InvestorQ : Is trading in futures a Zero sum game since it is purely speculative?
Siya Saran made post

Is trading in futures a Zero sum game since it is purely speculative?

Answer
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2 years ago


Hold on, trading in futures need not necessarily be speculative. Specific strategies like hedging and arbitrage are anything but speculative. Let us understand this point with an illustration. Let us assume that X purchased Tata Motors futures in the February 2018 contract at Rs.372 with a stop loss of Rs.365 and a profit target of Rs.395. In this case let us assume that the stop loss gets triggered at Rs.365 so the trader books the loss of Rs.7 and closes his position. Does that result in an exact profit of Rs.7 for the other party? Again, that is only possible if these are symmetric trades, which is not the case in most real life situations. Let us assume that Y who sold Tata Motors futures at Rs.372 had actually created an arbitrage position because he was holding an equity position in Tata Motors at Rs.369. Therefore, the intent of Y was to lock in the profit of Rs.3 as assured arbitrage profit. Now, irrespective of whether trader X makes a profit or a loss on the position, for trader Y the assured arbitrage will be restricted to Rs.3. Here again, we see asymmetry ensuring that it is not a zero sum game.