Hi Jim,

In this post I challenge the claim that options are any more or less a zero-sum game that is stock trading. The thing that makes options trading seem zero sum is implicitly excluding the options (and warrant) trades which include the issuer of the underlying stock as a counterparty. The thing that makes stock trading seem NOT-zero-sum is implicitly including transactions engaged in by the issuer of the underlying stock (including dividend payments, public offerings, exercise of warrants and options they issued and share buybacks).

So including the issuer of the underlying makes the market non-zero sum whether it is options or stock. Excluding the issuer of the underlying makes the market zero-sum whether it is option or stock.

You wrote:
Ultimately, all of the money received from selling options exactly equals the amount of money paid to buy options. It's an identity, true in every sub-period and over time.

This is true but it isn't the whole story. It *is* the whole story for options that expire worthless, but for options that are exercised, there is a further transfer of value. Further, the exercise involves the exchange of cash for shares, exactly the same kind of transaction that characterizes stock trading.

This is still zero sum. Just as any trade of shares for cash in the secondary market is zero-sum.

Ultimately, options contracts are just a funny way to organize exchanging shares for cash, but statistically aggregated, that is what they are.

R: