There is a reason why out-of-the-money options are so cheap; it’s the equivalent of buying a lottery ticket. And gamblers love lottery tickets.
But unlike the typical lottery system where the seller of the ticket pays only a small portion of the overall proceeds in the form of winnings, options are a zero-sum game in the truest sense of the definition – winner’s profits are loser’s losses. And the majority of loser’s losses typically come in the form of speculative out-of-the-money plays.
The winners know how to skew the results. Moreover, they know the risk-reward and the probability of success BEFORE each trade.
In the options world the gambler is defined by a trader who buys a call or put with a delta of .35 and below. (Delta is the probability that an option will expire in the money.)
Like lottery tickets in the store, options with deltas this low have a low probability of success. But because of their cheap price and high-profit potential, they lure in newbie options traders.
This is why I prefer to take the other side in this zero-sum game. I do so by essentially taking the other side of the trade – by selling options to the speculative crowd.