Minyan Mailbag: General Motors Option Strategy
Are options zero sum?
I enjoy your writing - just a comment (and no I did not take it as advice) but looked into selling General Motors (GM) Nov 27.5 puts as you discussed last Tuesday. At the time GM was at about 30.5 and it sure seemed strange that someone would pay 85 cents for a put 3 dollars out of money. I did sell the puts and shorted the stock which reduced my risk if GM went up but defined (limited) my reward if it ends up below 27.50 in November. At the time I never thought that would happen in 6 days and what I find more humorous is that the "dummy" who bought them could have captured a 250% gain in 6 days. It turned out to be a good trade for me and the "dummy" but he had a better percentage gain.
I did the same. In addition, the sale of those puts "fit" my position as I was extremely long vega and gamma at the time.
You bring up an interesting point that I have debated with others: are options zero sum? In other words, a put buyer can make money while at the same time a put seller can if they are hedged appropriately. The fact that the buyer (speculator) over-paid for the puts versus the stock price at the time in no way eliminates the profit if the speculator has the direction and timing correct (although all agree that the buyer could have made more if they paid the right price).
Those that say though that options are not zero sum argue that the introduction of a put buyer changes all the dynamics of the liquidity of the stock so that even though the two that actually transact in the put can both make money (zero sum), there are other participants away from the option transaction that turn out to be the losers.
For example, the buying of the put introduces gamma into the liquidity of the stock. The buyer of the put turns out to be right and the stock begins to go down. The seller of the put begins to re-hedge, forcing the stock down more. Both of these participants (within a range) make money at the expense of a third unrecognized party: the stock trader. This trader is caught long the stock. Because of the gamma the stock trader is forced to sell at a lower price than if there had been no gamma.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter