The Social Value of Options Trading

Discussion in 'General Discussion' started by Ice101781, Mar 28, 2017.

  1. Ice101781

    Ice101781 Guest

    How, if at all, confident can we feel that the work we do benefits society at large?

    When options trading comes up (rarely as it does) in conversation in my social circles, I simplify things by telling people that "I sell portfolio insurance." In my head, I imagine like-minded traders writing contracts that pension funds, institutions, etc. are willing to buy to manage their downside exposure. The buyers benefit from smoother future returns. We, as net sellers, benefit similarly to the way insurance companies benefit: a bit of premium added to the premium. The additional liquidity also aids in price discovery. So, do we get paid to help lower the long-term variance of returns for other investors? Is that the demand we fill?

    This is, of course, to say nothing about transacting with other speculators, etc. I'm curious to know if my view of my role in the markets matches anyone else's. If not, what do you see?
    Shin likes this.
  2. David C.

    David C. Member

    I'll be curious to see where this thread goes, I do have somewhat of a moral dilemma from it (it is very slight, but it is there...), which could also extend into the topic of trading psychology, self-sabotage, etc.

    I've generally been a "producer" most of my life, both in professional life and in hobbies (tool & die maker/machinist, design engineer, race car fabrication as the hobby, real estate rentals/rehabs). My general outlook has been (at a basic neanderthal level I might add...) "if I were to wake up tomorrow and "industry XYZ" no longer existed, how would my life be affected?" I've just felt the need to be in a "needed" industry, thus the act of trading as a form of income generation goes against my formal training and schooling.

    The flip side of it is, I am quite fascinated by it, I love learning it, I love learning new things, and I do love it as another means of investing and wealth-building. I also believe in personal responsibility, so this is something that anyone can learn to better themselves if they really want to.

    So far, I've mentally balanced trading with the fact that I've worked in an industry that produces "hard goods" and adds value while I also learn new investing methods so I am not a burden to the state :)

    Thanks again for starting this thread. Geez after re-reading my reply, maybe I need a trading shrink :D
    Ice101781 likes this.
  3. Paul Demers

    Paul Demers Well-Known Member

    That is exactly how I feel David.
  4. tman

    tman Active Member

    Ice: I love it. "I sell portfolio insurance." It is the truth. It will end many conversations. It may interest like minded folk. I'm gonna use it. Thanks.
    Seth H likes this.
  5. Gabor Maly

    Gabor Maly Well-Known Member

    Maybe the direct impact is none unless you are donating a portion of your proceeds each month. But what about the indirect impacts.....more time spent with your kids (isn't that a huge one?) , less time commuting and polluting the air if you are trading from home, ability to help your family and friends to make sensible investment decisions, ability to have some time to take part in community projects, etc, etc.....these do add up in my book.
    Ice101781, Shin and David C. like this.
  6. Rnord

    Rnord Guest

    I look at options buying / selling as no different as someone who buys a painting, collectable car, undeveloped land, gold, etc. We all are in the business of profiting from a change in value. Man has been buying / selling / trading items for 10's of thousands of years.
  7. AKJ

    AKJ Well-Known Member

    I have high conviction in my belief that options trading has zero benefit to society at large. Such is the nature of zero sum games.
    Paul Demers likes this.
  8. Scott Slivnik

    Scott Slivnik Well-Known Member

    Other than trading options, I develop mobile apps. Whenever I describe what I do to others, they understand the software development, however, I almost always receive a blank look when I try to describe the options trading. I usually just state I am a professional stock market trader and leave it at that as most know what stocks are.

    I did run into a portfolio manager (forget the firm) at the dentist last year. We had an interesting conversation. We started by discussing investing in general. At some point the manager stated that his firm did not allow options as they are too risky. I could not help but laugh. I asked him if he believes selling a put is riskier than buying stock. He answered yes. About one minute later, he got called in for his appointment. Even many "professionals" are clueless.
    David C. and Ice101781 like this.
  9. Ice101781

    Ice101781 Guest

    I don't believe options trading is a zero-sum game. If no skew existed, future realized volatility could be predicted, slippage/commissions/fees didn't exist, etc., then I think we could agree that options trading is a zero-sum game.

