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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?

user102086
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1 Answers1

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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.

Bob Baerker
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