I'm going to post a reply here that analyzes the accuracy of your premises since nobody else has. Your analysis is off, which probably won't change the nature of your question. However, your analysis must be corrected. You don't know that the seller of the stock to you made or lost money. There may or may not be a counterparty to your trade as companies issue equity. If you sell a stock and make money, that does not imply that the original seller made money. For example, company xyz issues 100 shares of common stock at $10. Andrew buys 50 shares, Brian buys 25 shares, and Carl buys 25 shares. David would like to buy some shares, but there are none available. Ethan says that he will sell David 25 shares @ $11 that he doesn't own. Ethan borrows 25 shares from Andrew to sell to David, and in return he pays Andrew an annualized rate of interest of 5% to borrow those shares. Brian wants to sell his stock so that he can pay some bills. Frank offers to buy Brian's stock for $9. The stock falls from $11 to $9. Who makes money? Only Brian makes money. Company XYZ raises money at a level they would likely not raise it at currently given Frank's transaction, but they do not make money. This is not a zero sum game like futures and options. There is not a short for every long in the marketplace. Stocks are only a zero-sum game if you consider the equity offered in public offerings, which is not a method for analyzing the market structure. Otherwise, there is a float with a market structure surrounding that float that is organized along esoteric considerations of repo rates and borrowing considerations [/B][/QUOTE] If some one wrote you a call (i.e. sold short - either hedged or naked, regardless) that was profitable to you, that means the premium, or price, of the call had risen. By definition, that call writer would have lost money on that transaction as he sold for a lower price than he would have to buy it back for now. He does not profit the premium at the point that you sold it for a profit, and is not a winner. There is a zero-sum relationship between every call and put bought and sold as these derivatives are based on the price of something else and by definiton profit or lose in relation to the underlying product from which they are derived. You are correct, there are only longs and shorts in the futures market and by definition every winner is the counterparty of a loser and the profits of the winners are equal to the losses of the losers (ignoring transaction costs). However, there are actual materials in the world that correspond with the underlying products of derivatives. Farmer Joe harvests 5,000 bushels of corn from his farm. His cost of production was $2.00 per bushel and it's going to cost him $0.10 per bushel to deliver his crop to the delivery point and $0.02 per month for 3 months to store his crop at the delivery point. He sells futures for December delivery for $3.50 to Frank. He has locked in a profit of $1.36 per bushel. The price of December Corn goes to $4.00. Farmer Joe has locked in his profit already and does not participate in the profit, but Frank gains. The point is that futures are a zero-sum game when evaluated strictly as futures.
Ticketwatcher, appreciate your reply. Tradetart, wonderful examples. Trading stocks is non zero-sum game and futures (ES...etc, not corns or pork bellys) is a zero-sum game. Differ with you in that options are also non zero-sum when an option expires worthless. You can have a case where everyone lose except this original writer of the call loses. Turn it around for puts, if you buy a put to recieve stocks and takes delivery you can come out winner if the stock is valued at greater than the strike minus the put premium you already receive. Again, in this scenario everyone could lose except you the put owner.
What happens with the stock after delivery is irrelevant to the gain or loss of the option. There is a 1:1 correspondence between buyer and sellers of options, and there is a 1:1 ratio of open interest that matches buyers and sellers of futures and options. Stocks, on the other hand, have a float. There is not a short matched up with every long as in futures, options, and other derivatives. Whether they are hedged is ultimately irrelevant to whether or not it is a zero-sum game for these purposes.
I don't have alot of experian like you Ticketwatcher. I theink you are a good person in this Forum .At least you help some one to think abou trading or talk positive about trading so you are indirect motive some on has been loosing money on the market . I hope I can post moer offen with you and ask some advise from you or instant massage with during market open , or emai some time to exchange more information about trading.