At first I though this topic is boring but after read all posts I have good understand of gambling (casino) and investing (stock market). Thanks all.
You're bringing into the discussion something that wasn't being discussed (except by you). The statement was simply that, unlike the stock market, futures and options are zero sum. You can ascribe all the hedging motives you like to the futures and options markets, and rightly so. But that has nothing to do with the zero-sum nature of the game.
Finally, you're somewhat naive if you don't think a very decent part of both of these markets is pure speculation.
Don
Asked to explain the difference between gambling on a horse race and investing in the stock market, the American humorist Will Rogers famously replied: "In horse racing, you bet on a horse. If it wins, you make money; if it doesn't, you lose money. In the stock market, you buy a stock. If it goes up, you make money; if it doesn't, you lose money. See the difference??!!"
Don
Of course, I understand that a certain part of all markets are speculation. And of course this adds no value, actually it hurts the markets since it can destabilize them. Speculation can occur in all asset classes, including tulips. In the stock market, it’s called day trading. In real estate, it’s called flipping. It’s the speculation that causes bubbles and ultimately crashes, which can take a lot of different asset classes down. We saw what happened to banks with the real estate bubble. They didn’t fair too well.
But that’s what happens in a free market. I guess you could say it’s the dirty side of free markets. No system is perfect. No amount of government regulation can completely stop speculation.
My point is options and futures add value. They are not a zero sum game like gambling. Gambling adds no value to society, other than through entertainment. I know you know this, but options and future are somewhat like insurance. I think most people would argue insurance has a value. It doesn’t generate anything but it adds value for the person buying it if the stock should fall and the person on the other side of the trade gets value by making money by taking on the risk. This is a simplistic view of how options and futures work. Again, this is not a zero sum game in the way betting on an outcome of dice or cards is.
Look, I’m a low level AP and I actually like playing in a casino with an advantage. But that doesn’t mean I’m under any belief that I’m adding any value to society when I’m in the casino. In fact, I’m probably extracting value from society when I take money from a casino since this means the casino will pay less profit on their taxes...and at the basics of why casinos are legal is to raise revenue for our government, local, state and federal.
We're talking somewhat at cross-purposes. "Zero sum" has a very specific mathematical meaning. There's no ethical or moral component to the term. What value people do or don't derive from the exercise is separate from the notion that the stock market isn't zero sum and futures and options -- along with casinos -- are. You have a right to your opinion that gambling adds no value to society. But the millions of people who work in the gaming industry and feed their families from the salaries they derive therefrom might differ with you.
The point is that all of this is tangential to the original discussion.
Don
Don't you pay taxes on your gambling winnings? The IRS says gambling winnings are taxable. The government can't lose. If you lose, the casino pays the taxes, if you win then you pay the taxes. In fact with the new tax law many individual tax rates are higher than what corporations pay.
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Don, I get where you’re coming from, but I still would argue value occurs when an option or future trade occurs. This is the time element of the vehicle. I fully understand the options and futures markets are also used by speculators (some would call these people gamblers).
From a mathematical standpoint, I understand value has probably not be created when an option or future trade occurs. It should be pointed out these trades are much more complicated than any mathematical model can predict since they include outside influences that are outside of math. This is not true with games in casinos, which can be modeled with math, and are not impacted by outside influences.
As far casinos generating value, I have repeatedly stated gambling has value as entertainment, and I think this is a valid reason for it to exist. I have many friends who look at it like that. The gaming industry (casinos) are in the same space as pro-sports, movies, and other forms of entertainment. All these add value to people’s life. Some of my best experiences have occurred in a casino.
I’m surprised you made your comments about what I said about the gaming industry. Have you read any of my posts? I’m probably the most pro-casino person on this site. I’m constantly defending the casino industry and explaining their business model to people. Again, I said in this thread casino adds value by providing entertainment. If it adds value in another way other than entertainment please let me know.
I also understand why our government outlawed casinos and gambling in the past. There is a downside to gambling for society that many on this site constantly point out to me, as if I lived in a cave and didn’t know gambling could be harmful to a certain weaker element in our society. When gambling and casinos were illegal in our country, options and futures were legal. Why? Because options and future add value for our economy, which is driven by the stock market..
