I've studied the derivatives market, and I've heard of a number of huge losses by firms; I've heard of individuals forewarning against investing in this market.
I never hear about the big winners. Where does the money go? Who wins the billions?
Unlike the stock market which offers growth long term, the derivatives market is a zero sum game.
This phrase is how one describes a poker game. 7 people walk in, and walk out with the same total amount of money (note, the 7th guy is the 'house', and with nothing at risk, he gets his cut). No money is created, the total value doesn't change.
When I buy or sell an option, there is someone on the other side of that trade with a gain or loss equal and opposite to my position. At option expiration, or a repurchase that closes an open contract, the whole series of trades resulted in no net gain of wealth.
The huge losses were spread among the banks, the investors, the insurance companies, and the government. By government, I mean the taxpayer. You paid your share, my friend, as did I.
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Focusing on options, many people and companies use them to mitigate risk(hedge) When used as a hedge the objective is not to win big, it is to create a more predictable outcome.
Option traders win big by consistenly structuring trades with a high probability of success. In this way, they take 100 and turn it into 1000 with 100 small trades with a target profit of $10/trade. Although options are a 'zero sum' game, a general theory among options traders is the stock market only has a 54-56 probability of profit(PoP) - skewed from 50-50 win/loss because the market tends to go up over a long time frame. Using Option trading strategies strategically, you have more control over PoP and you can set yourself up to win whether the security goes up/down/sideways.
A quick and dirty measure of PoP is an options' delta. If the delta on a call option is 19, there is roughly a 19% chance your option will be in the money at expiration - or a 19% chance of hitting a home run and multiplyimg your money. If the delta is 68, there is a 68% chance of a profitable trade or getting on base. There are more variables to this equation, but I hope this clearly explains the essence.
In addition to JoeTaxpayer's answer there are articles that describe the writing of options as "being the casino". When you write, or sell to open an option, you are selling one of the most desirable things in the world to sell: a depreciating asset.
Writing options are not without risk, but they can be a very conservative strategy.
Who wins these massive losses? Sometimes run of the mill investors, myself being one of them.
Think of options as insurance. An insurance company makes money by selling the policies at a rate slightly higher than the average payout.
Most options expire worthless. This is because most options are purchased by hedge funds. To 'hedge' means taking out insurance in case your position goes against you. So the sellers of options obtain a price that covers their (averaged) losses plus provides them with a profit for their trouble.
An option has an amount that it declines in value each day (called theta). At the expiration date the option is worth zero (if it is out-of-the-money). So it is option writers that, typically, make money in the options market (as they are the sellers of insurance). If they didn't make money selling options they would not sell them.
For example, the February call option on SPY strike 200 traded at 8.81 on 12/30. Since then it has crumbled in value to 0.14. The option writer currently stands to make a huge profit.
So, just as with insurance, you (generally) never make money by buying insurance. But the sellers of insurance tend to make money as do the writers of options.
Edit: Theta @ Investopedia
Ever heard of The Wolf of Wall Street , theres where the money goes . In short ,bankers, traders who are paid millions to take make leverage bets using the banks money regardless of whether they do well .
If they screw up and lose millions , they get paid to leave ( compensation package ) . If they do well , they get bonus.