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How much can I earn with Options?
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How much can I earn with Options?

  #71 (permalink)
Dallas, Texas
 
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wldman View Post
I'm unable to see a point in an ongoing debate. It could be that there is a misunderstanding, a semantics issue, about the understanding of what a zero sum game is and why or if that matters.

A derivative contract is not a finite thing. It is created by contractual agreement between two adverse participants...one buyer and one seller. Net winners and net losers do not match to zero ergo a zero sum output could happen, but so could any other outcome.

Long to open could be paired with short to open or short to close. Short to open could be paired with long to open or long to close. The obligations created are not linked.

But I'm pretty sure I don't know what Kevin is talking about.

That pretty much sums it up.

It is possible to lose more on call contract than the initial and that is no where close to being zero sum. You have to consider the option pricing model also

Kevin can you show an example with real option data where contracts over a certain time period equaled zero? There is your answer.

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  #72 (permalink)
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jackbravo View Post
It seems to me there are two different discussions here. TheShrike and KevinKDog are talking about the math behind futures ONLY. Everybody else is discussing the reality of the overall market.

All money from winning FUTURES trades + all losses from losing Futures trades = 0

There is no arguing with that equation. If you disagree with that equation, then write the equation you think is correct.

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You do realize futures /ES is a derivative of S&P 500 index stocks, you add in options (what this thread is about) and it is most certainly not zero sum.

I encourage you to go explore and study derivatives (options) and the option pricing model.

Volatility is good for the market and trading.

Preservation of capital is the most important concept for those who want to stay in the trading game for the long haul. - Van Tharp
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  #73 (permalink)
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blb014 View Post
You do realize futures /ES is a derivative of S&P 500 index stocks, you add in options (what this thread is about) and it is most certainly not zero sum.

I encourage you to go explore and study derivatives (options) and the option pricing model.

That's fine. But I'm addressing the point of FUTURES ONLY being a zero sum equation. You're adding options. I'm just saying that you guys are discussing different things.

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1. You don't know the future.
2. Anything can happen in the market, including:
-market stops you out and keeps going to unimaginable levels
-market stops you out and reverses direction to hit your initial target
-market hits your target and keeps going to unimaginable levels
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  #74 (permalink)
Market Wizard
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blb014 View Post
That pretty much sums it up.

It is possible to lose more on call contract than the initial and that is no where close to being zero sum. You have to consider the option pricing model also

Kevin can you show an example with real option data where contracts over a certain time period equaled zero? There is your answer.

I am starting to realize as @jackbravo stated that we (me, shrike, Jack) are talking about a totally different concept than you, wldman and harryguy.

So let me try to understand you. Can you explain (with numbers preferably) what you mean by this:
"It is possible to lose more on call contract than the initial and that is no where close to being zero sum. You have to consider the option pricing model also"

and then explain what you are asking for with this: "can you show an example with real option data where contracts over a certain time period equaled zero?"

Because I honestly don't understand what you are asking.

If you don't want to explain, that is fine too. At this point, everyone is probably pissed at each other anyhow, likely because we are talking about different things. Might be better for everyone's sanity just to let this discussion die unresolved.

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  #75 (permalink)
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I think the problem is and I pointed this out several posts ago, the definition of a zero sum game. I think some arguments, to Kevin's point, is result of misunderstandings. However, my example conclusively demonstrates that Kevin's arguments based on the presupposition that the futures market is zero sum are wrong.

Wikipedia describes it mathematically, sum of wins and sum of losses and mentions zero-sum thinking as basically thinking one loss must come from another.

However, Merriam-Webster defined it as

A situation in which one person or group can win something only by causing another person or group to lose it.

Business dictionary describes it thus:
In decision theory, the 'lose-lose' situation where all participants lose or the sum of winnings (positives) and losses (negatives) is negative. See also positive sum game and zero sum game.
-----

My points are very clear

1. If we consider the futures PARTICIPANTS and the EXAMPLE I gave, the futures market does not have to be zero sum.
2. If we consider Merriam-Webster definition, the word "cause" is a problem. In my example, the speculator does not cause the arbitragers losses even if we don't consider that they actually made a profit. The arbitrager did "cause" the speculators hypothetical loss even though they acquired an actual win.
3. If we consider it purely mathematically and as a closed system. Kevin is right. However, he is INCORRECT about the implications of that it is zero/negative sum because he FALSELY believes that one traders gains HAVE to come from another losses. Notice I said "trader". Yes, all CONTRACTS have sum to zero. But, all TRADERS can win. Go back to my example if you don't believe me. Remember, he uses the argument that futures markets are zero sum to argue that it must be competitive and claims failing to see this is ignoring reality. My argument clearly shows this to be incorrect.


Mathematically with the formal definition Kevin is right. Mathematically the futures market is a zero sum (and negative sum with costs) games. However, he is wrong about where the losses have to come from and the conclusion that all traders must lose. His arguments that futures markets must be competitive stem from idea that one traders win must come from another's losses. On the second argument, he is wrong "that it must" because I shown an example where it DID NOT. Of course, that does not mean that it cannot be competitive-- it certainly can be.

In other words, technically and ironically the futures market is a zero sum game but the thought because of that it must lead to zero sum thinking is incorrect. The mistake derives from the thought that the only way to make money from futures trades is by winning the profit another-- in reality the arbitrager can offset it with the stock market. The wins could come from drift in market, investors, stock traders, etc. no one really knows but they don't have to come from another traders losses. Kevin is also correct if we consider HYPOTHETICAL profits. In the example I gave, hypothetically the speculator lost $25 but made $2,000 actual. The arb trader shows an actual loss $2000 but made $25. If we don't get philosophical though, if I make $2,000 and the trader I'm trading against makes $25 then it is a net benefit or win-win.

The error in Kevin's thinking is the result of considering the futures market as a closed system only and/or not excluding equity index futures from his argument. As for other markets, I'm not sure. However, even if they are negative sum, the arguments regarding competition can still be debated because of uncertainty and hedging. For example, let's say an oil refiner wants to lock in their profits from crude oil. They have the oil underlying product. They short the futures market. They think it will probably rise but the risk to the downside is too high to take. Some global event causes futures to rise. They may shown an actualized futures loss but didn't really lose anything because they hold the underlying. They only lost a hypothetical profit. It is more like paying an insurance.

What else? Some might argue we can ignore the arbitrager's profit -- that it somehow came from the equity market but, in the example, provided it could not. The arbitrager merely knew the value of the index and quoted offset from it. Their profits therefore must have came from the futures side.


Last edited by tpredictor; February 9th, 2018 at 07:52 PM.
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  #76 (permalink)
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Trading VIX options in 2018 february you could have made a lot of money, but you could have lost all too...

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