Demand for Lotteries : The Choice between Stocks and Options

The literature has demonstrated that historically stocks with skewness-like characteristics -- lotteryness-- have been the target of a type of investors willing to pay a premium to achieve exposure to skewness. We show that, nevertheless, it is mostly stocks without options the ones that have the potential to attract skewness-seeking investors; furthermore, out-of-the-money options are the dominant security with lottery characteristics for skewness-seeking investors. Finally, while skewness-seeking with out-of-the-money options is arguably a strategy of retail investors, we find evidence that suggests that returns characteristics of at-the-money options are related to mutual funds strategies, namely covered-calls