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Can someone redpill me on financial products like options, from the perspective of "how does this benefit society"? I understand why price discovery via supply/demand and markets integrating information is beneficial. What I don't understand is which contributions does a person who buys an option contract make to society, in theory. I want to be crystal clear that this is not a question about morality, I'm well aware that people are free to make contracts and profit. I'm just wondering if there is some benefit to options existing, and I'm maybe looking for some wider navel-gazing about how complex financial products are a social good.
My attempt at answering this is the following. Mind you I'm basically guessing from vague memory that options are a contract that you can buy, which allows you to buy another thing later at a specified price. There is no immediate benefit created by a person who profits off a correct bet he made. That part is zero-sum like gambling. However, there is a benefit when a market for such contracts exists, because it functions like a prediction market. People make real-money bets on how valuable certain products will be in the future. In this way, the options market aggregates information about predictions. This information may be useful to other people who observe the prices, because they can adjust their behavior accordingly. Maybe they are policy makers, for example, who can better stabilize their economies.
Is that correct? Furthermore, is there any simple real-world evidence that this happens, i.e. that people other than speculators benefit from complex financial products in positive-sum ways? For example, does this benefit the overall economy of a country? Does it benefit it in concrete ways so that politicians (or more realistically, economists) there might say, "hey, lets encourage options trading"?
Check out this: https://en.wikipedia.org/wiki/Hedge_(finance)#Agricultural_commodity_price_hedging
The original purpose of futures etc was (and remains) to allow productive sectors of the economy to manage risks: if you're a farmer planning to sell some wheat, you can short wheat to limit your losses in case the price is lower than expected; if you're a baker who will need to buy some flour in the future, you might go long on it in case the price rises. Speculators provide liquidity--they compensate those farmers and bakers when things go south and buffer the losses. Some prediction market component is applied automatically, as some speculators would physically stockpile resources.
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