Financial Chess
Options trading is like financial chess. Gary Kasparov, the world chess champion, is currently playing the entire world on the Internet (www.zone.com/kasparov). Each side has one day to make its move. Kasparov chooses his own moves, naturally, and the world’s moves are chosen by a vote of all the players who want to participate.
Kasparov is possibly the best chess player of all time, and the smart bet is that he will win. Why? Certainly there are players in the world who are close to Kasparov in skill–wouldn’t their collective intelligence give them an edge over Kasparov?
The answer is that most chess players are average or below average in ability (in fact, around 50% of players must be below average). So if the composition of the large group of 10,000 players voting for the world’s moves reflects even remotely the general composition of chess players in the world, the votes of the average and below average players will dominate.
The world will play more or less like an average player, and Kasparov will play, of course, like Kasparov. It will be almost impossible for the world to win against him.
This is similar to the situation in options trading. An option price is set by a sort of vote–not the kind of vote cast in the Kasparov vs. world chess match, but a vote that is backed by cash in the form of purchases and sales. Thus the price of an option is set, on average, by average players.
When you trade options, you are in a sense playing the world, just like Gary Kasparov. If you are above average in ability in this arena, you will have an edge, just as Kasparov does in his. If the world is paying too much for an option, you will sell that option to them, and if it is selling that option for too little, you will buy it.
Such an edge does not come without cost: a bit of study and concentration, and grappling with some unfamiliar concepts. But once you have that understanding of options, you will have an edge that sets you apart from the average options trader, and that edge will translate into additional profits.