I am not sure I understand it. If the underlying is in a bull market both buyer and seller of the option contract make money. Seller of the contract makes money because he it bought at the lower price. The buyer of the contract is going to make money because he's going to sell it at the higher price. But the point is that if the underlying is not a ponzi scheme I don't understand how derivitives would be - since I can always in my trading strategy replace underlyings with theire derivitives.
i get so tired of people with NO knowledge of game theory arguing against the zero sum game reality just because they don't understand what the term means, and they think it's pejorative, therefore, options can't be zero sum it is this simple. options are zero sum within the options market, the net = 0 (necessarily) hence, it HAS to be zero sum fwiw, options are not ownership of anyTHING. they are an agreement between two parties, the option writer, and the option owner. necessarily, the position of a writer is the exact opposite of the position of the buyer options can be "created' out of thin air, because they are not ownership (as stocks are) , they are agreement futures are the exact same thing (zero sum). the primary difference between futures and option is that EACH side of a futures contract is part of a binding agreement that necessitates action *assuming it is not rolled over, offset, or position closed out. options give an OPTION (not an obligation) to the holder, but an obligation to the writer. but both are necessarily zero sum. it is a structure of the market question. it does not say they are 'bad' or you can't make money with them, or whatever. heck, a large %age of both market is involved with people hedging physicals and/or positions in OTHER markets, so their GOAL is not to get a winning trade inthe option/future but to offset risk of another position in another market. stocks are NOT zero sum. any market where the net CAN be other than zero is not zero sum by definition stocks represent ownership of a THING. the stock market can see built wealth, and (even without dividends) is clearly not a zero sum game to anybody that understands game theory. i could also go on about closed system (option/future) where every additional long position is necessarily offset vs. open system (stocks) where new long positions can be created WITHOUT a concomitant short position, but whatever this is basic math/game theory/market structure it is not arguable. it is absolutely 100% incontrovertible \
How exactly would a seller buy a call option contract at a lower price in a bull market!? Forget about ponzi scheme, derivatives are contracts. One party against the other. What one party gains the other loses so it is just a re-distribution of wealth from one party to the other.
There is no way one can make money in a zero sum game. It's hard for me to embrace this idea. Can someone give any other examples of zero sum game besides the markets where people actually make money?
the reason some people care is that it helps to understand the underlying nature of the instruments u trade, market structure, etc. you don't HAVE to , in the same way you odn't have to understand how an internal combustion engine works, or even that there is one under the hood, to drive a car. generally speaking, most traders are better off in the stock market than the futures market. personally, on my daytrading i trade mostly futures, but that's me. it offers phenomenal reward, but has a different structure to the stock market news can come out tomorrow that wil bring huge wealth to the stock market as a whole, a particular sector, etc. this is not true of the futures market. it may be true of the long or short side (Which are necessarily equal), but not the market as a whole. most traders lose money. most investors don't. if u are going to trade an instrument - stocks, futures, options, or whatever, it can behoove one to at least understand the structure of the market one is trading. that helps with risk and money management. and in my opnion, risk management and money management are the single most important factor in any trader's career. more important than entries, exits, or the latest "magic holy grail" indicator all the people continually search for (that doesn't exist btw)
You know how - on the exchanges. The same way one buyes and sells underlying. I believe the fact that those contracts are traded on the exchanges does not change the fact in your logic that options are zero sum game. Or does it? It should not.
for pete's sake maybe the problem was the term "seller" . substitute WRITER necessarily, the net gain in an options contract = the net loss if it doesn't please explain how? it cannot. that is basic math this is a completely different structure than the stock market as soon as somebody writes an option, puts it on the market, and somebody buys it - the net is zero he sold for $100. they bought for $100 the contract can be (and usually is) traded between parties many times over. some other dood buys it for $150. then sells it somebody else, etc. for $300 but the rub is that somebody NECESSARILY is short that contract. the writer. ANY additional wealth gained by the owner(s) is offset by the writer. there are only three options the option is exercised. writer is responsible. his losses offset the winners gains option expires worthless. net again = 0 writer buys back his option. net again = 0 this is a totally different structure than the stock market. options and futures are derivatives. contracts . agreements ABOUT stocks they are not ownership of anyTHING things can grow wealth - independently agreements cannot. because for every dollar won by one side of the agreement, the other side loses a $1
In a zero sum game one can't profit in the long run by taking the same action. Let's take as example rolette that has only black & red number - no green field for simplicity. This is a zero sum game and I am going to bet always on black ( I am going to take the same action all the time) If roulette stops on black I get double of my bet. Otherwise I lose my bet. This would be my contract with the house. My result will be zero in the long run. So would be for the house. And this is a zero sum game for both of us. With options if I can always buy calls in a bull market ( which direction basically determined by the underlying and the fact that underlying has its own intrinsic value) and be in profit. This does not look to me like zero sum game. By the way there is no such underlying in the roulette game and that's what makes a difference.