Who wins the zero-sum disasters?

[orion69]

See trades done on SHORT PUTS OPTIONS on a BULL RUN FOOTSIE index.

15 WIN trades. ZERO losing trades.

http://www.tacticaltrader.com/forum/read-topic/166/The-Options-Edge-writing-vs-buying

O69

 

[peto]

Miss Peto.

I have just returned from my dinner. sorry i took so long keeping you waiting.

Over 90% of options traders say Options are ZERO SUM Game [for every ONE winner you must have ONE loser] And the small minority [under 10% say its NON ZERO SUM.]

You obviously stand with the majority for not agreeing with me. Now tell us where are the losers in this scenario:~

ONE CALL CONTRACT PER PERSON

Day one 50 persons buy a FTSE March ATM CALLS at 60 pts [£10 per point] from the MMkrs at his bid price.

Day 2 all 50 persons sell those Calls at 70pts to 50 other buyers. [gain of 10pts = £100 profit each]

Day 3 all 50 owners sell those CALLS at 90pts to 50 other buyers. [gain of 20pts= £200 profit each]

Day 4 all 50 owners sell those CALLS at 110 pts to 50 other buyers. [gain of 20 pts= £200 profit each]

Day 5 all 50 owners sell those CALLS at 150 pts to THREE buyers [at a gain of 40pts = £400 profit each.

Now you have just THREE persons holding all those 50 CALLS contracts from the 50 sellers. HOW MANY WINNERS IS THERE AND HOW MANY LOSERS CAN YOU SEE?

THE THREE HOLDERS ON THOSE 50 CONTRACTS SELL TO ME IN FEBRUARY AT 170. THEY MAKE A GAIN OF 20PTS = £200 PROFIT PER CONTRACT BETWEEN THREE PLAYERS.

I'M NOW THE HOLDER OF ALL THOSE 50 CONTRACTS AND STILL HAVE 20DAYS TILL EXPIRY AND THEY ARE SHOWING 200PTS VALUE = £2000 X 50 CONTRACTS. I'M STILL HOLDING CONTRACTS FOR MORE PROFITS.

WHERE ARE THE LOSERS TO MAKE SCENARIO ZERO SUM GAME?

To be ZERO SUM GAME you need to show ONE loser for every ONE winner!

I have plenty of time, i can wait until you go back to your boss at IB for help!

http://www.gametheory.net/Dictionary/ZeroSum.html

O69

Let us define a zero-sum game:

Websters online dictionary: "Noun 1. zero-sum game - a game in which the total of all the gains and losses is zero "

Farlex Financial Dictionary: "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.

i.e. it is the net wealth which is zero, not the number of losers/winners. One individual losing a lot to many traders winning a little might be an example of a zero sum game.

In your example, the market maker is sitting on a large (as yet unrealised) loss which balances the combined realised profits of all the other traders plus your unrealised profit. If the situation is unchanged then at March expiry the MM's loss on these 50 calls will exactly balance the the combined profits of all the traders including you. This is simple stuff, but from earlier discussions with you I regret it may be beyond your understanding.

Perhaps you feel the market maker 'doesn't count' (EDIT I presume that's what you meant by the comment "Who fcuk cares about the MMker?" )
because he will probably have offset this losing trade against others on the other side of the market. If we look at this broader picture we will see that the offsetting wins the MM made here are the result of the losses of another group of traders who took the wrong side of the market, so restoring the 'Sum' to Zero.

 

[orion69]

Let us define a zero-sum game:

Websters online dictionary: "Noun 1. zero-sum game - a game in which the total of all the gains and losses is zero "

Farlex Financial Dictionary: "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.

i.e. it is the net wealth which is zero, not the number of losers/winners. One individual losing a lot to many traders winning a little might be an example of a zero sum game.

In your example, the market maker is sitting on a large (as yet unrealised) loss which balances the combined realised profits of all the other traders plus your unrealised profit. If the situation is unchanged then at March expiry the MM's loss on these 50 calls will exactly balance the the combined profits of all the traders including you. This is simple stuff, but from earlier discussions with you I regret it may be beyond your understanding.

Perhaps you feel the market maker 'doesn't count' (EDIT I presume that's what you meant by the comment "Who fcuk cares about the MMker?" )
because he will probably have offset this losing trade against others on the other side of the market. If we look at this broader picture we will see that the offsetting wins the MM made here are the result of the losses of another group of traders who took the wrong side of the market, so restoring the 'Sum' to Zero.

