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Customer Review

318 of 331 people found the following review helpful
5.0 out of 5 stars The Classic, Essential Options Text, June 4, 2000
By A Customer
This review is from: Option Volatility & Pricing: Advanced Trading Strategies and Techniques (Hardcover)
I have been a professional options trader for over 11 years. In my experience most options traders fail, and for two reasons: naive faith in mathematical models and software, and a basic misunderstanding of the concept of impled volatility.
This is the one book that everyone who has worked for me has been required to read: it is ESSENTIAL. There is no other book that covers these topics in the the way that market practitioners think about them, nor does Natenberg forget to include anything that's really useful.
I have to agreed with another reviewer: understand and study this book! Options trading is a zero-sum game. Professional traders have the edge and been earning a good living from the ill-prepared, arrogant, and naive for years.
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Showing 1-9 of 9 posts in this discussion
Initial post: Dec 20, 2007, 4:41:29 AM PST
I (or a market maker) can at any time create a perfectly hedged position by buying (or selling) a call option and then shorting (or buying) the underlying stock at the "delta" ratio of the option. I continue to adjust holding of the underlying as the delta of the option changes (with time and stock price). This action "spills out" option trading into the entire universe of trading in that stock. Net, option trading is NOT a zero-sum game isolated from all of the trading in the underlying stock.

In reply to an earlier post on Oct 7, 2008, 6:47:59 AM PDT
Mustaine says:
You are broadly correct in that it is possible to hedge an option. But you are not taking into account things such as transaction costs, gaps in the market, liquidity problems etc. Which means that in practice it is not always possible.

I think you are forgetting that if you hedge your position, you remove the potential for losses, but ALSO the potential for gains. So in effect, you have created another zero sum system.

What the original reviewer was saying, and is correct in saying so, is that if you gain on an option as a taker, the loss is borne by the writer, and vice versa. If however you bought a stock, let's say in an IPO for $10, first of all the company has received their money. If you then sell the share for $15, you have made $5. If the company has done well, the buyer may sell it for $20. In each case, someone has profited, but in no case has that come at a loss to the seller. This is fundamentally different to the way the options market works.

In reply to an earlier post on Nov 3, 2009, 10:48:09 PM PST
Last edited by the author on Nov 4, 2009, 1:11:16 AM PST
I have a counter-example to the statement "if you gain on an option as a taker, the loss is borne by the writer, and vice versa." Say I bought a stock at $100 to write a covered call with strike = 105, and afterward the stock rises to 110. I am forced to sell the stock at expiration, for a $5 profit plus the premium I collected. The call buyer would make $5 minus the premium she paid if she were to exercise on expiration. Both parties profit in this instance. The "zero sum" claim seems intuitively correct, but as Mr. Roberts points out, it is not a closed system: Could you say that hedging creates a hole for value to leak to and from the underlying market?

In reply to an earlier post on Jun 28, 2011, 7:55:25 AM PDT
Sir,

Hedging eliminates directional risk. Actually both writer and buyer may finish with a positive P

In reply to an earlier post on Dec 9, 2011, 9:39:13 PM PST
Last edited by the author on Dec 9, 2011, 9:41:29 PM PST
JK Oregon says:
@J. David Roberts: It's still a zero-sum game. The option transaction is zero-sum and the stock purchase or sale is zero-sum. Two separate zero-sum transactions. The fact that you're using one to offset the other has nothing to do with them being zero-sum or not.

Posted on Feb 5, 2012, 7:27:06 AM PST
H. HERTZ says:
Your review was written in June 4, 2000, and you wrote:
"I have been a professional options trader for over 11 years"

Do you continue with success trading options?

Did you read this book:

Stock Options: The Greatest Wealth Building Tool Ever Invented

?

I use the method that he teach, and work very good!

In reply to an earlier post on Feb 28, 2012, 8:50:20 AM PST
[Deleted by the author on Feb 28, 2012, 8:51:06 AM PST]

In reply to an earlier post on Feb 28, 2012, 8:53:51 AM PST
Tim Cook says:
@Larry Richards - the trade that makes your covered call zero sum is that someone sold you the stock at $100 then lost $10 over the same time frame. This makes more sense if you consider the possibility they shorted the stock and have to buy it back to close their trade.

Posted on Jul 8, 2014, 2:57:16 AM PDT
G Man says:
I'm going to rear my ugly head and disagree with everyone! Stocks and options are all negative sum games because of the overhead of commissions and fees. :P Check. Mate.
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