Oh good Gawd, if only that were true. The "crisis" of last year was all about... "those who were owed couldn't get paid"... and "those who owed didn't have the ability to pay"...
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Zero-sum vs. positive sum trading
- Thread starter billyjoerob
- Start date
Oh good Gawd, if only that were true. The "crisis" of last year was all about... "those who were owed couldn't get paid"... and "those who owed didn't have the ability to pay"...
Let me try to answer this this way then:
If there are participants in the derivatives market who are in it for net economic benefits over their entire spectrum of activities, then they are willing to pay a premium for the ability to remove risk (via the derivatives market). Then, a trader should be able to enter and capture that risk premium.
This is not in defense of any particular day-trading strategy, of course. It's an argument for legimitate trading motivations in these zero sum (in isolation) markets
If there are participants in the derivatives market who are in it for net economic benefits over their entire spectrum of activities, then they are willing to pay a premium for the ability to remove risk (via the derivatives market). Then, a trader should be able to enter and capture that risk premium.
This is not in defense of any particular day-trading strategy, of course. It's an argument for legimitate trading motivations in these zero sum (in isolation) markets
Quote from billyjoerob:
Then why do traders trade futures and options, which are zero-sum markets?
Quote from sjfan:
In that case I don't under your premise.
You are of course right that within isolation each derivatives market is zero sum (net of t-costs). But that's not a particularly useful or relevant observation? So long as there are participants who gains real economic benefits from these transactions outside of these markets (ie, airlines hedging their fuel cost; I don't understand your cost basis question - what are you referring to?), these markets provide a legitimate value-adding service.
So I guess I don't under your original premise.
My original premise was, what markets offer the best opportunity to make money? For instance, traders say futures trading is very difficult . . . I'm sure they're right. But isn't that because every futures transaction has a winner and a loser? And if the purpose of your trading is to make money-- and often I think traders would rather solve a complicated puzzle than make money -- then why bother with options and futures?
I understand the leverage argument . . . but equities can be leveraged too.
I think I might have just replied on that point right above your post. Does that make sense to you?
Quote from billyjoerob:
My original premise was, what markets offer the best opportunity to make money? For instance, traders say futures trading is very difficult . . . I'm sure they're right. But isn't that because every futures transaction has a winner and a loser? And if the purpose of your trading is to make money-- and often I think traders would rather solve a complicated puzzle than make money -- then why bother with options and futures?
I understand the leverage argument . . . but equities can be leveraged too.
"Then, a trader should be able to enter and capture that risk premium. "
Doesn't all of the economic value accrue to the airline (and it's customers)? I don't see the speculators capturing any of the value.
Doesn't all of the economic value accrue to the airline (and it's customers)? I don't see the speculators capturing any of the value.
Ultimately the commodity is going to be sold and bot by an economic buyer . . . so the ultimate buyer and seller is economic. The speculators are just lending liquidity to the market.
I see your point that the speculators could extract value if the economic buyers and sellers lose money on net, and pay the speculators for providing liquidity . . . Of course, the converse is probably the case.
I see your point that the speculators could extract value if the economic buyers and sellers lose money on net, and pay the speculators for providing liquidity . . . Of course, the converse is probably the case.
That's only true if all market participants are risk neutral. Different degrees of aversion to (differing types of risk) means that risk premium can be captured
Quote from billyjoerob:
"Then, a trader should be able to enter and capture that risk premium. "
Doesn't all of the economic value accrue to the airline (and it's customers)? I don't see the speculators capturing any of the value.