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To: Eddie Kim who wrote (73328)	10/21/1998 8:46:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

Eddie, thanks for the link. He confirmed one thing that I contended that you were critical of: that market makers establish balanced positions (equal number of puts and calls written or purchased at the same strike price) and earn their money on the spread (which, as Geoff Nunn pointed out can be huge). If this is true, there is no reason for market makers to try to move the market as options expire, since the price of the stock is irrelevant to them. Herm goes on to say Big money buys and sells blocks of stock which impacts the stock price and the confidence of the investors. They can start a stampede or pug up a hole in the dam. They can first move on the options and then drop the bomb in the stock price depending on what is easier to impact. This statement is true, but irrelevant to the issue at hand. It also skirts the issue of profitability. TTFN, CTC

To: Eddie Kim who wrote (73328)	10/21/1998 4:04:00 PM
From: Geoff Nunn	Respond to of 176387

Eddie, The link which you posted to Chuz contains several errors. The first is the author's claim that 70-75% of options expire worthless. The correct figure is considerably below that. Herm seems to be confusing the percent of options that expire worthless with the percent of investors who lose money. These two are not the same. The percentage of investors who lose money on options is ~85-90% according to Barron's. The fact that the percentage is this high isn't surprising when you consider the zero-sum nature of options. Stock options are side bets on the magnitude and direction of movement in the price of the underlying stock. For everyone who profits, someone else must lose. Because transactions costs must be subtracted from both sides of the bet, aggregate losses exceed aggregate gains. Transactions costs can be substantial, involving not only brokerage fees but also "the spread." Now, the percent of options that expire worthless depends on how option contracts are written. Suppose all buyers and sellers had a preference for out of the money options. That's the way all options contracts would be written, and consequently 75% or more could easily expire worthless. Alternatively, suppose everyone - buyers and writers alike, preferred in the money options. In that case all options would be so configured when initially traded, and a smaller percent would expire worthless. The percent of options that expire worthless doesn't tell you much. It says more about players' preferences for in-the-money v. out of the-money-options than it does anything else. As an indicator of expected return on investment it's worthless. Herm also errs by asserting that a writer who buys a put and a call on the same position is "balancing out his position." This is nonsense. The combination of a put and a call on the same stock written at the same strike price is called a "straddle." If you buy a straddle you are hoping the stock will either soar or crash, you don't care which. Writing straddles on volatile stocks is risky business. Geoff