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If used as part of a holistic risk-hedging strategy, they aren’t necessarily zero sum from a portfolio theory perspective. But purchased on their own as a stan

If used as part of a holistic risk-hedging strategy, they aren’t necessarily zero sum from a portfolio theory perspective. But purchased on their own as a stand-alone bet, all options and futures contracts are by definition zero-sum games. So 99.999% of the retail investors (robinhood et al.) trading options are playing a zero sum game. Hence why I didn’t feel the need to elaborate.

seibelj 6y ago
It isn’t like a coin flip though. You can sell the option before expiration. And the seller of the option is harvesting premiums for their own reasons. The whole game is much more complex. I haven’t thought about whether it’s zero sum in super great detail but my gut says it isn’t.
emteycz 6y ago
Not at all. There is much more to capital markets than just betting on a number without any meaning. There is something under that number. Maybe you're confusing options and "binary options"?
- pembrook 6y ago
  Again, all options are a zero sum game. No value is created or destroyed (outside of trading fees), just transferred between parties. I think you might be confused by the name "binary options." The word "binary" doesn't refer to the fact that they are specifically zero sum. This doesn't need to be called out, because again, all options and futures are zero sum. The "binary" qualifier refers to the fact that they result in "yes/no" outcome. Did the thing you bet on happen? Yes? You win. No? you lose everything.
  - emteycz 6y ago
    I know what options are, and I know what binary options are. It's not true that no value is created or destroyed on transfer. Transferring or obtaining the asset might be extremely valuable to someone. Market conditions change. And so on.
  - pgwhalen 6y ago
    I’m not the first person on HN to say it, but I’ll say it here - by this definition of zero sum, are not all economic transactions zero sum?
    - pembrook 6y ago
      No. The simple fact that you can create value for others without stealing that value from someone else means the economy is positive sum. If all economic transactions were zero sum, then growth would be impossible. Things like GDP, the stock market, etc grow every single year on average because they are positive sum. That’s why it’s most smart to just buy-and-hold boring index funds. You’re taking advantage of the positive sum nature of all business in aggregate, instead of playing the zero-sum game of short term trading against other market participants.
      - pgwhalen 6y ago
        I'm not suggesting that all economic transactions are zero sum. I'm just using that idea to expose what value really is. > No value is created or destroyed (outside of trading fees), just transferred between parties. That transfer is the value. In fact, that's pretty much the point of finance in its entirety - moving around capital/risk is valuable in and of itself.
- lottin 6y ago
  An option is a zero sum game. The payoff on a long option position is the same as on the short position but with the opposite sign. This means the profit on one side of the deal always comes from a loss on the other side, and the other way around. That's the definition of a zero-sum game.

seibelj 6y ago

It isn’t like a coin flip though. You can sell the option before expiration. And the seller of the option is harvesting premiums for their own reasons. The whole game is much more complex. I haven’t thought about whether it’s zero sum in super great detail but my gut says it isn’t.

emteycz 6y ago

Not at all. There is much more to capital markets than just betting on a number without any meaning. There is something under that number. Maybe you're confusing options and "binary options"?

pembrook 6y ago
Again, all options are a zero sum game. No value is created or destroyed (outside of trading fees), just transferred between parties. I think you might be confused by the name "binary options." The word "binary" doesn't refer to the fact that they are specifically zero sum. This doesn't need to be called out, because again, all options and futures are zero sum. The "binary" qualifier refers to the fact that they result in "yes/no" outcome. Did the thing you bet on happen? Yes? You win. No? you lose everything.
- emteycz 6y ago
  I know what options are, and I know what binary options are. It's not true that no value is created or destroyed on transfer. Transferring or obtaining the asset might be extremely valuable to someone. Market conditions change. And so on.
- pgwhalen 6y ago
  I’m not the first person on HN to say it, but I’ll say it here - by this definition of zero sum, are not all economic transactions zero sum?
  - pembrook 6y ago
    No. The simple fact that you can create value for others without stealing that value from someone else means the economy is positive sum. If all economic transactions were zero sum, then growth would be impossible. Things like GDP, the stock market, etc grow every single year on average because they are positive sum. That’s why it’s most smart to just buy-and-hold boring index funds. You’re taking advantage of the positive sum nature of all business in aggregate, instead of playing the zero-sum game of short term trading against other market participants.
    - pgwhalen 6y ago
      I'm not suggesting that all economic transactions are zero sum. I'm just using that idea to expose what value really is. > No value is created or destroyed (outside of trading fees), just transferred between parties. That transfer is the value. In fact, that's pretty much the point of finance in its entirety - moving around capital/risk is valuable in and of itself.
lottin 6y ago
An option is a zero sum game. The payoff on a long option position is the same as on the short position but with the opposite sign. This means the profit on one side of the deal always comes from a loss on the other side, and the other way around. That's the definition of a zero-sum game.