"Perhaps you feel the market maker 'doesn't count' (EDIT I presume that's what you meant by the comment "Who fcuk cares about the MMker?" )
because he will probably have offset this losing trade against others on the other side of the market. If we look at this broader picture we will see that the offsetting wins the MM made here are the result of the losses of another group of traders who took the wrong side of the market, so restoring the 'Sum' to Zero."

Miss Peto your closing comments strenghtens my point further! The MMker does not lose either! [you said] So who the FCUK lost ?? Your just keep diggin yourself in deeper hole!

I hope your boss at IB dont read your posts on OPTIONS being ZERO SUM GAME

I also i hope Optionxpress dont read your post either?! They at Optionxpress say OPTIONS are NON ZERO SUM GAME! I wonder what IB say? Please let us all know tomorrow.

O69

O69

 

[peto]

"Perhaps you feel the market maker 'doesn't count' (EDIT I presume that's what you meant by the comment "Who fcuk cares about the MMker?" )
because he will probably have offset this losing trade against others on the other side of the market. If we look at this broader picture we will see that the offsetting wins the MM made here are the result of the losses of another group of traders who took the wrong side of the market, so restoring the 'Sum' to Zero."

Miss Peto your closing comments strenghtens my point further! The MMker does not lose either! [you said] So who the FCUK lost ?? Your just keep diggin yourself in deeper hole!

I hope your boss at IB dont read your posts on OPTIONS being ZERO SUM GAME

I also i hope Optionxpress dont read your post either?! They at Optionxpress say OPTIONS are NON ZERO SUM GAME! I wonder what IB say? Please let us all know tomorrow.

O69

O69

Please try to keep up Bull, I know you have trouble with long posts.

"If we look at this broader picture we will see that the offsetting wins the MM made here are the result of the losses of another group of traders who took the wrong side of the market, so restoring the 'Sum' to Zero"

To re-phrase, just for you, If the MM's successfully offset their trades, then a whole new subset of traders made net losses, which restores the balance to zero.

Optionsxpress I never heard of until you brought them up. If they believe as you do they are clearly wrong. I neither know nor care what IB think, although your belief that I work for them is a source of great amusement to me What a funny chap you are.

 

[orion69]

Please try to keep up Bull, I know you have trouble with long posts. To re-phrase, just for you, If the MM's successfully offset their trades, then a whole new subset of traders made net losses, which restores the balance to zero.

Optionsxpress I never heard of until you brought them up. If they believe as you do they are clearly wrong. I neither know nor care what IB think, although your belief that I work for them is a source of great amusement to me What a funny chap you are.

You have admited you work for IB on here about 2 yrs ago! have you forgotten that Peto?

Your NOT alone who think that Options are ZERO SUM GAME theres infact more than 90% who believe that! including your mates Mr Profitaker and Pitscum Kelvey.

O69

 

[zupcon]

You have admited you work for IB on here about 2 yrs ago! have you forgotten that Peto?

Your NOT alone who think that Options are ZERO SUM GAME theres infact more than 90% who believe that! including your mates Mr Profitaker and Pitscum Kelvey.

O69

Why does it matter so much?

Surely the bottom line is one can still trade successfully regardless of your views

regards
zup

 

[peto]

You have admited you work for IB on here about 2 yrs ago! have you forgotten that Peto?

Your NOT alone who think that Options are ZERO SUM GAME theres infact more than 90% who believe that! including your mates Mr Profitaker and Pitscum Kelvey.

O69

I should think 99% do Bull. You have not given anyone a reason to believe otherwise.

Why does it matter so much?

Surely the bottom line is one can still trade successfully regardless of your views

regards
zup

It matters very much to Bull, because he has previously explained that his religion will not allow him to profit, if others lose. Unless it is only the MM's that lose, then that's ok it seems.
Thus he must support and argue for his standpoint however absurd, or give up trading. Why he keeps introducing the subject is more of a mystery, perhaps he is looking for supporters to reassure him.

 

[orion69]

Why does it matter so much?

Surely the bottom line is one can still trade successfully regardless of your views

regards
zup

Zup

He maintains that options are ZERO SUM when infact they are NON ZERO SUM.

Truth is what matters!

