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Ask HN: Why be an option/futures/day trader when it is zero-sum?

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Ask HN: Why be an option/futures/day trader when it is zero-sum?

#1

Post by hashtable »

Many very intelligent people whom I admire, such as Nicholas Taleb, are speculators. But isn't it very irrational considering that it is provably zero-sum? I also would have moral qualms about doing it as well considering that I am not using my energies to produce wealth in any meaningful way.

Nicholas Taleb talks about jobs that "scale well". But isn't it more important to have jobs that are non-zero sum? If you have a job that is zero-sum, you have to keep working to stay ahead, whereas if you have a job that is less competitive you can relax. There will always be jobs available even for bad programmers because they at least create some wealth, whereas bad speculators would quickly lose their money and bad baseball players would starve in the streets.

I think it is as a rule irrational to enter a zero-sum game. When you enter the game, you are assuming that you are better than at least half of the other players. But everyone else is thinking the same thing. Clearly someone has to be wrong, and is going to be sorry. Is there any reason to believe that it is not you?

What do you think about this? I have been thinking a bit about getting into option trading, if you have any experience with it, please share.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#2

Post by utnick »

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

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#3

Post by getp »

The irrationality you are referring to is called the self-serving bias (SSB). I wrote a thesis on overconfidence for my master in behavioral economics, and the two are related. SSB is a well-documented bias. For instance, 90% of American drivers think they are in the top 50%. It's hard for people to fully appreciate this fact. Allow me to illustrate. Do you still consider yourself, even after reading this statistic, to be in the bottom 50% of drivers? If so, then you're a minority, my friend ;-) (10%, to be exact)

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#4

Post by johnrob »

This is human nature. It happens everywhere, the most commonplace example is a lottery ticket: that is a negative sum game. Venture capital is also a negative sum game (EDIT: I'm actually not sure about this, the winnings of top VCs might outweigh the losses of the majority).

Risk hungry people will pay a premium for increased upside. For example, they will prefer a win 20-lose 30 game over a win 10-lose 0, because 20 > 10.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#5

Post by aaronblohowiak »

Being a quant has a certain appeal, but nothing (to me) is as appealing as creating tools that people use to accomplish things.

Gambling on anticipating/creating the future is not an easy way to make money. However I agree that there is no wealth creation resulting from this (the increased liquidity of the market due to new kinds of derivatives may increase the efficiency of the market, but I think you are talking about "simple" trading.)

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#6

Post by rrival »

I have a Series 3 (futures/forex) license and worked in that industry for about 6 months. It was like the bad parts of Boiler Room. I left when I realized the shop I was working for had no problem ripping off retail clients and allowing them to speculate with money they didn't have; clients had to sell their homes to cover their obligations.

Bona fide hedging is a lucrative business for the companies involved, whether that's hedging against currency or commodity price fluctuations. It's also more "buy side" than "sell side" - you're dealing with companies rather than 'raising money' from new clients who get blown out over the course of 3 months.

I know a few successful options traders. It's highly lucrative (high 6 figs base after a few years), you just need the pedigree and the intellect to pull it off. If you're in a position to do that, though, you might try to get an analyst job, get on a path to assistant portfolio management, portfolio management, keep a good track record and start a hedge fund. That's all buy side and would allow for some flexibility in the strategies you implement.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#7

Post by rrival »

Wrt to the "why" of the market, without speculation, liquidity is far lower. Take a look at the Chicago Climate Exchange's (CCX) price fluctuations compared to a fall expiring wheat contract on the CME/CBOT - you can move the CCX with a small amount of money.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#8

Post by brentr »

First, options and futures involve a sub-zero game. Money leaks out via commissions.

Second, there are two types of players in this game. The first group is the speculators. They play the game for profit from the game. The second group is risk managers. They play the game for risk reduction. Speculators serve the risk managers. The speculator's strategy is starkly different than the risk manager's strategy. The speculator can profit by optimizing his strategy.

EDIT: The assumptions made by Black, Scholes, and Merton are highly idealized. There is much research to still be done in the area of behavioral finance and the game theoretic approach to derivatives pricing.

I've thought about conducting graduate research in this area because the mathematics are truly fascinating in this branch of finance/economics. When you start exploring this area from a game theory approach, you can start to understand why John Nash won the Nobel.

Re: Ask HN: Why be an option/futures/day trader when it is zero-sum?

#9

Post by muerdeme »

johnrob wrote: post #4

This is human nature. It happens everywhere, the most commonplace example is a lottery ticket: that is a negative sum game. Venture capital is also a negative sum game (EDIT: I'm actually not sure about this, the winnings of top VCs might outweigh the losses of the majority). Risk hungry people will pay a premium for increased upside. For example, they will prefer a win 20-lose 30 game over a win 10-lose 0, because 2…

Venture capital is not an example of this phenomenon. VCs accept high risk/variance in order to achieve high expected value, and it is not a negative sum game.
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