Demand for Lotteries: the Choice Between Stocks and Options

with Ilias Filippou and Fernando Zapatero.


We show that the availability of options to retail investors displaces lottery stocks. We also find that investors are willing to pay substantial premiums only for the lottery characteristics of out-of-the-money options. Moreover, OTM options displace other types of lottery securities in the stock and option markets when available. We find evidence that uninformed traders (e.g., gamblers) may drive lottery trading in OTM options. We also find that the lottery features of OTM options are likely unrelated to the underlying securities, as we observe systematic violations of arbitrage conditions. On the other hand, the payoffs of at-the-money lottery options seem to be driven by the lotteryness of the underlying securities.

Presented at.

2019 Canadian Derivatives Institute conference* (Montreal, Canada), 27th Finance Forum (Madrid, Spain), 7th Optionmetrics Research Conference (ORC2018)*, 2018 ITAM Finance Conference*

*Presented by co-authors.

JEL Classification: G11, G12, G14, G32