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What is the practical difference in terms of gambling between wagering on the future score of a sporting match and wagering on stock market derivatives based on indices, such as the future value of the SPX (by trading call and put options on the SPX) or the future value of the VIX (by trading VIX futures)? The SPX and the VIX are both metrics; there are no underlying assets other than the price of the option or future itself. Like sports gambling, when one trades SPX options and VIX futures there is only an exchange of money on whether the prediction was right or wrong.

If not, what am I misunderstanding?

RonJohn
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lurning too koad
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  • Note that indeed, you may not be aware spread betting in the UK, is indeed part of an regulated as part of the UK's gambling agencies! not the UK's stock market agencies! – Fattie Feb 03 '21 at 20:19
  • VIX options and futures might be explained as a nesting. See, options and futures are used to hedge physical commodities or equities. But the cost of the options can change which effects the cost of the hedging. So VIX options and futures can be used to hedge the cost of the primary hedging. In fact Black-Scholes option valuations are largely based on volatility. – S Spring Feb 03 '21 at 20:21
  • Related: How does gambling (like buying a lottery ticket) differ from investing? – Ben Miller Feb 03 '21 at 22:07
  • One huge, huge confusion on this page is that: there are two utterly different types of sports gambling. In Parimutuel systems, there is simply "a cut for the house". For example when a casino offers blackjack, simply mathematically there's a small endless win for the house. Same with Parimutuel horse race betting. IN TOTAL CONTRAST there is bookmaking where, literally, the bookmaker is using skill to set a bet and you try to out-skill him. (Exactly like when two friends in a pub "make a bet", so, I say to you "7 gets you 5 that such and such will happen.") ... – Fattie Feb 04 '21 at 12:48
  • the two concepts are utterly different and there is total confusion on this page in discussing the issues involved. – Fattie Feb 04 '21 at 12:49
  • @Fattie Blackjack isn't a parimutuel game: Casino's bear the risk every hand and is the same risk profile to the house as being a sports bookmaker, with both having large daily swings in their realised profits as a result depending on the results of the day. Poker and bingo are the classic parimutuel games offered by casinos, where players play against each other and casino takes a flat, zero variance cut per game independent of the result in the same way the house does on parimutuel sports betting pools. – Philip Feb 04 '21 at 16:54
  • hi @Philip , sure (do you work in the biz too?) the point for the question at hand, there are there are two types of gaming. (1) there's a fixed percentage win (either literally Parimutuel, just as you explain, or bj etc) both of which for different reasons have a "fixed win" (2) actual "odds writing" (eg on sports, ponies) which has nothing to do with a fixed percentage win and depends on the odds writers skill. Hence, "casinos bear the risk every hand and is the same risk profile to the house as being a sports bookmaker' Not really, the "over time" risk (well, win) with bj – Fattie Feb 04 '21 at 18:21
  • is perfectly determined by mathematics. bookies who literally write odds could win or lose heaps (and if the latter, be out of a job obviously :) ) on the other side as you know, a BJ player can never win long-term (it's fixed by math), but it's a commonplace that (a few) sports betters can consistently win – Fattie Feb 04 '21 at 18:23
  • {of course, "odds writing" is moderated by the fact that on big books the odds move with play etc etc) – Fattie Feb 04 '21 at 18:24
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    Paramutuel has a very specific meaning and shouldn't be applied in this way to games like blackjack where the house assumes loss risk. Blackjack is also possibly a bad example here as can be counted and doesn't have a fixed margin (by far more long term winning card counters than sports bettors in history as well). Mass market books who are just in effect adding a margin to the market price (basically following exchanges plus their overround these days) also have basically no skill and the product is virtually identical to running a countable blackjack game for the house. – Philip Feb 04 '21 at 19:45
  • @Fattie You seem to not understand gambling at all. The house does in fact take a risk in blackjack, and doesn't in bookmaking. Bookmakers constantly adjust their odds to keep their books balanced. If they have more bets on Manchester than Liverpool, they'll decrease the odds on Liverpool until the bets even out. Moreover, bookmakers pool their bets. A bookmaker in Manchester is going to get more bets on Manchester, and a bookmaker in Liverpool will get more bets on Liverpool. So the bookmaker in Manchester will take on some of the Liverpool bets and vice versa. – Acccumulation Jan 03 '24 at 02:20

5 Answers5

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You are missing that many people or institutions that buy these options don't bet on anything.

Market makers hedge their entire exposure and make money by offering liquidity. That's why option pricing is based on the principle of no arbitrage, risk neutral pricing and replication.

If you are long an index or stocks and worried about short term declines, you can hedge your exposure. The option premium is much like an insurance premium.

You are also missing that an index, even if it doesn't trade on its own, still has underlying securities that can be traded (SPX is actually replicated by numerous ETFs and funds). There is no difference if you cash settle or get the Underlying other than mechanics and that cash settlement doesn't require you to take delivery.

With betting, it's purely about guessing an outcome.