And why 90% of traders think that way on Options!

O69

 

[orion69]

I should think 99% do Bull. You have not given anyone a reason to believe otherwise.

It matters very much to Bull, because he has previously explained that his religion will not allow him to profit, if others lose. Unless it is only the MM's that lose, then that's ok it seems.
Thus he must support and argue for his standpoint however absurd, or give up trading. Why he keeps introducing the subject is more of a mystery, perhaps he is looking for supporters to reassure him.

You say options are ZERO SUM. Optionxpress say they are NOT. Who do you think the members here really believe ? You or me and Optionxpress.

 

[zupcon]

I should think 99% do Bull. You have not given anyone a reason to believe otherwise.

It matters very much to Bull, because he has previously explained that his religion will not allow him to profit, if others lose. Unless it is only the MM's that lose, then that's ok it seems.
Thus he must support and argue for his standpoint however absurd, or give up trading. Why he keeps introducing the subject is more of a mystery, perhaps he is looking for supporters to reassure him.

Now that would go a great way to explaining things, and certainly helps put things in perspective.

I had a similar debate regarding the morality of foreign exchange. Anyone who considers themselves a Christian simply should not be trading, on the basis that the only time Jesus exhibit’s any violent tendencies, is when he turned over the tables of the money lenders at the temple. I mean, how much more disapproving of an activity could he be ?

There are simply hours of fun to be had winding people up with that one

 

[orion69]

Optionxpress say Options are NON ZERO SUM GAME

http://www.optionsxpress.com/educate/investing101/players.aspx?sessionid=

http://www.gametheory.net/Dictionary/ZeroSum.html


By Optionxpress

Options: Not a Zero-Sum Game

With the possible exception of futures contracts, trading is not a zero-sum game. In other words, for every winner there doesn't have to be a loser. Therefore, because there are so many different combinations and ways options can be hedged against each other, it doesn't make sense to look at overall figures (e.g., the number of options that expire worthless) and reach conclusions about how many people made or lost money.

 

[zupcon]

Zup

Truth is what matters!

O69

Agreed, but not necessarily a prerequisite to trade profitably, which is what concerns 95% of the members at this site, and therefore perhaps a subject for debate in more elevated circles

regards
zup

 

[orion69]

Peto.

Re: Zero SUM

Would you like to inform Optionxpress they have it terribly wrong?

O69

 

[peto]

Peto.

Re: Zero SUM

Would you like to inform Optionxpress they have it terribly wrong?

O69

Try to concentrate just a little longer Bull. Remember

Optionsxpress I never heard of until you brought them up. If they believe as you do they are clearly wrong.

. Since I have never heard of them before I care not a jot what misconceptions they have; so obviously no, I see no need to, but you should feel free.

 

[hellokimchi]

OK, so aside from options which appear to maybe or maybe not be a zero-sum game - what about stocks, or real estate?

All everybody heard about during the dot.com crash was the $billions and eventually maybe $trillions wiped off the value of the stockmarket. So I assume a few people made billions while many more people 'only' lost thousands.

So this money isn't 'wiped' it's just 'transfered', right?

How about real esatate? Since land values seem to have been rising above and beyond the value of inflation for as long as anyone can remember (bar relatively short-lived corrections), where is all this money being 'created'? If land values on average increase above the rate of inflation, then this money must come from some people who lose a shed load on property deals every year.

I always hear about people who make money during real esate booms and relatively few who get trapped in -ve equity or the like during the down years.

And how about stock indexes? If pretty much all of them rise beyind the rate of inflation, then that means the values of the individual stocks represented by the index also increase in value over time.

So who loses during the relentless rise of stock indexes amd real estate...or is there a horrendous crash and financial meltdown brewing somewhere? If pension funds pretty much all increase in value during the course of a person's working life - who lost?

I'm sure most of this is finance 101, but I haven't been able to find the answer - assuming it is all a zero-sum game.

 

[PKFFW]

orion69,

I'm truly interested in how options trading can be a non zero sum game? My understanding of zero sum means that the total amount of wealth of the participants in the game is the same at the end of the game as it was at the begining. So with an "options game", when the option expires(and is then deemed worthless) the sum total of the money exchanged through out the life of the option will balance the worthless option. This is different to there being one winner for every loser. There could be 50 winners for 1 loser so long as the 50 winners profits equal the one losers losses.

