no money lost...

It is interesting to me when there are hyped discussions about “lost money” when share prices decline. It is axiomatic that for every seller there is a buyer.

So if shares are issued at $100 and the rise to $500, and then falls to $300 each transaction along the way has a buyer and a seller. The value changes hands, but it is not lost.

The problem is in the way people think about it, if I bought shares at $100 and see a transaction at $500 I feel happy and smart and go buy stuff thinking my wealth has increased, if I sold my shares and buy stuff ok. But people tend to want it both ways, they feel richer so they buy stuff without selling shares, and then they are emotionally crushed when the value they are thinking of is no longer available.

Same thing when people talk about stocks being “overbought” the number of shares is defined and each one has an owner. “Overhyped” might be what is meant, but overbought makes no sense.

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It is axiomatic that for every seller there is a buyer.

Sure, but not at every price point: it’s an auction. There can be huge spreads between bid and ask, especially on less liquid companies. Money is most certainly lost when share prices decline rapidly.

Neil

My point is there is someone on each side of the transaction, (yes there are spreads and commissions). For each Seller there is a Buyer, for each Buyer there is a Seller.

The sum of money is the same, it is distributed differently. People are acting as if wealth suddenly evaporated in China, but it was redistributed within China. I am pretty sure China still only lets citizens own shares. So all the wealth is still there the seller are getting less than they hoped but the buyers are paying less.

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if i buy 1,000.00 worth of stock, some one or a series of someones (broker, exchange, seller/sellers) receive my 1,000.00 and party like it’s 1999.

a year later the shares have fallen to a total value of 100.00 and i decide to get out, someone decides to take a chance and buy from me, i receive my 100.00, minus commission.

there is a buyer and seller both times, but there is a real loss of money. the sum of money is not the same.

if the stock price continues to drop and the shares go to a total value of 10.00 and the buyer from me sells, he too has lost 90+% of his/her investment.

also, sometimes there is not a buyer, just like in 1929, some people buy x number of shares of a company and when the crash comes, there is no one on the other side to fulfill the trade.

how sickening is that, you buy this great company at 100.00 a share and it drops to 80.00 and you decide to get out and there is literally no one willing to buy at any price.

Stock trading is not a zero-sum game because the stakes keep changing for all shares.

On May 26 2015 KORS closed at 60.59.
On May 27 2016 KORS opened at 49.50.

The trading overnight was insignificant, but the value was down 18%.

On May 27 2016 KORS closed at 45.93, with 69,237,385 shares traded. With a bit less than 200 million shares outstanding. Even if none were traded twice, 65% of the outstanding shares did nothing, nothing except loose value.

Option trading, on the other hand, is a zero sum game (minus the bit that both sides pay the house). Options are bets

Stock trading is not a zero-sum game because the stakes keep changing for all shares.

RH:

I’m not sure I understand the point you and others are trying to make.

Taking your numbers, if on May 26 I owned 1,000 KORS shares, they were worth $60,590. On May 27 they were worth $49,500 at the market open. If I had planned to sell them to make a down payment on a house, I’m out $11,190, or if I had planned to borrow money against them, I can now borrow a lot less.

Option trading, on the other hand, is a zero sum game (minus the bit that both sides pay the house). Options are bets

Again, I don’t understand the point you are making. If I owned KORS $30 calls, they would have also lost about $11,190 in value. If I had been lucky enough to own $30 puts, I would have made a killing.

Can you clarify what you mean?

John

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I think many people are missing the point here. Stock Trading in itself IS A zero sum game. The money in circulation remains constant. Yes for individual buyers and sellers there are is value creation and destruction, but if you consider all the buyers and sellers as one family the money in circulation at any given point in time remains constant. Only when the underlying businesses grow/destroy their wealth there is value creation or value destruction. Stock price emoting up or down does not change the fundamental value of the business.

Reminded of an old Warren buffet classic:
http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort…

It is more about how trading velocity decreases returns for the investor family as a whole, but I think touches the same theme that value is created when businesses create money (or more correctly when total output of economy increases) not when stock market go up or down.

With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B.
And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.
Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.
To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies.
Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.
But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what.
So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.

Having said the above, stock market crash in China can still have consequences. Rising markets create a sense of notional wealth inducing people to spend more and crash can do the opposite. Leveraged financial institutions failing can also set of a chain reaction.
How much will it impact Chinese economy ? Frankly I do not understand enough of China to make a prediction, but I from all that I read it seems this will be contained.

