Demand for Lotteries: The Choice between Stocks and Options

Abstract

The literature has demonstrated that stocks with skewness-like characteristics – lotteryness– are the target of a type of investors willing to pay a premium to achieve exposure to skewness. We show that only stocks without options written on them have the potential to attract skewness-seeking investors; furthermore, out-of-the-money options are the dominant security with lottery characteristics for skewness investors. Finally, we find evidence that suggests that skewness-seeking in out-of-the money options ist driven mainly by retail investors, while average negative returns in at-the- money options seem to be linked to the covered-call strategies of mutual funds.

Keywords: Lottery-payoffs, Option Trading, Lottery Stocks

JEL Classification: G11, G12, G14, G32