Short Term Trading Member Forum

[Toppcats]

Mr. Cash - a call option on a stock issue is not the same as owning the stock/nor does it represent actual ownership of the underlying stock. The CONTRACT represents the RIGHT to buy the underlying stock and nothing else (at a particular price/within a particular time frame) - you do NOT own the physical stock until the option is exercised and you pay out the $$ for the stock. This is separate transaction which now moves you to the ownership equation. The fact that an 'in the money' contract has pricing in it which is derived from the underlying issue does not change the argument. There is a single buyer and seller/ the net-sum is still zero/the derivatives price whether in or out of the money - is derived from the underlying entity and the market - but is separate and distinct from the equity itself. The 'value' of the contract exists only between the two parties involved in the trade.

While it is correct that a derivatives' 'price' is based on whatever the underlying derivative is - there is a buyer balnced by a seller on each contract acting on that price. The sum total lost and gained is zero. When the contract is closed - nothing remains. Additionally, a derivative such as an ES contract simply can not have underlying real value as you can't own a share of 'ES' since it doesn't exist. Therefore the underlying 'real' value is $0.00.

With the gold -ETF; neither the buyer or seller owns the physical gold. The 'house' which underwrites the ETF buys/sells the physical entity as needed to satisfy the underlying requirements of the markets for the contracts being traded. However - the ETF long position in gold is convertible to physical gold (for certain qualified sellers) - Therefore the gold ETF is a blended type of entity. Those who can only buy/sell and not take physical possession though, are locked into a zero-sum game.

With the MSFT SS ETF - you may correct. In reading about the SS-ETF I noted it was reported as a zero-sum entity, however, while you do not have physical possession of the msft stock, if you not close your position then 3 days after future expiry you will own the physical stock. In addition the derivative's underlying entity is real and the ss-etf is directly convertible. As such if you were to simply open and close a contract it would be a zero-sum game, however, these entities are more complex and here the ETF does represent a direct ownership tie, albeit leveraged, to the actual physical stock.

Gary