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I think many people are missing the point here. Stock Trading in itself IS A zero sum game. The money in circulation remains constant. Yes for individual buyers and sellers there are is value creation and destruction, but if you consider all the buyers and sellers as one family the money in circulation at any given point in time remains constant. Only when the underlying businesses grow/destroy their wealth there is value creation or value destruction. Stock price emoting up or down does not change the fundamental value of the business.

I can’t believe that people who have lived through the financial meltdown of 2007/2008 would believe these things. Lives were destroyed, people’s retirement plans were destroyed. Money in circulation doesn’t matter if all values have been reset lower.

John

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It is interesting to me when there are hyped discussions about “lost money” when share prices decline. It is axiomatic that for every seller there is a buyer.

So if shares are issued at $100 and the rise to $500, and then falls to $300 each transaction along the way has a buyer and a seller. The value changes hands, but it is not lost.

The problem is in the way people think about it, if I bought shares at $100 and see a transaction at $500 I feel happy and smart and go buy stuff thinking my wealth has increased, if I sold my shares and buy stuff ok. But people tend to want it both ways, they feel richer so they buy stuff without selling shares, and then they are emotionally crushed when the value they are thinking of is no longer available.

Certainly value is gained or loss when prices go up or down regardless if you sell or not. I can’t all my unrealized gains or loss as real gains or losses in my head. I don’t hold on to the idea that I didn’t loss anything yet because I didn’t sell. I never can understand that idea.

Now saying that… if my portfolio doubles tomorrow, I don’t go by stuff just because I am wealthier. I only purchase items from my income I make from work and never from gains from investments excluding a condo. But that is more a transfer from one asset to another.

Likewise, I don’t (or try not to) feel a need to slow or delay purchases or reduce going out to eat if the market turns sour. Those expenses are from my income and not from investments. Though it is emotionally a bit harder for me not to feel like I should cut back when my portfolio drops if it did like during the financial crisis.

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Hey there !

MY interpretation: For the individual, money is lost or gained - but the market value remains the same.

As to the phrase “you don’t lose if you don’t sell”, this is true in this respect:

You invest $1000 in a company’s stock.
The stock goes down 50% = your value is now $500
The stock goes back up 300% = your value is now $1500

You haven’t sold … did you lose any money?

You would have lost money when the stock was down the 50% if you had sold.

Just trying to help,
Rich (haywool)

Okay, my interpretation:

The stockmarket goes up over time. The AVERAGE person who buys a stock sells it later for more money. He makes money. And the AVERAGE person who buys it from him makes money when he sells.

Options and futures are zero sum games. Each contract has a buyer and seller. No profits are created ON AVERAGE. One person gains and the other loses the EXACT SAME AMOUNT OF MONEY.

That’s just the way it is.

Saul

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John, on my first point are you sure you saw the not, as in “Stock trading is not a zero-sum game”? I am not going to try to explain my point except to say that your post http://discussion.fool.com/i-think-many-people-are-missing-the-p… is in complete agreement with my intention.

As for the options, I will try to clarify that. With options the money made by one side of the transaction is the same as that lost by the other side. Your killing is the other guy’s bloodbath. Add them up and you have zero (minus fees). A straight bet, with the house taking a small cut.

The case was made in another post that a stock, taken as a whole over time, is a zero-sum game. That may be true, but the scale is so broad that it doesn’t help much in understanding what is going on.

When there is a stock market crash there usually are more losers numerically than winners . Lots of small investors pile into stocks at the top of a bubble. When the bubble bursts the buyers of their stock are more likely to be a smaller number of wealthy investors. Because usually only the pros have guts and cash to buy at bottoms. The result of this is to concentrate assets, money, into fewer hands.

Stock market gains ,even if unrealized, make middle class buyers feel wealthier. So 100 of them may all go out and buy a new iPhone… The 5 wealthy types that buy their stock after the crash will not buy 100 iPhones no matter how rich they are. Thus there is a wide impact on the economy

Another way to look at this is how much money could you borrow from your Uncle Bill using the stock as collateral. 100 shares of stock at $50/share gives a different amount than 100 shares of stock at $10/share. Forget about theoretical value , you need the cash tomorrow. Clearly you have lost wealth.

Money in circulation may not be very meaningful. This money can be put under the mattress . With many of today’s banks being too unsure to lend, particularly to small start up innovators, the money you put there is basically under a mattress,.When it is lent it is lent to the government , who will spend it buying votes. Good for them but not so good for the rest of us.

So Velocity of money counts, the more wealth is concentrated the less the Velocity. Add this to the long list of reasons the middle class is being squeezed out of existence.

The vastly more numerous middle class tends to spend money. Which flows directly into the economy. The smaller number of wealthy tend to save/invest it - which may take years to flow back into the economy. If it ever does, they may invest it outside the US. Or put it in places the government can’t find or tax.

