Option trading zero sum game
Most people consider options trading to be a zero sum game. When you make a trade, someone takes the other side and when one of you gains, the other loses an equal amount. When the stock is sold, the trader is happy with the result. With this point of view, trading is a zero sum game.
I prefer to look at it this way: Once the position is out of the account, the trader neither makes nor loses anything. There is no corresponding loss on the part of the trader who sold the shares.
One trader made a graceful exit, accepted a profit, and now a different trader has a new investment. If I buy a call option and earn a profit by selling at a higher price, there is no reason to believe that the seller took a loss corresponding to my gain.
The seller may have hedged the play and earned an even larger profit than I did. The thought that options represent a zero sum game assumes that all trades are standalone plays and that if you profit, the other person must have lost. When I sell a covered call, I am thrilled when the stock rallies far above the strike price. It means I will earn my desired profit.
Error (Forbidden)
In fact, it was my additional gain in the scenario presented. Options were designed to transfer risk. In the covered call example, the seller accepted cash to help reach the target profit.
However, the point is that there was no potential profit to be sacrificed.
The option buyer took on limited risk. If the stock did not rise far enough or fast enough, that buyer would have earned a loss. I understand that others see it as black and white: If one gained, the other lost. Article printed from InvestorPlace Media, http: Financial Market Data powered by FinancialContent Services, Inc.
About Futures Trading in India
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