Don't some people, especially big organizations buy options/futures as hedges for another investment?... so it might not be a true zero sum game in the sense that some of the players aren't really playing to win.. they are just putting money in for insurance
Correct. There is a big difference in leveraging options when you own tons of stock in a company vs. using options as a high class lotto ticket.
Example: Mark Cuban used options to guarantee he would be set for life no matter what happened to Yahoo's stock after they bought Broadcast.com for $5 billion (in stock mostly).
"The basic worry that comes with having lots of money is no different from what worries everyone else. Whether you've got $100 or $100 million, you don't want to lose it. After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had. Todd Wagner and I had a credo: "Pigs get fat; hogs get slaughtered.""
Yup, This is called an Equity Collar. One should consider getting this insurance even as an individual investor... to protect your investments against worst case scenarios.
The other thing worth noting is that a well functioning capital market is not zero-sum, it puts the capital in the most profitable growth opportunities. So speculators may be incorporating information into prices that has value. Of course they may be incorporating disinformation as well; hence the importance of regulation against cornering the market or pump-and-dump schemes.
Aren't options zero sum? I don't think anyone would suggest the entire stock market is. But every penny you make from an option is a penny someone else loses, unless I'm missing something.
Right, sorry options are zero sum in a money sense, but not in a utility sense. If I write a covered call on shares that I own and a speculator buys it, we both might end up with returns distributions that are preferable to what we had before and so expected utility of wealth is increased though wealth itself perhaps isn't.
Also you have to remember that when options mature in the money they will be exercised resulting in transactions in the actual stock market which is more obviously not zero sum.
So suppose I think Yahoo is under-priced at the moment. I could
1. Purchase a share of Yahoo on the open market, exerting buy pressure on the stock driving up the price
2. Purchase a call on Yahoo; Yahoo's price appreciates some if I'm right putting my call option in the money. If the option writer was naked, they have to go to the open market to purchase a share for me to buy, resulting in buy pressure on the stock driving up the price.
Obviously the link in #2 is not as direct, but potentially prices in the actual stock market can move to incorporate information in the purchases and sales of option contracts as they are exercised. And one step further removed a long equities trader might use the size of the outstanding call and put options market on a stock to forecast price changes.