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Saul:

Can you place a restriction on the number of posts per day for this board. It’s very hard to keep up :slight_smile:

The stockmarket goes up over time. The AVERAGE person who buys a stock sells it later for more money. He makes money. And the AVERAGE person who buys it from him makes money when he sells.

Options and futures are zero sum games. Each contract has a buyer and seller. No profits are created ON AVERAGE. One person gains and the other loses the EXACT SAME AMOUNT OF MONEY.

Your characterization of the stock market could equally well be applied to the options market (with some qualifications, which I’ll get to below.) In a rising market, one person could buy a call and later sell it for more money, and someone who buys it from him could also make more money when he sells.

I think the key distinction is to think of the options market as an insurance market. If you buy auto insurance or homeowners insurance, do you think in terms of losing money on it? Generally no. You are happy to have the protection that insurance gives you if you get in a car crash or your home burns down.

Options serve the same purpose. Someone who owns NFLX today may be worried that the stock price will retrace. He wants to buy a put to protect his gains. I am happy to sell him a put. My belief is that long term, NFLX is still a good investment. There is a chance that NFLX price will go down and I will have to pay out on the insurance, but in the long run markets and stocks go up, so in the long term, selling puts as insurance is a very profitable business.

John

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The stockmarket goes up over time. The person who buys a stock sells it later for more money on AVERAGE. He makes money. The person he bought it from made money on AVERAGE. And the person who buys it from him makes money when he sells it, on AVERAGE.

Options and futures are zero sum games. Each contract has a buyer and seller. No profits are created ON AVERAGE. One person gains and the other loses the EXACT SAME AMOUNT OF MONEY.

John, You write: Your characterization of the stock market could equally well be applied to the options market… In a rising market, one person could buy a call and later sell it for more money, and someone who buys it from him could also make more money when he sells.

That’s not what I was talking about. I was talking about each options contract. When it is initiated there is a buyer and a seller. Let’s say the person long pays $100 and the person short gets $100. When the option contract is closed whoever the person long is (even if it has changed hands) gets exactly the same amount that the person short pays to close the contract (again, even if it has changed hands. There is no profit or loss created (except fees). If you gained money, someone else lost exactly the same amount. That is indeed different than the stock market.

Saul

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That’s not what I was talking about. I was talking about each options contract. When it is initiated there is a buyer and a seller. Let’s say the person long pays $100 and the person short gets $100. When the option contract is closed whoever the person long is (even if it has changed hands) gets exactly the same amount that the person short pays to close the contract (again, even if it has changed hands. There is no profit or loss created (except fees). If you gained money, someone else lost exactly the same amount. That is indeed different than the stock market.

Saul, technically you are correct. However, options have value to both people who are trading opposite sides of that trade or there would be no market for options.

Part of that value is speculative where one party is betting that the price will go up while the other party is betting that it won’t go up before a certain period.

Part of the value is in the bid ask spreads which are usually wider than for the underlying stocks. This allows market makers to earn (on average) as the expense of those who are speculating or using the options for some other purpose. The market makers’ participation is very important because it allows more options trades to happen.

Part of the value is what John said: insurance. This could be either insurance against a drop or a conscience decision to forgo some upside in exchange for reduced volatility. Many investors do not like volatility and are willing to pay to reduce it. I am not particularly sensitive to volatility (and Saul, you seem not to care much about it either). Because others care and I don’t, I have an opportunity to profit from options because others loathe volatility.

Options can be successfully used to increase returns. I’ve calculated that about 18% of my total YTD returns are from options. I primarily use options in 3 ways: a) bull spreads, b) time value harvesting, and c) short deep-in-the-money puts as a substitute for buying shares when I want to leverage without paying margin interest and am short on cash. Using the deep in the money puts overcomes Neil’s objection to options having limited upside. As examples of my current deep in the money short puts, I current am short SWKS Nov15 $150 puts, CRTO Aug15 $65 puts, and AMBA Sept15 $125 puts.

Chris

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Chris,

For those 3 puts, are you hoping to buy more shares, collect the premium and not have to buy shares, or close the put for a profit, or something else?

Thanks

Andy

For those 3 puts, are you hoping to buy more shares, collect the premium and not have to buy shares, or close the put for a profit, or something else?

