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Strategies & Market Trends : The Residential Real Estate Crash Index

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To: Perspective who wrote (70604)1/23/2007 11:08:59 PM
From: ChanceIs of 306847
 
>>>Options are a zero sum game. Somebody wins, somebody else loses, right?<<<

You are asking a philosophical question and a mathematical question.

I have taught the occasional informal investment course - for seniors at local colleges, etc. I talk about options. I ask them how many have ever bought an option. They all leave their hands down - nobody has bought an option. Then I say, who didn't drive here. No hands. They I say, who drove here without car insurance. No hands. Everybody drove, everybody had insurance, and nobody has bought an option. Than I say: you gave a insurance company someone money, they agreed to give you money if the option went into the money (you had a wreck and the wreck cost exceeded the strike price) and this arrangement lasted for a fixed period of time. So everybody has bought an option. Who didn't win there? The insured won because he drove risk free for a period of time for a known cost. The insurance company won because they charge each insured enough to cover all the expenses in the pool and then some.

Options represent damping - negative feedback. When there is lots of damping then the markets calm down. If more people sold options, then the option price would drop on supply, but so would volatility. The market would tend to "straight line" growth. Options are all about managing risk. Yes mathematically they are a zero sum game, but if you are clever about their use, then they can be very valuable - like anything else in life. Some people use hammers to drive screws.
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