June 28, 2018
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.