Wow, what a stupid post. I don’t even know where to start. Midwest Player, I like most of your posts but this one is definitely one of your poorer ones. Using this logic, casinos should just make all their games positive EV and make sure everyone is a winner when they walk out of a casino. Do you see a problem with this line of thinking?
Here’s another way to think of it. When someone wins the lottery, they pay a lot of taxes on their win. Since this is the case why doesn't the govenrment make sure everybody wins the lottery? Using your logic, this would be a huge windfall for the govenrment coffers due to all the taxes they would collect. Think about this for a while and you’ll see why your post made no sense.
Anything in life have it negative effect if you do it recklessly, like you need food but if you eat too much you get sick or you need car to going places but if you drive recklessly you can kill yourselves or other people. That said, what is harm if you watch too much movies or sports compare to you, general public, spend too much time (money) in gambling. I may not express my view clearly as English is not my strong but I think you get my point.
cc12b, you express yourself very well. I get what you’re saying and agree with you. It’s a everybody's choice how they spend their money. If they want to spend it all in a casino, then that’s their choice. We live in a free world. I’m not going to tell other people what to do and how to spend their money.
With this said, anything done in excess can harm you. Even though our govenrment has legalized casinos that does not mean they want people to gamble to excess and destroy their lives.
As with everything else in life, stuff (eating, gambling, sports, etc) should be done in moderation. There’s a group here that see casinos as evil. I’m not in that camp. I see them as doing exactly what their business model calls for them to do. I have no problems with casinos. In fact, I’m usually the one of this site defending casinos. I defend them so much that many here think I work for casinos. People here have a hard time understanding how I can be an AP and respect casinos at the same time.
Bosox, yeah I’m glad I could help Don out on this. This is a common misconception about options trading. If you google “options zero sum” you’ll find a lot of articles debunking this myth. One of the better ones is on the Ameritrade web site. It’s called “Debunking the Option-Trading Myth of Zero Sum”.
The article starts out by saying “There’s an urban myth in options trading that’s probably as old as the CDOE itself. It’s often said that option trading is a zero-sum game.” This article goes on to show why that’s not true. Both sides can win when you look at options from the broader market prespective. I’m not going to go into here since people that are interested can look up these articles themselves.
In a casino, that’s not true. Both sides can not win, unlesss you consider the ploppy a winner since he/she is getting entertainment as he/she is losing their money.
As far as the math behind options and a game like bj, they are in two totally different worlds. In bj, what happens in the past can be used to predict the probability of something happening in the future. This is not true with the stock market, which options is a part of.
One of the first things you’ll learn in the stock market is don’t use the past performance of a stock (or hedge fund, mutual fund, etc) to predict future performance. But this is what the math models try to do and it’s why companies like Lehman Brothers are no longer around. Lehman Brothers was a 169 yr old company that made it through the depression in the 30s but couldn’t survive the 2008 financial collapse brought on by the housing crash. Why? Because their mathematical models couldn’t predict something that hadn’t happened before.
You’ll see see a lot of people (even Ed Thorp does this) try to make parallels between bj and financial markets, but it really makes no sense. Bj math stays the same no matter what happens on the outside. When the financial markets collapsed in 2008, the math of bj stayed the same. This wasn’t true for the options or futures market since these markets are connected to the stock market.
Math will never be able to predict the markets and let you know when you have an advantage. Markets are much too complicated for that. Don’t be fooled by some hedge fund manager who shows you his outsized returns over the last couple years. That’s short term. Any hedge fund manager can be successful in the short run, and out perform the market. The long run is what happened to Lehman Brothers. They did nothing wrong, there was no corruption at Lehman Brothers. What happened? They relied too much in math on derivative trading (think options, which are highly leveraged vehicles). It can give you outsized returns when the markets are stable, but it can go the other way too when an unforeseen event happens. Something outside Lehman Brothers mathematical model happened and now they no longer exist.
I’m sorry if some don’t find this interesting. I do and one of my pet peeves is when I hear people try to compare casinos to the stock market. They are totally different. One (casino) is a zero sum game and adds no value to society (other than the entertainment value), while the other (stock market) is not. The stock market adds tangible value (outside of entertainment) to our lives. It is why we have one of the highest standard of livings in the world.
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