Options : zero sum game

[Profitaker]

gkishot

If you interviewed every single person that traded in any option series when they expire, let's say GOOG Mar06 370 Puts, and asked them what profit / loss they made, then added the results, it would net to zero (ex comms).

That is what is meant by Zero Sum - net wealth doesn't change, it just get's re-distributed.

 

[gkishot]

Quote from Profitaker:

gkishot

If you interviewed every single person that traded in any option series when they expire, let's say GOOG Mar06 370 Puts, and asked them what profit / loss they made, then added the results, it would net to zero (ex comms).

That is what is meant by Zero Sum - net wealth doesn't change, it just get's re-distributed.

My problem with this claim is that mathematically it's impossible to make money in 0 sum game ( as in my example with roulette). As I showed in previous example options can not be strictly 0 sum game because of the presence of the underlying with its intrinsic value. Only if intrinsic value of the underlying is 0 options become a 0 sum game.That's why people can win options game but they can't beat the roulette that even does not have a house edge. Besides what everybody says in the interviews tell me what do you see wrong in my logic?

 

[Li Ka Shing]

Quote from gkishot:

My problem with this claim is that mathematically it's impossible to make money in 0 sum game ( as in my example with roulette). As I showed in previous example options can not be strictly 0 sum game because of the presence of the underlying with its intrinsic value. Only if intrinsic value of the underlying is 0 options become a 0 sum game.That's why people can win options game but they can't beat the roulette that even does not have a house edge. Besides what everybody says in the interviews tell me what do you see wrong in my logic?

Hi hi.....

About the underlying with intrinsic value, true, but imagine this. If the underlying with the intrinsic value goes kapoot (bankrupt/ zero), then it would be a zero sum, agree? Uh wait a minute, this is exactly what you said above also, ok.....

Option is a derivative which also goes kapoot each month. So each month it dissapears. Gone.

In other words, although this derivative follows an underlying intrinsic value, but it always goes kapoot each month.

The underlying is still there after 1 month, but the option is not, it dissapears.

So now you see, Im sure you agree once you consider this.

I had read the other thread at 'Trading' and wanted to mention this point, that besides being 2 parties agreeing and there is no ownership, one other important thing also differentiates it from pure stock, and that's the kapootness which is certain. In stock market it will never go to 0, but fut/ options have limited timespan afterwhich it will be totally worthless/ 0.

Although more money comes in into market due to increasing wealth, increasing intrinsic value, but in fut/ options this simply means more trading volume, that's all. For example, next month there will be more trading volume than this month, but next month's option will also expire to 0, over and over again. It's different with stock market where it actually get continuous, never get reset to 0. So the underlying intrinsic value may increase and not a zero sum for people trading them, but the derivative on this underlying keep getting reset to 0 each month, and therefore this derivative is zero sum.

 

[gkishot]

This is not true. At the expiration only time value of the option goes to 0. The value of the option contract does not go to 0 at the expiration. The fact that the time value goes to 0 is irrelevant.
There is only one criteria of 0 sum game - whether it's beatable or not in a long run.


Let's say one trader always buys in the money call contracts from another with small time value ( like LEAPS). The buyer will be the winner in this game if the underlying is bullish. He will be more often making money than not.

 

[Li Ka Shing]

Maybe I said it wrongly, I didnt say 0 to mean 0, but dissapear, gone. Evaporate.

 

[menelaus]

What abou this scenario:

I buy some straddles, counter party sells them

underlying whips back and forth over and over

I buy and sell underlying against my long gamma, make $

Seller of straddle does nothing, colledcts premium

At expiration we have both made $

This happens frequently

 

[gkishot]

Quote from menelaus:

What abou this scenario:

I buy some straddles, counter party sells them

underlying whips back and forth over and over

I buy and sell underlying against my long gamma, make $

Seller of straddle does nothing, colledcts premium

At expiration we have both made $

This happens frequently

If underlying whips back and forth then yes underlying intrinsic value for this period is 0 & options are a 0 sum game. Commodities probably have intrinsic value of 0 in the long run because they sweep back & forth in the long run. But stocks do not. So for stocks it should not be a 0 sum game.

 

[Pekelo]

Quote from menelaus:


I buy and sell underlying against my long gamma, make $

Mind you, you suddenly introduced stocks into a clean option (closed system) game. Thus you just made the system an open one...

 

[menelaus]

semantics

 

[Li Ka Shing]

About making money on long term.....I dont know why an individual can't make money on a zero-sum game for the long term.

Why must an individual break even at long term?

This is only true collectively. Isnt it?

Because there are so many people, although the collective net is 0, but some of them will lose more, and some gain more.

So as an individual it's still possible for you to be among the ones gaining more.

Even over long term also. Why not?

If you consider.....there are big boys out there who dont mind losing money because they hedge/ buy insurance only. They lose money happily. This should relieve some pressure from people actively seeking to make money. Also there are casual punters/ speculators/ even traders who actively seek to make money but do not spend serious effort into it. Again this relief some pressure.

I mean to say although this is zero sum but, there is room for you. It doesnt mean you have to end up breaking even in the long term. You can wiggle your way to be among the ones gaining more.

Dont compare it with roullete because roullete is pure probability only. There is no difference among any roullete players.