Parallel Paths Of Sports Betting and Options Trading
You know the scenario well:
An annoying acquaintance tries to browbeat you into submission by regaling you and your mates with his success in the stock market. Knowing that you are just a "weekend warrior" sports bettor, he believes he has you outgunned.
Next time:
Try replying (with a straight face):
'Of course, unlike you but like Nassim Taleb, I am an independent, privately-funded options trader. I buy Out-Of-The-Money (OTM) Call Options and either trade them for a profit or let them run to expiry!'.
Then, as the quizzical look on his face expands towards infinity, either abruptly change the topic of conversation or promptly leave the interaction itself.
What we are getting at here is that our Convex Betting approach is roughly (not literally) equivalent to an options trader buying OTM Calls and, if they are In-The-Money (ITM) before expiry, she trades them for a profit.
With a certain amount of 'tongue-in-cheek' exaggeration, here are some 'broad-stroke' parallels between familiar betting scenarios and their Wall Street equivalents:
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Backing the Favorite to Win When you're at the Royal Ascot, betting on the favorite let's say, an exceptional horse like Frankel in the Queen Anne Stakes (2012) it feels like a safe bet. On Wall Street, this would be akin to buying an In-The-Money (ITM) Call Option on a blue-chip stock like Apple. The call option gives you the right to buy the stock at a specific price, known as the strike price, within a certain period. If the stock continues to perform well, your option will increase in value.
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Laying the Favorite to Lose Conversely, betting against a strong favorite in one of the graded stakes races at Royal Ascot would be a bold move. Translating this to the trading floor, it's like buying an Out-Of-The-Money (OTM) Put Option on a blue-chip stock. This gives you the right to sell the stock at a specific price. If the stock price falls below the strike price, your put option could become quite profitable.
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Backing a Longshot to Win We all remember when Holloway Boy, a 40/1 longshot, won the Chesham Stakes (2022). The thrill of backing such a horse is similar to buying an Out-Of-The-Money (OTM) Call Option on a volatile or underperforming stock. If the stock suddenly performs well and surpasses the strike price, your potential for profit can be significant.
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Laying a Longshot to Lose Betting against a longshot is another strategy some bettors use. In Wall Street terms, this is similar to buying an In-The-Money (ITM) Put Option on a volatile stock. If the stock price continues to fall, the put option will increase in value, resulting in a profit.
See Lure Of OTM Options for a more detailed discussion of OTM options.
Enjoy!