The short answer is, it depends. I view many of my options as dynamic as my view can change with a variety of changing circumstances. Factors that affect my outlook on a particular options position include:

  1. the price of the underlying stock
  2. my overall position size in the underlying stock (incl options)
  3. premiums available in the options chain for the stock
  4. the timing of upcoming earnings announcements
  5. other possible catalysts for the stock
  6. recent trading range of the underlying stock
  7. my view of the valuation of the underlying stock
  8. my current cash position
  9. my near term cash needs
  10. my current allocation in the sector
  11. my view of current fear/greed in the market
  12. my overall short put options exposure: I calculate this using the worst case scenario that all my stocks on which I am short puts go zero

There are probably other factors but the list above is what I can think of right now. So I take all of these things into account. So the situation is different for each of those three positions. Note: that I also have other options positions on SWKS and SKX and on some other stocks.

So let’s look at the CRTO options as an example since I just traded some options today. CRTO is my 4th largest position at 9.2% of my portfolio. Note: this percentage is my long stock position only. My view of the stock is very positive and I have been increasing my position size by buying more shares in the recent past. I view the long term prospects as very positive. Specifically, I like the low PEG and the very rapid rise in earnings. I like that the business model is capital light so they can add a lot of revenue and earnings without much additional capital expenditures. I really like that they customer count has been increasing 8-10% per quarter sequentially and that their revenue per customer has been rising as well. I have becoming increasingly confident that by monitoring these two metrics I can detect early decline of or problems in their business. I like that earnings as growing despite their management saying that 2015 is a year of investing into the business; what a contrast to AIOCF! So given this view, I think a bull spread would be the appropriate trade. Ideally, I would do this by selling a deep-in-the-money put and selling a near-the money leap. I would try to match the premiums to roughly match the cost of the long call with the proceeds of the short put. I would look to buy a Jan2017 $55 call with a deep in the money put that expires sometime in 6-9 months. Ideally, the put would expire are 2 more quarters of earnings reporting on the stock so that I could have a chance of having the put expire worthless leaving me with the call for “free”. Fast forwarding to the time close to the put expiration, I would look to roll the put forward if the stock price is still below the put strike price thus enabling me to harvest some time value every month that the stock stays below the strike price. This is what I would do ideally, but, unfortunately, there were no leaps available on CRTO. At the time of my CRTO options trade, there no options beyond October 2015 available and I wasn’t confident enough in my short-to-midterm outlook to buy long calls. So I sold Oct15 $55 calls when the price was around $45. I received $12.80 in premium per share.

In the past several days CRTO has risen to close to the strike price ($55) so it’s gone up a bit faster than I expected. So I was now, I was sitting on this short put position with only time value left (i.e. no upside if the stock continues to rise). In addition, I still had 3 months of exposure to a market decline or a stock specific decline. To address these issues, I decided to do the following trade: I bought back the Oct15 $55 puts for $4.85 and sold the Aug15 $65 puts for $10.75 for a net credit of $5.90. Some might ask why I would trade a $10 difference in strike price for only a $5.90 credit. Wouldn’t I be getting shorted by $4.10? Sort of but not exactly. There will be one more earnings report before the August expiration. The new information that I got last night is that Google had a better than expected result in their ad business. This is good for CRTO and it bodes well for their 6/30/15 quarter result. Thus, I think there is a good chance that CRTO could go to $65 before August 21st. If it does, then this trade will net me an additional $5.90 compared to leaving my October put in place. The other benefit is that if the stock rises to $65 then I’ve also reduced my overall options exposure by $5500 per CRTO options contract in the period between Aug 21st and Oct 16th. Reducing my exposure reduces my risk or alternatively allows me to sell other puts of similar risk. Now, if CRTO does not reach $65 by August 21st then I will have 2 opportunities to roll the position forward. Right before August expiration I could buy back the Aug15 $65 puts and sell the Sep15 $65 puts; this would likely net me an additional $1.50 per share. If the stock is above $65 at September expiration then I’ve collected an addition $5.90 + $1.50 + reduced my exposition from the period between Sept and Oct. If it’s still below $65, then I can roll forward again to October, probably for another $1.50 net credit. In fact, I can keep doing this until the stock reaches $65, each time collecting an additional $1.50 or so.

Hope this helps.

Chris

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If you gained money, someone else lost exactly the same amount. That is indeed different than the stock market.

Saul:

I’m curious as to why you make this distinction and why it bothers you.

I see what you are saying, but along the lines of what Chris said, if I sell a put to someone who owns shares of NFLX, and let’s say he pays me $100. If NFLX price doesn’t go down, I get to keep the $100, so yes, the other person is out $100, but what he bought was the peace of mind that if NFLX had gone down, he wouldn’t have lost as much.

Do you consider auto or homeowners insurance a zero sum game?

John

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Chris,

Yes, it does. Thanks for taking the time to explain it.

Andy