please help me settle an argument on options...

[ajizzle]

i am currently with a group of new hires studying for the series 7. One guy in my group thinks he knows everything about anything, and is convinced that making money on options is like taking money from a baby. My personal thinking is that, like most things, if it sounds too easy, then it's not realistic.

His argument: By buying an option, you have the potential to make a HUGE gain since your initial investment (premium) is heavily leveraged. Also, your potential loss is much smaller than actually longing the underlying security, because you can only lose your premium.

My argument is that options are zero-sum. For every dollar someone makes in options, there is someone on the other end losing that money. Since investing in the actual market has given a steady average return of X% over the last 70 years (dont know X), it's much easier to make a large sum of money trading securities as opposed to options.

I compare it like poker, although I may be way off base here. Although i have no actual experience in handling options (just studying for 7 here) i imagine that the vast majority of people lose a little bit of money(like 70%), a few people make a little bit of money(like 25%) and only the best of the best make a lot of money in options, just like poker.

His perspective sounds like someone who believes they will clean up any 80/160 game after reading HPFAP. Please either correct me, or help me explaining this to him. Thanks