Not a claim I am making or my focus, at least as I understand your question.
My claims are very clearly posted in the 4 bullets in the prior post. Thanks.
The aim of my question is to determine whether it is worth while considering marker makers when trading options. My impression is, it is not. My objective is to profit from option trading with little regard to the finances of option markets. Option markets certainly have a different point if view.
Some years ago I split my portfolio in two, long term holds as investments and covered calls for income. I collected lots of premiums but that was partly offset by capital losses on the underlying stocks. My current effort is trying to find the sweet spot between capital gains/loses and option premiums. That requires a better understanding of charting, volatility, and market forces as opposed to valuation. One example, at first I excluded long term holds from option trading but after tops, on the way down, it is quite safe to sell covered calls on long term holds provided the strike price is high enough.
The Captain
2 Likes
It does not, and it’s what has been explained many times already here.
The simplest way of looking at it is as follows:
- A company has millions of shares outstanding. Let’s say the company is valued in total at about $10B.
- At the same time, there are hundreds of different options trading on that company’s stock. Let’s say a total of $10M was invested into options on that company’s stock.
- One evening, the company reports blowout earnings and the stock goes up by 20% in one shot.
- The next morning, ALL the shares are valued at about 20% higher. And they begin trading at that higher price. The value of that company is now about $12B in total.
- What happens to the options that morning? Sure, the value of each option changes (calls go up, puts go down) because the value of the stock has changed. HOWEVER, the sum total of money in those options remains at exactly the same $10M as the night before. The only difference is that the people that were long call options or short put options have more of that $10M, while the people who were short call options or long put options have less of that $10M.
And this is precisely why stocks are not zero sum (because the total value can go up making everyone a gainer) while options are zero sum (because the total value cannot go up making some losers and some gainers - always).
5 Likes
Just to be crystal clear, the above is not my claim. It is a question posed by someone else. The latest summary of my claims and reasoning, was listed in 4 bullets a few posts above, and is posted again below.
If anyone would like to refute these points, please go for it.
1 Like
This is wrong.
Options, as derivatives, derive all their economic value from the underlying asset (stocks and rates markets for listed equity options).
If stocks and bonds are not zero sum then options markets are not zero sum.