You mention people onselling the option over and over for a profit. However someone is going to be left holding the option when it expires. That someone will have had to pay money for it. Hence they will make a loss on that option. That loss, as far as my understanding goes, will be equal to the profit made by all the others. Is that not so?

Let me assure you, I am genuinely interested in the topic. I freely admit I do not know alot about options though. I'm just trying to understand how it works.

Cheers,
PKFFW

 

[Directional]

The option writer carries the loss from his account margin if the option gains value and expires IN the money with intrinsic value.

The option purchaser carries the loss (the writers gain) if the option expires worthless out of the money.

If between the first write and the expiry the option fluctuates wildly in price, it makes no difference - if its sold or purchased along a chain of traders a thousand times or none at all, no "new" value is created - wealth is merely exchanged between the buyers & sellers at different points in the value process.

At all stages from the moment the option contract is first written, to the moment it expires, as PKFFW stated - the sum total of the money exchanged through out the life of the option will balance against the worthless option.

example (excluding commissions for simplicity's sake):

FIRST SELLER: (Writer) Sell short 1 x call option @ $500 premium collected
FIRST BUYER: Buys 1 call for $500

Market rises & Call Option increases in value to $3000

FIRST BUYER decides to cash in and sells his option -
FIRST BUYER Sells 1 call for $3000 to SECOND BUYER

Market falls & call option decreases in value to $2000

SECOND BUYER decides to eat his loss and sell the option
SECOND BUYER sells the option for $2000 to THIRD BUYER

Market again surges & call option increases in value to $4000

THIRD BUYER takes his profit
THIRD BUYER sells the option to FOURTH BUYER for $4000

Market continues the trend upward & option increases in value to $4500

FOURTH BUYER takes his profit
FOURTH BUYER sells the option to FIFTH BUYER for $4500

market retraces and option expires OTM worthless...

FIFTH BUYER loses entire option value at expiry.

so:
WRITER = net profit of $500
FIRST BUYER = net profit of $2500 ($500 purchase and $3000 sale)
SECOND BUYER = net loss of $1000 ($3000 purchase and $2000 sale)
THIRD BUYER = net profit of $2000 ($2000 purchase and $4000 sale)
FOURTH BUYER = net profit of $500 ($4000 purchase and $4500 sale)
FIFTH BUYER = net loss of $4500 ($4500 purchase with expiry of option worthless)

TOTAL OF ALL GAINS = $5500
TOTAL OF ALL LOSSES = $5500

This example is a simplistic one, and the original writer holds his short for the whole example, but the writer could have joined the chain of buyers at any stage and the net swap of wealth would stay the same amongst all the participating traders.

I'd be interested in seeing where in the process orion69 thinks "new" value is created to make this a non-zero-sum option trade?? the net gains balance the total of all losses in the life of the option. its zero sum. money is just moved between the participants.

For every dollar won, there is a dollar lost. it doesnt matter how many participants there are, nor whether a thousand traders sequentially win one dollar each, and one trader loses a thousand. the "zero" sum comes from the total of the bottom line of wins & losses.

A zero-sum trade totals all dollar wins against losses and nets back to zero. A non-zero-sum trade is where new value is made without someone else losing it, ie: through the appreciation in value of an asset, such as a real-estate property.

It would seem that orion69 is counting the winning participants vs the losing participants and using this as his justification for saying that its not zero-sum - ie: in the above example there are two net losers and four net winners from the trade - but this is not the correct way to define the sum of the game, since some of the winners were massively smaller than the losers, its not a straight win/lose one/nil equation since "win" or "lose" only defines whether each trader "scored" above or below zero with his change in account value - the way the sum is scorec/calculated is through the total of all money exchanged, and the total $$ won in options always is offset by the total lost.

Unlike sports where its only win or lose that matters rather than number of goals or points, in trading its MONEY that determines the scale of your success, not simply win or lose. orion69 seems to be trying to justify his position by scoring the options trading sum differently from everyone else. You wouldn't score a football leage solely on the number of goals made: ie, if say liverpool lost every game in the season, but still scored four goals in each of their losing games - so what if they scored the most aggregate goals of the season, they still would get relegated! just because there may be four winning participants and two losing participants in the above options example doesnt make it non-zero-sum, since the sum of the game is balanced by the money exchanged.

