose $1,000 between them with $200 each.

Question 2. Five Option traders win $200 each and 5 Option traders lose $200 each.

Which of the 2 questions is a Zero Sum Game ?

None of these scenarios include stocks and is only about Options. I will say my answer is Question 2 as five tarders each lose $200 each. But where does that leave Question 1 as one trader has won $1000 and five traders have each lost $200. Are both Zero Sum or just one of the questions?Cheers.

According to my definition of zero-sum, both are zero-sum.

What is your definition of zero-sum?

http://en.wikipedia.org/wiki/Zero-sum

Zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s). It is so named because when the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

http://www.smartoptionsreport.com/glossary/zerosumgame.html

Definition: When one participant's gains result in another's equivalent losses. The total wealth's net change is zero, but it's moved from one to the other. Gambling and chess is a good example of this, as are options, because for everyone who gains on a contract, there is someone who loses.

http://www.investopedia.com/terms/z/zero-sumgame.asp

Zero-Sum Game

A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.

Options and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.

 

[MajorUrsa]

Quote from Derivman:

My reading of educational websites clearly shows that a lot of Option traders think that Options are not a Zero Sum Game, but here on Elite I also have some experienced traders saying that they are. I do not mean to be contradicting anyone, so again my apologies, but how am I supposed to know what is the correct answer.
Derivman

Just a guess: these other 'educational websites' are all selling a product, right? And it probably has to do with being an options broker, or an options data broker. Right?
It's like getting history lessons from the Soviet Ministry of Education.
Here at ET we are the people . Just believe what you want, but know that some of those talking to you here have true, hads-on experience and years of trying and thinking behind them.

I would know who to believe. Maybe you hesitate to believe because you don't like the truth?

Ursa..

 

[TraderMojo]

Quote from Derivman:

Thanks GTS. Maybe if I post my two questions again we may now have a clearer picture of what the differences may be.

Question 1. One Option trader wins $1,000 and five Option traders lose $1,000 between them with $200 each.

Question 2. Five Option traders win $200 each and 5 Option traders lose $200 each.

Which of the 2 questions is a Zero Sum Game ?

None of these scenarios include stocks and is only about Options. I will say my answer is Question 2 as five tarders each lose $200 each. But where does that leave Question 1 as one trader has won $1000 and five traders have each lost $200. Are both Zero Sum or just one of the questions?Cheers.
Derivman

Given you said you have experience with e-mini futures trading, let me rephrase question 1 in those terms:

If you buy 5 futures contracts and 5 other people take the other side with one contract each, does that mean it is no longer a zero sum game?

 

[Derivman]

Quote from GTS:

According to my definition of zero-sum, both are zero-sum.

What is your definition of zero-sum?

http://en.wikipedia.org/wiki/Zero-sum


http://www.smartoptionsreport.com/glossary/zerosumgame.html

http://www.investopedia.com/terms/z/zero-sumgame.asp

Thanks GTS for the reply. It is said that there are more losers than winners in Option trading. My understanding is that there has to be same amount of winners as losers for it to be a Zero Sum Game. Also it is said that the great majority lose in Options trading and only a small few win. Could it be that most people have it wrong in that Options are a Zero Sum Game and the small few that believe it is not a Zero Sum Game are right and are the few that make the most money trading Options. It really is not that easy when you have so many conflicting opinions but I think the correct answer will allow me to approach my new Options trading with a greater chance of success. Cheers.
Derivman

 

[GTS]

Quote from Derivman:

Thanks GTS for the reply. It is said that there are more losers than winners in Option trading. My understanding is that there has to be same amount of winners as losers for it to be a Zero Sum Game.

False - Show me who said that, certainly not any of the links I quoted. Read them again.

Also it is said that the great majority lose in Options trading and only a small few win. Could it be that most people have it wrong in that Options are a Zero Sum Game and the small few that believe it is not a Zero Sum Game are right and are the few that make the most money trading Options. It really is not that easy when you have so many conflicting opinions but I think the correct answer will allow me to approach my new Options trading with a greater chance of success.

Look, I can lead a horse to water but I can't make you drink.

If you don't understand why options are zero-sum then you shouldn't trade them because you clearly don't understand how they work on even the most fundamental basis.

I don't even understand why you are relying on web sites or ET posters like myself for this answer. Use your brain. Construct an fictious example and do the math. Again, if you can't do that then you have no business messing with options.

 

[Derivman]

Quote from GTS:

False - Show me who said that, certainly not any of the links I quoted. Read them again.

Look, I can lead a horse to water but I can't make you drink.

If you don't understand why options are zero-sum then you shouldn't trade them because you clearly don't understand how they work on even the most fundamental basis.

I apologise if I have offended you GTS but I am only trying to get to the correct answer. I stated earlier that I like to finish off one thing before I move on to another and this is why I may see a bit persistent. Again, you have my apologies and I think I will wait for some other experienced traders to comment also to see where the bias is. After that I can then make a decision and move on. Thanks for your kind help. Cheers.
Derivman

 

[TraderMojo]

Quote from Derivman:


My understanding is that there has to be same amount of winners as losers for it to be a Zero Sum Game.

Unfortunately, your understanding of what it means to be a zero sum game is semantically incorrect. For some reason you are assuming that everyone has to win or lose the same $ amount each. This holds only if there are equal numbers of winners and losers.

However, fewer winners and more losers just equates to the winners each winning more $ per person than the losers lose $ per person. This is basic math. If you are not clear on this concept then the math involved in understanding options gets a lot more complex than that.

and the small few that believe it is not a Zero Sum Game are right and are the few that make the most money trading Options.

I hope this doesn't turn into another majority vs. minority debacle.

 

[Derivman]

Quote from TraderMojo:

Given you said you have experience with e-mini futures trading, let me rephrase question 1 in those terms:

If you buy 5 futures contracts and 5 other people take the other side with one contract each, does that mean it is no longer a zero sum game?

Thanks for the reply TraderMojo. Is this exactly the same as the Options question as a Futures contract does not have any premium attached to it and thus the passage of time will have no additional effect on the price apart from the normal price changes resulting from the supply and demand over time. Surely we must look at each market individually as derivatives can vary according to their purpose. Cheers.
Derivman

 

[Derivman]

Quote from GTS:

False - Show me who said that, certainly not any of the links I quoted. Read them again.

Thanks for the reply GTS. Can you please clear up what you are referring to in that there is more losers than winners or the Zero Sum Game. Cheers.
Derivman

 

[TraderMojo]

Quote from Derivman:

Thanks for the reply TraderMojo. Is this exactly the same as the Options question as a Futures contract does not have any premium attached to it and thus the passage of time will have no additional effect on the price apart from the normal price changes resulting from the supply and demand over time. Surely we must look at each market individually as derivatives can vary according to their purpose. Cheers.
Derivman

So you accept that in the futures example, you can have different numbers of winners and losers but still be a zero sum game? Yes or no?

With options you have buyers and sellers of premium. You can have differing numbers of buyers and sellers just as with the futures example. There is no difference.