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How much can I earn with Options?


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How much can I earn with Options?

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  #61 (permalink)
Market Wizard
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If it seems like I am arguing with people who I respect, like @wldman, I sincerely apologize. Arguments generally do not make for good forum reading.

I'd rather it be a discussion, so people can hopefully come to a common understanding.

So, my request of everyone - if anything I've said in this thread about zero sum is incorrect or wrong, PLEASE correct me. An example showing how I am wrong would be really helpful.

If I am wrong, I'll happily admit it. I make mistakes all the time.

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  #62 (permalink)
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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.

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  #63 (permalink)
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Kevin is correct. Nothing is conjured in futures markets. Any gain is the direct result of someone's loss somewhere along the line. If you want to get really technical, trading in futures markets is actually negative sum. Commission makes losers worse and is also a drag on winners. Not only do you have to beat the other players, you have costs to worry about. That's why trading is so difficult. Also, wouldn't you know it...negative sum games are the most competitive...hmmm

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  #64 (permalink)
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Example where both parties can make money. This example cast doubt that futures trading has to be a negative sum game and shows an example where the entire futures market could be a positive sum game.

Let's imagine you are a speculator. You think the market will go up over some weeks. You go to market and buy 1 ES contract. A high frequency arb firm is on the other side of the trade and we'll assume they always know the true value of the ES and quote it on both sides. They capture 1 tick spread because you went to market and immediately offset their futures contract with a short of the SPY. Now, let's say in 2 weeks the ES has rallied $2,000. You made $2,000. The high frequency arb firm made $12.50 on your trade and we'll say they make another $12.50 when you unwind. The rest of the profits came from the market's change in value.

Is it really negative sum? You did lose $25+ your trade costs. However, you made ~$2,000 and the arb firm made $25.

Where did the $2,000 in profit come from? Remember, the arb firm is always quoting the true instant value. There are no other contracts except your contract. What about the arb firm trying to be a strong hand and not give you your winnings? In this model, we assume that other arb firms would trade if that were the case. In this case, the $2,000 didn't come from futures traders losses because there are no losses. It had to come from the drift in the stock market and/or other non futures traders loses. Technically, sure the arb firm will report a $2,000 loss on the futures contract but they will report a $2,000 win on their stock trades. The point is your win did not come at the expense of anyone you were counter party too nor as a result of trading a contract that is matched with another.

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  #65 (permalink)
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Just to recall what I said previously...


kevinkdog View Post

But with futures, when you take the whole aggregate sum total of all the transactions with a certain contract, that is zero sum...

This is not how stocks work, because there is an ownership stake.


The example in the post above inadvertently confirms both of my points:


The futures market is a zero (negative) sum game (the futures market transactions net to zero)

The stock market is not a zero sum game (the stock market SPY trade does not net to zero)


Rather than cast doubt on "zero sum" claim, the example given actually confirms it.

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  #66 (permalink)
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tpredictor View Post
Technically, sure the arb firm will report a $2,000 loss on the futures contract but they will report a $2,000 win on their stock trades. The point is your win did not come at the expense of anyone you were counter party too nor as a result of trading a contract that is matched with another.

The arb firm lost 2,000 dollars on the futures trade minus cost (if any). You profited 2,000 dollars on the trade minus your cost. Your 2,000 dollars that you have in your pocket comes from a direct result of the arb firm LOSING 2,000 dollars. Nevermind that they hedged their position in another market - that has nothing to do with what we're talking about. Mathematically, futures markets have to be zero sum, there is no other way.

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  #67 (permalink)
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The definition I have for zero/negative sum game is a game where all participants lose or sum of their transactions nets to zero (and negative with costs). In the example I gave, both futures participants made money and no futures participants lost money. The key word is participant and the word "or". The arbitrage firm could not have made money if they weren't a futures participant. This suggest that if we consider futures market as a closed system then it is negative sum. The transactions net to zero and then it becomes negative with costs. But, in the real world, it is not a closed system at least with equity futures.

The important part is, even though the futures market is negative sum: this example shows that it is possible for all futures participants to make money. I gave the example of a week but it could be over a minute, an hour, day, etc. The important ramification is that you postulated knowing that futures market was zero sum to be important because it emphasizes the traders compete and/or the wins come from other traders losses. But, I provided a counter example where all futures participants were able to make a profit. The wins from the speculator did not come from the losses of any other futures participants or traders. Yes, on a transaction basis it did but on a participant basis it didn't.

I'd repeat the key idea isn't how we consider the futures market but the implication that it is possible, in the real world, for all futures participants to make a profit.

It might be worth knowing when it is likely to be more vs less competitive:

More competitive
1. Only one frequency trader dominant/active in the markets.
2. Commonly used and/or known strategy
3. High certainty of outcome
4. Low risk
5. Shorter holding period

Less competitive
1. Multiple frequency traders active.
2. Less commonly used or known strategy.
3. More uncertainty of outcome
4. Higher risk
5. Longer holding period

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  #68 (permalink)
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No, no, no! Why do keep insisting that all futures participants are able to profit? That's not even the case in your own example. The arb firm lost 2k, someone else made 2k. That's the only way it can work in futures markets. Net zero minus cost. The exact definition of zero-sum. The fact they did some risk arb in another market is beside the point. They lost 2k on their futures trade. It is possible for two market participants to make profit, but in the realm of futures everything nets to zero.

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  #69 (permalink)
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How did they lose 2k on the futures side? I said they knew the true instant value of the underlying at all times, so they had to make 2 ticks from the futures side. Also, they are futures participants. This is the point of the examples: futures transactions have to net to zero but it is still possible for all futures participants can still make money. Also, they could not have made money from the stock/index side without trading the futures. The profits had to come from the futures side. In actuality, the arb firm locked in 2 ticks of profits on the futures side and then they transferred the index risk to the speculator. The speculator made $2,000 from the SPX side. This illustrates something else: the arb firm is shown as the futures loser but their actual profits came from the futures side. The speculator shows a $2,000 win but his profits came from the SPX side-- not from futures.

Extra thought and not central to the argument, a bit contrived but still might be worth consideration, even though the speculator did lose some money on the trade. He might have had a higher cost of capital and/or not able to obtain the capital and still saved and/or accrued a value. This is somewhat tangential but if his borrow rate was higher then he may still came out ahead trading the futures. Let's say if he made the trade in stocks, he'd need to borrow 50k and could use 2x leverage from his broker (which has a cost too which we'll ignore) but let's say he can borrow 50k at 6% with no extra costs. $50,000*.06 = $3,000/52 = $57. He saved $25 trading the futures.


TheShrike View Post
No, no, no! Why do keep insisting that all futures participants are able to profit? That's not even the case in your own example. The arb firm lost 2k, someone else made 2k. That's the only way it can work in futures markets. Net zero minus cost. The exact definition of zero-sum. The fact they did some risk arb in another market is beside the point. They lost 2k on their futures trade. It is possible for two market participants to make profit, but in the realm of futures everything nets to zero.


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  #70 (permalink)
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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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