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>for someone to "win", someone else has to lose Not necessarily: farmers use options as a kind of "price insurance" to insulate themselves from changes in the
by frank2 6y ago
>for someone to "win", someone else has to lose
Not necessarily: farmers use options as a kind of "price insurance" to insulate themselves from changes in the price of their crop between now and when they are ready to sell it.
Yes, for one party in an options trade to gain X dollars the other party must lose X dollars, but both parties can gain in what the economists and decision theorists call expected utility.
We have all heard the saying that after a person's income reaches $80,000 or so per year, further increases in income don't improve happiness as much as the previous increases. In other words, a person's utility function is not a linear function of income, but rather the curve flattens out a little after about $80,000 a year.
Similarly, just because an options trade is zero-sum in dollars doesn't mean it is zero-sum in the utility conferred on the two parties to the trade.
- dx034 6y agoSame with airlines, hedging oil prices via futures and options is incredibly important for them to be able to price out flights a year in advance. But that doesn't explain why a 20 year old with no income should have access to these instruments. There's a reason most banks wouldn't allow that, in the end the platform probably has to cough up the money.
- manigandham 6y agoIncome doesn't matter. As long as your account has funds, you trade with those until they're depleted. You don't get access to options by default, and even then there are levels of approvals before you can do advanced trades. If they require margin, your broker will keep watch and instantly liquidate if you go negative. That's the whole point of a "margin call". It's very rare that a broker will lose money because of a retail trader.