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I noticed that some financial instruments have lottery-like payoffs. If that is really the case, I am planning to play the "lottery" using financial instruments instead of the lotteries organized by the gambling industry. Reasons for doing so:

  • Transaction costs for financial instruments appear to be smaller than the "house-take" ("vigorish") taken by lottery operators.
  • There is a far larger selection of financial instruments than there are lotteries.
  • Flexibility: I can easily mix and match instruments, and choose the time I receive my payoffs.
  • Associating with the financial industry is more respectable than associating with the gambling industry.

By "lottery-like payoffs", I mean:

  • If I lose, I lose only the small amount I bet;
  • If I win, I win big.

I do not care about the direction of the market; I just want lottery-like payoffs that can replace the lotteries organized by the gambling industry.

At the moment, I have identified far out-of-the-money options as having lottery-like payoffs. Am I correct? If so, I need to make an informed judgement on whether to favor puts or calls. Is there any significant difference between the payoff distributions of far OTM puts and far OTM calls?

Besides far OTM options, are there any other easily-accessible financial instruments with lottery-like payoffs?

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    Why not just visit a casino and play roulette? The house edge (i.e. fee they take) is only ~3%, so just bet on any particular number for a 1/37 chance to x36 your money. If you want an even higher payout and the casino's cap is sufficiently large, repeat with your winnings. – Willi Fischer Sep 11 '20 at 16:04
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    You left out the major “lottery-like” payoff characteristic: in the long run, you lose more than you win. :P – Lawrence Sep 11 '20 at 16:24
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    By 'net positive', I mean, you expect over time that these will pay off. That implies a couple of things: (1) it implies that you expect you may be able to get an 'edge' on an otherwise likely-to-be-efficient market dominated by professional traders, so you may overestimate your ability to affect results; and (2) it implies you intend to do this enough that losses will be overcome by gains, so you may be intending to put a significant amount of money on the line. All I mean to say is, be careful. – Grade 'Eh' Bacon Sep 11 '20 at 16:46
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    I buy a $3 lottery ticket maybe once a month, when drudgery of a bad workday needs a daydream pick-me-up. If I caught myself putting a few hundred dollars down on binary options every week, I would consider that a gambling problem, with similar ramifications to other negative addictions. Not suggesting that's what you're thinking of, but the way you're talking about this raises some flags for me that I just thought you might want to be conscious of. – Grade 'Eh' Bacon Sep 11 '20 at 16:47
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    @PGnome Lottery bonds are similar to prize-linked savings accounts. – Flux Sep 11 '20 at 19:04
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You mentioned 'lottery ticket like' OTM options but your provided no details. What does that mean to you? 1 delta options? 5 delta? 10? How far out-of-the money? How far out will the expiration be? When you quantify that, you can compare the two gambles.

Because time premium is non linear, when buying options you should go out further in time. Couple that with the precondition of being OTM and cheap, you're now in the realm of illiquid options. Even if it's the most heavily trader SPY options, that still means wide bid/ask spreads and you may find that it can cost as much as 20% of the premium. I don't know what "house-take" (vigorish) by lottery operators is but 20% is pretty hefty. Either way, it's a terrible bet. And how many times will you have to repeat the bet before tail risk rears its nasty head for you?

While the probability of wining with options is higher, you'd have to buy many of thousands of them to achieve a win similar in size to the lottery. For example, 10,000 ten cent options would cost you $100k. If lightning hit and you got a 101 bagger profit, you'd make $10 million which is a far cry from the payoff of a Power Ball win which would only cost a $2 bet

Speaking of lightning, the odds of getting killed by a vending machine are higher than the odds of winning a major lottery. I'd guess that the odds of getting killed by a vending machine might even be better than this option bet. Perhaps you should bet on vending machines?

The proposed advantages of there being a far larger selection of financial instruments, flexibility of instruments to choose and a timeline of choice is just a rationalization for a bad bet. This entire concept is whimsical and amusing and no more than that.

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  • "Tail risk" is not an issue for long OTM options. The worst outcome is already the most likely (losing 100%). Rare extreme events are beneficial, not dangerous. This is what Nassim Taleb calls an "antifragile" position. Unless -- maybe you meant positive tail risk and "nasty" was sarcastic? – nanoman Sep 14 '20 at 8:37
  • Either way, it's a terrible bet. And how many times will you have to repeat the bet before tail risk rears its nasty head FOR you? FOR being the operative word rather than AGAINST. – Bob Baerker Sep 14 '20 at 11:20

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