From wikipedia definition of 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. Chess and Go are examples of a zero-sum game - it is impossible for both players to win. Zero-sum is a special case of a more general constant sum where the benefits and losses to all players sum to the same value. Cutting a cake is zero- or constant-sum because taking a larger piece reduces the amount of cake available for others.

 

[orion69]

orion69,

I'm truly interested in how options trading can be a non zero sum game? My understanding of zero sum means that the total amount of wealth of the participants in the game is the same at the end of the game as it was at the begining. So with an "options game", when the option expires(and is then deemed worthless) the sum total of the money exchanged through out the life of the option will balance the worthless option. This is different to there being one winner for every loser. There could be 50 winners for 1 loser so long as the 50 winners profits equal the one losers losses.

You mention people onselling the option over and over for a profit. However someone is going to be left holding the option when it expires. That someone will have had to pay money for it. Hence they will make a loss on that option. That loss, as far as my understanding goes, will be equal to the profit made by all the others. Is that not so?

Let me assure you, I am genuinely interested in the topic. I freely admit I do not know alot about options though. I'm just trying to understand how it works.

Cheers,
PKFFW

"You mention people onselling the option over and over for a profit. However someone is going to be left holding the option when it expires. That someone will have had to pay money for it. Hence they will make a loss on that option. That loss, as far as my understanding goes, will be equal to the profit made by all the others. Is that not so?"

PK.

Please read my post again on page 18

In my simple Vanilla Option scenario i am left holding ALL the ITM Footsie CALL Options. I will put them on the Mmker on expiry day for a profit. The only loser is the MMker.

Now according to Miss Peto the MMker has not lost out either [althou she admits i won TOO from the MMker] The very first buyers bought the Calls from the MMkers bid price. This means they paid the MMker for all those 50 calls, inother words the MMker was the WRITER of the Options.
For the play to be ZERO SUM there would need to be ONE LOSER FOR EVERY WINNER. ie 64 teams enter a tournament or 64 tennis players. On day ONE there would need to be 32 losers for the next 32 to progress to the next round! Then on day TWO yould would need 16 losers for the next 16 to go thru! 16 -16 =ZERO The number of winners on ALL rounds MUST EQUALE the same number of the LOSERS! ONE FOR ONE

You now get to the final two. ONE MUST WIN AND THE OTHER MUST LOSE. THERE IS ONLY ONE CUP FOR THE WINNER ONLY!
There has been manny winners and many losers. but, this was not the case with my scenarion on page 18. ALL the owners of the CALLS rose in value on a BULL mrkt until those calls last day [expiry day] Even the holder of those CALLS [me] on last day made a profit! PAID by the MMker! Now Miss Peto says and likes to defend the MMkers. They, the mmkers made NO LOSS as they hedged those writen positions on the outset! well and good i say to miss Peto. My point is strengthened more. NO losers and all winners. Even if the MMker did not hedge those writen CALLS positions this would make them the only player who lost! ONE loser does not equate to the same NUMBER of the WINNERS!

If anybody wants to argue the point made on the play i ilustrated? they are free to argue their point with Optionxpress Options Brokers.

http://www.optionsxpress.com/educate/investing101/players.aspx?sessionid=

http://www.gametheory.net/Dictionary/ZeroSum.html

O69

 

[Profitaker]

Trading options is zero-sum, period. Rather like playing poker, where 10 players walk into a room with wealth totaling £ xxx, so 10 poker players will walk out of the room with wealth totaling £ xxx. The wealth just got re-distributed during the game. Anyone that can't grasp this very basic concept probably shouldn’t be trading options, IMHO.

OK, so aside from options which appear to maybe or maybe not be a zero-sum game - what about stocks, or real estate?

Whether trading stocks is zero-sum is more open to debate, and I would say that trading real estate is almost certainly not a zero-sum game.

 

[chump]

Investing or trading of money is much like a game of musical chairs ...no matter how many people get a chair you know that someone will not. Now in the financial markets we have a level of complexity that sometimes makes it hard to see who is not getting the chair ,but that does not mean someone just found themselves without a place to sit ,or more aptly a shirt to put on their back. Markets are interdependent to a degree that unravelling exactly who is picking up the bill is hard ,but we know someone is. With deference to our now banned member ,the fact that a string of successive punts might leave those punters ahead does not change that , it just means you didn't look hard enough to find who was footing the bill.