Wednesday, June 10, 2015

Lotteries revisited

It is a VERY slow trading day, stuck in the doldrums between earnings seasons. So, like any committed trader, I filled the idle hours by thinking about my trading strategies.

Today, I chose to revisit the lottery as a rational speculation. My 2013 essay, "Trading the Lottery", discusses my strategy.

Today, I've updated the analytical spreadsheet, adding in more games from the Oregon Lottery (although other states have comparable games, perhaps with different prices, prizes and odds), and also a couple of lotteries from Japan, a country I visit at least once year. The Japanese lotteries are the Takarakuji 宝くじ  Loto 6, perhaps the most popular in the country, and the lower jackpot Loto 5 for comparison.

I've also added in some analysis for specific ways of playing.

Lotteries resemble gigantic  roulette wheels; the more numbers covered in a single roll (or drawing), the better the odds of winning but the higher the cost. It's the same thing traders encounter with stocks and their options every day: The higher the reward, the greater the risk. Call it the Roulette Principle.

Specifically, I've added a "Draws per week" row for the number of drawings the trader plays each week, and a "Plays per draw" row, for the how many tickets  the trader plays per week.

From that, I calculate the how many years the trader could play at that rate and still earn a profit, assuming that I play every drawing. That's the Years of Play Column.

I play Oregon Megabucks, which has the best risk/reward ratio of any of the games available to me in Portland, Oregon. And in order to gain from the Roulette Principle, I spend $20 each time I play, which gives me 40 tickets.

Note that the Roulette Principle reduces the odds against my winning from more than 6,000,000:1 to about 153,000:1.

I also play only when the jackpot is $3.1 million or greater, which gives me an odds-adjusted index of 1.00 or greater. The jackpot was above that level for 52.56% of the drawings in 2014, so I on averaged play 0.5256 draws per week.

There's no way to say for sure what the ratio of high-jackpot days will be in 2015. So far it is running at 64.18% of drawings with a jackpot of at least $3.1 million.

Plugging in those numbers, my strategy for playing Oregon Megabucks means that I could play for 1,890 years and if I won only a single jackpot, I would still be profitable.

At my age, the actuarial tables show me having even odds of living for another 15 years. (Honestly, a 1:1 risk/reward ratio is better than I usually get on my options plays, so I consider that to be a joyful number).

If I never win the jackpot, I'm out $24,600. If I win a $3.1 million jackpot but continue to play the entire 15 years, then my net profit is $3,075,400 before taxes.

In other words, my lifetime reward/risk ratio, assuming one jackpot at the minimum that I'll trade, is 126:1.

My analytical spreadsheet as a Worksheet (in green) useful for calculating lifetime reward and risk.

Is the lottery worth it? Hard to say. There's something unsavory about a lottery, as though it's too easy, or immoral, or a fool's game.

And yet, I have never in my 40 years of trading and speculation encountered any other chance at a reward 126 times my risk. Indeed, generally, the risk is greater than the reward.

It is by far the best opportunity for wealth that I have ever encountered, and I have no doubt, that I shall encounter.

-- Tim Bovee, Portland, Oregon, June 10, 2015


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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