Your example of one kind of trade between specific counterparties doesn’t prove that all (or even most) options trades are zero sum and your example ignores how options prices are calculated (theory of asset pricing). Also your example ignores (and doesn’t refute) my example in any way, so my counter example remains.
Here’s a specific logical recap.
You assert in this thread
and
and in another thread
In order to refute these assertions of “every penny”, “truly”, “always” and “only”, one need only provide one example of a non-zero sum options trade. I provided an example upthread of an options dealer as counterparty to a trader long/short a call/put - a very material example because the options dealer is the primary liquidity provider in the options markets.
Starting to repeat myself now:
The dealer’s trading book is near delta neutral, the dealer earns a bid-ask spread based on a replicating portfolio, and on average the dealer makes money regardless of the directional equity risk of the trader counterparty.
The long run outcomes of the dealer’s business for these kinds of trades are:
- dealer makes money on spread, trader makes money on directional option
- dealer makes money on spread, trader loses money on directional option
- Either way dealer makes money (and hence stays in business)
- The dealer’s economic outcome is materially independent of the trader counterparty’s directional equity return
These two bullets are directly counter to your assertions (“every penny”, “truly”, “always” and “only”): these economic outcomes are not zero sum.
My above example (not yet countered by you, instead you created a new example) disproves your zero-sum assertions about “every penny”, “truly”, “always” and “only”.
Now, for your argument to support your assertions, you give the example:
So in this example my desired trade exactly complements MarkR’s desired trade: I happen to order to buy the exact option (underlying, strike, expiry) at about the same time and nearly the same price as MarkR happens to sell the same option and our respective brokers route our orders to the same dealer who happily holds both offsetting positions and collects the spread without having to execute an additional hedging trade. This happens in the market, but for every single options trade? Even for most trades? And all calls, puts, strikes and expirys for every underlying are always perfectly in balance over the investor universe?
That’s very far fetched, even if I squint, really hard.
It seems to me that most trades are routed to the dealer, the primary liquidity provider, and sometimes can be balanced out over time as trades open and close and sometimes not, depending on many factors in the market (e.g., bullish/bearishness, volatility, corporate events, macro events, etc).
But your example is not the only kind of trade, and thus does not prove that options trades and markets are generally (“every penny”, “truly”, “always” and “only”) zero sum (by generally I mean “almost always”).
So you have not proved your assertion because you give one example of one kind of trade, and you have not shown that all options trades are zero sum.
I think we can clarify this discussion with one question, if you would kindly offer an answer.
Is your claim that single leg trades with options dealers, the primary liquidity providers, per my example in this thread, are always/mostly (insert your favorite caveat word) zero sum?
If yes, please explain how a dealer with a delta-neutral portfolio gains/loses the loss/gain of directional equity return of its counterparty? (by definition a delta-neutral portfolio has no directional equity return, so I don’t see how this can be yes)
If no, then your assertion is false per my counter example.