Options Jive

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Buying Lottery Tickets

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Tom and Tony take a break from the tastytrade go-to strategies to talk about buying out-the-money (OTM) options. Many traders look at buying far OTM options as “lottery ticket” trades that are low risk and thus cannot hurt to implement when they feel a rally or selloff coming. Today, the research team took a look at the historical performance of $0.05 options in the S&P 500 (SPY) to test this “lottery tick” theory. Currently, the nearest to 45 DTE $0.05 put in SPY would require that the market sells off around 40% in order to start making money.

Going all the way back to 2005, the strategy of buying either the $0.05 put or call has been a consistent loser averaging a loss of a little more than half the debit paid for the option in both cases. This, surprisingly, came at a win rate larger than the average delta of the options. This would tell us that the market really needed to move in the trader’s favor to make any money. Check out the segment above for more details and commentary.

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