it is possible for two of the three parties to realise a profit at the strike, and the third to ultimately profit from holding the security.

it does follow that a and then b could have made more profit by not lending or selling, but it is far from zero-sum.

You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that.

Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often).

Currencies too are printed when needed. About the only thing really zero sum are some cryptocurrencies.

You could argue in some way that it is zero-sum, but if the price goes down and oil companies don't pump oil out, they don't really lose anything - especially with derivatives as it is on a future outcome.

It is zero sum in the sense that all the money has to be equal to all the stocks. Not in the sense of perceived value.

You can make more money though & you can make more stocks. That's where the notion you're addressing breaks down, even in the perceived sense:

The Hong Kong dollar is pegged at the moment, this also means it's not zero sum for a buyer or seller either, especially at the peg boundary like now. They simply make more Hong Kong dollars or withdraw them.

It is zero sum because it adjusts, no matter what you do. If you pump more oil from the ground, the prices will fluctuate until they reach the new zero-sum level that takes into account the new production level.

A pegged dollar is the same, it only takes a little longer. When they print they dilute the value of the current dollars in circulation but not immediately, because of the peg. But eventually, because it is zero-sum, so much pressure is pent-up trying to maintain that non-zero-sum peg that the system begins to crack and they have to re-peg it. Which happens often with pegged currencies.

This does not mean there are no winners and losers, personal finance is of course not a zero-sum game. And because the adjustments are not instantaneous there is a lot of room to profit if you know what is happening, which gives the impression of it not being zero-sum.

Actually with the lag it changes everything, because you can earn interest/dividends on the amounts. You can die in the meantime so its someone elses. The variations are endless. When someone discusses it as being zero-sum there is always just a scenario you can describe where it isn't, and if even just $1 can't be accounted for the whole argument breaks apart.

It is never really instantaneous and can take more than months, years. You would have thought printing 6 trillion would have changed something but not really.

The interests and the dividends come from someone, they don't magically appear from the heavens. That person had to add value to the system in order to be able to pay the interest, maintaining the zero sum.

> You would have thought printing 6 trillion would have changed something but not really.

I know these are crazy times, but that money did something: it delayed the inevitable by keeping alive zombie companies that should've gone bankrupt the minute the crisis started, if not before. The whole point of printing 6 trillions was to maintain the status quo, not change it, to maintain it and not face economic reality. It didn't work 100% as a lot of that money went directly into assets such as TSLA, AAPL and HTZ(??), some of it went to gold and bitcoin and a lot of it went into bribes and corruption, which prevented companies who could've used that money to stay afloat for a few more months to do so. But because it's a zero sum system it will crash eventually, just that for now it appears to be holding if we stay completely still and don't make any sudden moves.

There is positive supply of oil, or Tesla shares.

However, the net supply of derivatives (such as options, forwards, futures) is zero.

> the net supply of derivatives (such as options, forwards, futures) is zero.

so we believe, but yes.

also CDOs have entered the chat

But CDOs have to have someone on each side the deal, hence net zero.

you mean the same person on all three sides of the deal, unbeknownst to them

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD.

That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs.

In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those guys import and how much those guys value them

Enters a day trader - someone who will never buy a Big Mac nor any clamshell. The guy speculates and there are two possible outcomes :

- He fails. Technically he basically gave “value” to either USD holders or FAKE have holders. Too bad for him, but he kinda made this happen.

- He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t that be considered theft to some extent?

I guess the question may boil down to “why would they even let the day trader be part of this?”.

It's not theft, it's honest trading. Traders buy things from willing sellers and sell to willing buyers, in financial products as in any other market.

There are two ways to make money as a pure market player: connecting buyers and sellers who wouldn't trade directly (and taking your cut) aka arbitrage, or getting paid to take on risk. Maybe the trader notices that people on the far side of the island are hungry but can't get a big mac without a long walk, so he buys as many as he can carry, walks over to the other side of the island, and sells them for a bit more than they'd cost on the dockside - that's the first kind of trading. Maybe a clamshell farmer wants to make sure they can afford enough big macs over the next year. They might agree to sell their next year's clamshell harvest at a fixed price (that's lower than the average), or buy their big macs for the next year at a fixed price (that's higher than the average), or both; the farmer loses value on average, but they offloaded their risk, while the trader makes money on average but has to carefully manage their risk.

The third thing is to actually take an active position in the market, if you can predict what's coming. E.g. if you realise the clamshell harvest will be big this year, maybe you sell a bunch of clamshells short. That should send a useful signal to all the farmers, and it means you make money if you predicted right.

Awesome explanation. Thanks!!

A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary.

If you think that is theft then I don't know what to tell you.

Well, a theft can be voluntary: that’s what con-artists do all the time!

Now that you've reached the point of calling everything theft, there is nowhere to go. Congratulations.

Well according to Matt Levine, everything is securities fraud...

Con artists are getting your consent via deception. Is this the case what derivative traders are doing?

Well, one could argue that they are just smarter than other people and manage to find market opportunities. Good for them I guess. But technically since it’s mostly a zero-sum game would it be wrong to consider that they use their smarts to deprive other people of value?

Do you really need me to explain why fraud is wrong? Fraud is wrong because you're betraying someone's trust. It's bad for society because it adds friction to business dealings. When you can't trust your counterparty, you have to expend tons of money doing due diligence. This is true regardless if you're smart or not. Being the smartest person in the world isn't going to help you if you're being deceived (assuming you're not omnipresent).

*Omniscient

Though I guess it might be hard to deceive an entity that is literally everywhere.

This is also the case I make against bitcoin re: the value of trust.

That’s called fraud, otherwise known as theft by deception. Trading is transparent, people know all the details upfront and are not being deceived.

> Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent?

why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard.

And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.

The double standard question is totally legitimate and a very good one!

My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods.

Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.

> whereas the other two just wanted to actually trade goods.

They wanted to trade excess goods, in other words, unrealized profits, for something usable to them to realize the profits of their labor.

Everyone's intention is to profit, that is the reason you sell to the market.

Everyone's intention is to profit, even the con artist, but the buyer and the seller are providing and receiving goods, meaning they actually have a reason to be involved in this specific trade. One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else.

It shouldn't be surprising when one of these parties isn't trusted by the other two...

It's essentially scalping. Do you trust the people who buy concert tickets in advance and sell them to you at a 100% markup? They're serving the exact same role in society as these market players. No one likes them for a very good reason.

> One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else.

One party produces oil and a second party consumes oil, but those events do not occur at the same time. A third party 'stores' the oil meanwhile and charges for it. You are welcome do it for free, I'm sure you'd be a hero to society.

making a profit and trading goods are the one and same goal. it's not asymmetrical at all. After all, isn't the point of trading goods to produce excess value after the trade (i.e., profit)?

When he is successful he is providing liquidity to the market, which is value, not theft.