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Just a quick point. If the equity markets create wealth...then the
derivative markets transfer wealth. Derivatives are only a zero sum
business if you include the underlying instrument.
If you buy a call for a dollar and sell it for twice that you earn a
dollar. If the person who sold you the call was hedged they earned a
profit as well. You may have earned 100 % on your dollar trade. The call
seller may have earned 20% on their trade. The derivatives market is
merely a method to transfer risk, but to imply that is zero sum is to
assume that no value is created and that is a common fiction.
If you buy options all day long and are profitable and the contra party
simply buys conversions you both make a handsome return. IT IS ONLY ZERO
SUM when you include the underlying cash.
Tin Mervin Yeung wrote:
> Hi, RT,
>
> In equity markets, if the market rises, the holders of equities are
> making money and so it is fair for them to pay the income tax. (because
> value is being created. ) In derivative markets, however, since it is a
> zero-sum game(no new value is being created), the only thing happens
> here is the exchange of money (money flows from losers to winners). Is
> it fair for the government to tax the winners without compensation to
> the losers?
>
> Can this argument be justified to persuade people to buy stocks instead
> of trading futures and options?
>
> Mervin
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