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<DIV><FONT color=#000000 size=2>Any RT's use delta neutral trading
techniques? What are advantages and disadvantages of this technique?
Any recommended readings on the topic. Thanks in advance.</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>Marc</FONT></DIV></BODY></HTML>
</x-html>From ???@??? Sun Jun 07 19:57:46 1998
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Date: Sun, 07 Jun 1998 22:11:32 -0300
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From: "A.J. Carisse" <carisse@xxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Re: Gen: Is trading gambling?
References: <8be5f8f.357afc2e@xxxxxxx>
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BIIRE4U@xxxxxxx wrote:
> Maybe i'm missing something on this "zero sum" game we seem to be
> accused of playing in... I understand for every buyer there is a seller, but
> that doesnt necessarily mean a net of zero.
That's not what "zero sum game" means though. The "sum" here is the sum of all
wealth devoted to the enterprise. The real significance of this is that some
mistakenly perceive the markets as creating wealth - mostly from valuing their
assets at present market value, which would of course wouldn't be the case.
Whenever you make a profit or a loss in the market, it must be the case that
capitalization (less transaction costs) has increased or decreased by an equal
amount. As I've said, theoretically, there isn't even any need of anyone to lose
money in a zero sum game, as long as last sale keeps increasing due to a constant
inflow of capitalization. For example, I buy a share for $1, and sell it to you
for $2, and you sell it for $3, and so on. Each of us makes $1, but we are simply
exchanging money between ourselves.
The point of this, though, is to try to dispel the notion that financial markets
create wealth, which many believe to be the case. This arises out of the tendency
to value assets at last sale as fixed value, which is obviously mistaken. If
everyone decided to liquidate market assets, or even a significant portion for
that matter, most would receive nowhere near last sale. However, just like no
wealth is created by markets, no wealth would be actually lost out of this though
- just perceived wealth. This can be difficult to grasp at times. Say that total
wealth is 100 trillion, with 5 trillion in the markets. Through more capital
being allocated to the market, it doubles to 10 trillion. Then, a selloff occurs,
which brings it down to 5 trillion again. Throughout this example, though, total
wealth remains the same. So what happened to the 5 trillion that was "lost"? It
simply has been redistributed. Here's a simple example. 10 people buy a stock
for $10. Then another buys in for $20, another for $30, another for $40, and
another for $50. While it would appear that the current value of the 10 shares
outstanding would be $500, this really isn't the case. The value actually is
(10x10) + 40, or $140, which is the amount of capital committed to them. Of this,
4 persons are sitting with a profit of $10 each. Now, if the person who bought at
$50 sells in a panic for $20, the total capital decreases to $110, and he has lost
$30. The amount of net profit and losses (neglecting transaction costs, of
course, which can be assimilated in the calculation), will always equal current
capital invested minus initial capital invested (in this case, 40 - 30 = 110 -
100). This is essentially why this is viewed as a zero sum game.
Regards,
A.J.
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