    Also, as an investor, I appreciate that a secondary market exists which empowers me to defend the value of my assets. Seems like a social benefit to me. I'm also grateful that car insurance exists. On a trip to Yosemite once, my rental was broken into by a black bear. He tore out the back seat and damaged the rear half of the car to get to a cooler in the trunk. My insurance covered everything.
  10. Ice101781

    Ice101781 Guest

    Ha, are you me?
  11. Scott Slivnik

    Scott Slivnik Well-Known Member

    Doubt it. ;)

    I used to create websites, but switched to mobile apps a few years ago. HTML, CSS, JS, frameworks, backend etc. make developing websites WAY more complex than it should be in my mind.

  12. AKJ

    AKJ Well-Known Member

    I'd like to pose a few questions that might help illuminate a different perspective:

    Do Casinos offer any societal value?

    Let X% be the expected benefits you receive for every dollar you spend on insurance premium. Is there a level of X above which you would feel great/happy about buying insurance? Is there a range of X for which you would feel like a sucker but still buy the insurance anyways? Is there a level of X below which you wouldn't buy the insurance? As a seller of insurance, does the amount of value I create for society depend on where I set X?

    Suppose I told you that in any given month, your $500,000 house would burn down with probability of 0.1%. I will charge you $600 to insure your house against buring down for 1 month. Would you buy this insurance? By offering this insurance to you, am I generating some positive societal value?

    Suppose I offered you a casino game (say a slot machine) which costs $600 to play and will pay you $500,000 with probability of 0.1%. Would you play this game? By offering this game to you, am I generating some positive societal value?
  13. onyxperidot

    onyxperidot Well-Known Member

    Interesting questions -- and I happen to stumble upon some answers:

    IMHO, a casino game is different from insurance against day-to-day risks. When you play a casino game, you are paying the casino for the thrill of experiencing some artificial risk which does not exist outside of the game. Although it might be of some entertainment value, it hardly benefits society in general. On the other hand, when you buy house insurance, you pay the insurer a fee to bear your risk of having your house burnt down, which is a non-artificial risk. Hence the insurer provides you a useful service, which by definition would benefit you, viz. protecting you from ruin. With adequate insurance, members of society enjoy a higher sense of financial security and would in general be more productive in their economic endeavors.
    Ice101781 likes this.
  14. AKJ

    AKJ Well-Known Member

    Without giving it much thought, I generally agree with this dichotomy. So are which bucket do option buyers fall into?
  15. onyxperidot

    onyxperidot Well-Known Member

    Some buy options for leveraged speculation (gamblers). Others buy options for portfolio insurance (consumers). I belong to either camps at different times. And most of the time, I sell options.
    Last edited: Mar 29, 2017
  16. Ice101781

    Ice101781 Guest

    A 20% 'premium' on the fair value of the policy seems like a lot. I'd probably shop around. Ultimately, would I buy? I might, and someone else might not. How much is peace-of-mind worth?

    I'd be more likely to play the slots, assuming I'm in 'party mode' in Vegas and the fair value of things isn't my top priority.
    Last edited by a moderator: Mar 29, 2017
  17. Marcas

    Marcas Well-Known Member

    I look at this problem as follow:
    I participate in free activity I'm forcing nobody, deceiving nobody. I'm entering trades willingly, I might be deceived by others which I'm aware of.
    I'm glad that I live in such circumstances that I can engage in trading because I like it. Should I be ashamed of this?
    I don't feel anymore that what I do is easy, and thus sort of unethical, in comparison to others activities like 'real work' (and I did and still do this 'other activities' as well). I do have respect for honest work but I'm not ashamed at all because of my trading especially that 'society at large' benefits from my success (not necessary with my willingness involved) while my failure I'm eating up myself.
    The question that is important to me is not what good I do for society but what good do I do.
    David C. likes this.
  18. Ice101781

    Ice101781 Guest

    Does this imply that over the next 30 years, I'd have a 36% chance of having my house burn down? Seems awfully high. Then again, my aunt's house burned down.
  19. AKJ

    AKJ Well-Known Member

    you're missing the forest for the trees, my friend.
    Ice101781 likes this.
  20. onyxperidot

    onyxperidot Well-Known Member

    I think probability is not compound interest. In tossing a fair coin, the theoretical probability of getting a "head up" is 0.5. The law of large number says that if you tossed the coin a million times, you should expect the empirical probability to converge towards the theoretical probability viz. 0.5 in getting a "head up" event. If you tossed the coin 10 million times, your observed result would be even closer to the theoretical.
    If the intuitive argument is not good enough, lets try a contradiction. Compounding the 0.5 probability in 10 tosses would yield 1.5^10 = 57.665 which is a nonsensical probability. Probability of 1.0 means absolute certainty. Anything above 1.0 is mathematically meaningless.
    Last edited: Mar 29, 2017

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