Alex
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    It might amuse you to learn that there is at least one documented case of a sports book being used to hedge a business risk. Specifically, the owner of a Houston mattress store ran a promotion offering to refund customers' purchases if the Astros won the world series. He insured against the costs of paying off the promotion by betting on the Astros in casino sports books. Story here: https://www.npr.org/sections/money/2020/10/27/885197276/why-a-man-dressed-as-a-mattress-needed-to-win-a-9-million-sports-bet – Nobody Dec 18 '23 at 15:33
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There is a big difference. It all comes down to the fact that for financial derivatives, there's an underlying asset that can be bought and sold, allowing for hedging and arbitrage, which is not possible in gambling or betting.

Let's assume a casino offered a "fantasy SPX option" game. A computer randomly generates a fantasy S&P 500 index that changes by the minute, just like the real S&P 500, a random walk with the same (positive) expected annual return and the same volatility as the real S&P 500. The graphs of the real and the fantasy index would of course diverge but would look roughly similar. Now the casino allows you to buy or sell call options on their fantasy SPX. These are cash-settled options and the market would work just like the one for real SPX options.

You'd see that the prices of real SPX call options and fantasy SPX call options would differ dramatically. The reason is that you cannot buy a bundle of stocks that replicates the fantasy index, but you can do so for the real SPX. This means that you cannot hedge, you cannot arbitrage, and Black-Scholes pricing would not apply to the fantasy market.

If you buy or sell a fantasy call option in the casino, your expected return will be zero (or slightly negative if the casino takes a cut). If it were positive, say, the sellers would raise their price until the expected return becomes zero. Unless they are dumb.

If you buy a real SPX call option, your expected return is positive (assuming that the true expected annual return of the S&P 500 is large enough and the fees don't kill you). The sellers cannot simply raise the price of the option, because then arbitrageurs would show up; by cunningly borrowing the right amount of money and buying the right amount of the S&P500 stock bundle, they could offer to sell a cheaper call option and extract a risk-free profit from the buyers, pushing the other sellers out of the market. Why are the sellers selling options if the expected return of doing so is negative? They are essentially buying insurance. Buying insurance always has a negative expected value.

Axel Boldt
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Day trading derivatives is similar to sports wagering in that the house takes a cut.

Over the long haul (not a short lucky streak), they both require an edge to succeed though I'm not sure that you can find much of an edge with sports betting.

However, derivatives are more complex and they offer you many more ways to hedge as well as offset risk, at the outset and during the bet.

If you extend the time frame from day trading to swing trading (days to weeks or even longer), some uses allow you to mimic longer term investing with less risk but I suspect that's not what you're after.

Bob Baerker
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  • Interestingly enough, its much, much easier to find an edge sports betting (eg legit arbs are very common all over the place in sports betting for starters, albeit hard to scale up) than in derivatives. Key problem is just that the liquidity for most of these is small in sports so you tend to be battling liquidity constraints constantly, which is basically the reverse of derivatives, where edges are hard to come by but you can get vast sums on . – Philip Feb 04 '21 at 14:51
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The differences are purely cultural and arbitrary distinctions. These are necessary in some cultures and belief systems.

Not all cultures or individuals require a distinction between investing or gambling for any reason. Whether that is feelings of personal responsibility, religion, or maintaining respect in their community.

Not all cultures or individuals require a distinction between a negative expected value financial game, and a positive expected value financial game. Gambling is typically considered to be negative expected value financial games, whereas "not-gambling" is typically considered to be positive expected value financial games. Sports betting has been argued to fit somewhere on the positive expected value side, purely for regulatory reasons. Typically these arguments become pedantic and semantical as the root of arguing a distinction is for feelings of personal responsibility, religion, maintaining respect in a community, and for regulatory purposes.

In the United States, uniquely, "gambling" is regulated at the state level and ignored by the Federal government except to restrict banking of gambling services using interstate systems (the internet - as such, online gambling services that are not reliant on licensed banking systems have no prohibitions). While the federal government regulates securities and the derivatives of commodities (but not the trading of spot commodities). This causes the fairly arbitrary cognitive dissonance to be put at the forefront. As any one individual can play any money game at the state level and lose it all, but be presented with a paternal limiting relationship in positive expected value games such as daytrading and investing.

In other countries, these can be the same or different regulatory agencies, at the same level of government. Instead of dual overlapping governments.

But ultimately the venn diagram of financial games significantly overlaps such that it is almost a circle.

CQM
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Sure, they are logically and mathematically exactly the same.

Fattie
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    Perhaps you are right, but your answer will be much better received and more convincing if you explain why you think they are the same. – Ben Miller Feb 04 '21 at 02:41
  • Ben - fortunately I don't care about those issues :) – Fattie Feb 04 '21 at 12:45
  • @BenMiller-RememberMonica - to expand on my previous comment :) I only care about being right. And I'm completely, totally right. As I've already tried to undo some of the total confusion in comments on this page: The answer to the question acidgate asked (the title) is THERE IS NO DIFFERENCE. IT IS A PROP BET. It is exactly in every way like making a prop bet on "will it rain tomorrow". All of the software and accounting formulations and mechanics are literally the same. It's just a prop bet. – Fattie Feb 04 '21 at 18:38