This isn't a very ERE question, but...
Let's say you wanted to make a huge gamble with the results being either wiped out or significant return.
How would you do this? I assume we are looking for an "investment" that has high volatility with the highest expected value.
A single hand of blackjack, for example, would satisfy the volatility, but the EV is negative.
There are some volatile stocks out there, but you might need to apply some sort of leverage.
What are the best odds we can hope for here? Too bad they already fixed the Mass. lottery loophole
Do penny stocks have a positive expected return?
In THEORY, buying on margin can have "infinite liability," but in practice, will it just wipe you out when things go south?
As backstory, let's say ninjas kidnap your daughter, and demand 200k or she dies. You have 100k. The cops can't help, and you can't beg, steal or borrow. Is there a better option than Vegas?
"Let's say you wanted to make a huge gamble with the results being either wiped out or significant return."
You would want to buy out-of-the-money options. They have precisely these characteristics. You could buy them on stocks, commodities, interest rates, or even volatility itself.
Some people employ a "barbell strategy" where they keep most of their money in cash or the equivalent and make highly risky bets on out-of-the-money options with a small portion of their assets. Nassim Taleb recommends such strategies. Professional poker players also do this.
"What are the best odds we can hope for here?"
You know, if I knew the answer to this, I would tell my kids and they would never have to work at all. Most people that trade high risk/high reward assets blow up at some point -- even the professionals.
I've been trading VIX options this year with a few $Ks and am up over 80% on those trades. But I could be in the hole on the next one if it goes the wrong way for too long.
@Dragline - Look that the delta of the [call] option [which you can get from online option calculators]. That's a good approximation to the probability that the option will expire in the money. For example, delta = 0.4 => P(ITM)=40%. For a put just remove the minus sign.
Zwi Bodie also recommends something like this (with TIPS as the backbone). And there was another guy with a big book from the 1950s, but I forget his name (George something?). It's a very nice way of limiting the downside ... and maybe a better way of handling non Gaussian outcomes.
Dragline, for this exercise it's ok (and preferable) that the outcome is binary -- i.e. big win or big lose. Even I make 20% on my 100k, the ninjas will still kill my daughter!
@dragoncar - Way out of the money options will often be sold at 5 cents and have a tick size of 5 cents as well. Thus it may double to 10 cents or more likely it will expire at nothing with a probability of (1-delta)*100 percent.
BTW this is a way better deal than buying a lottery ticket but in reality not much different.
Thanks Jacob. It's a better deal than the lottery, but is it better than craps? If the market is pricing efficiently, then probably, but how thinly are such options traded?
@dragoncar Put this in perspective. You probably wouldn't mind to spend $1 on a gamble giving you $2 with a very small probability. However you would mind doing this with your whole wealth, e.g. spend your wealth (lets say 100k) on a gamble to get 2*100k.
Now lets change and say you have a 55% percent chance to double your wealth, but you must gamble all of it. I think this would be a bad wager for you, but for someone owning north of 10 billion it would be a good wager.
For more takes on that look up the "St. Petersburg Paradox".
55% chance of doubling would be the best choice so far if you knew how to achieve it!
Jasonr, this is somewhat true. That's why it's important to do all math and critical thinking before a crisis arises. Then you can focus on executing the strategy you already came up with. See: contingency plan.
Yes, plan B might be to go in guns blazing, but that carries even greater risk than a purely monetary gamble. Low-hanging fruit first.
I think it's a great question, fun to think about at least...
As I see it, the idea is what presents the best probability to double your money in a short time period of time.
Is craps better than the 47.37% you can get on a Roulette wheel betting on black, red, 1-18, etc?
I don't know the odds of winning a single hand of blackjack, but I know it would vary a little bit based on the situation and house rules. Also, blackjack doesn't really fit the bill, because to play properly you're supposed to double with certain hands right? You can't do that if you put all of your money on the bet to begin with. Maybe this doesn't matter much though...
Yes, craps is better, especially if you can find a place that offers 100x odds on pass or don't pass bets. Casino Royale in Las Vegas used to allow this. Essentially, you bet a small amount, say $10 on the pass line. When you get a point number (you may need to look this up), you bet "odds" for $1000 (100x10). The first 10 you bet has a casino advantage of about 1.4% long term. The $1000 odds bet has no casino advantage AT ALL and will give you a payout from $1200 to $2000 depending upon the point number. You will win or lose in short order, in any event.
Dragline -- I did this with x5 once. Lost the (very little) I set aside for giggles in short order. But it's stupid NOT to back it with as much as possible to get the best odds... right?
What most people don't understand about that game is that taking the odds on the pass line gives you a much higher variance -- meaning you will either make a lot of money or lose it. You almost never approach the theoretical result unless you make relatively small bets (like 1% of bankroll) and play for a very looooooong time. The casino really wants you to put more money out there all at once to bust you out on a losing streak. That's why they generally make more money on these games than the odds would suggest and why they are willing to give you those "teaser" odds.
^^^ I second what Dragline has shared. The only way to consistently make money at the craps table is to make a 2x odds bet backing your minimum pass line bet (maybe occassionally buy the 6 and/or the 8) and be prepared to stand for a few hours hoping for a hot win streak. And absolutely stay away from the prop bets (the field, the hardways, etc.). As one pro gambler put it, each of those sucker bets represents a crystal in the casino's chandaliers.
How about some kind of mining or oil speculation?
Or if you're young and don't have much to lose you could max out credit lines, put it all on black, and if you lose just go bankrupt. It's all upside.
Or you could become a hardened stoic, let the kidnappers keep your daughter, and just make another one.
If black has 10% of winning, always betting on black will be dangeous to your wealth.
If an investment returns zero or negative return, leveraging will do you no good.
For chance of winning, one better looks at a horizon of at least few years because in the short term, the odd of winning is less predictable.The shorter the term, the closer investing is to gambling.
