Just curious whether it is possible to set up a casino sort of unbeatable strategy( or something close to it)with option writing.In typical Russian roullette the odds in favior of a player is 1/38 with a payoff of 35 times if one wins. So this is an easy money strategy for casino owner.is it possible to replicate this sort of payoff in options market ? .The only difference with roullette is that here more than one scrips can end up in the money making the writer out of the business.what is the ideal framework to manage this risk ?I am talking about naked option positions not any sort of dynamic hedging . if i create a short option portfolio of x no of scrips , then by finding out the relationship between cash price movement of the underlying scrips and a widely traded index( Scrips are a subset of this index) can i hedge this risk.Of course i can to some extent hedge the risk if i write options for all the scrips which are there in the index.But what if i want to write only 20% of the scrips?I guess there could be some dynamic risk management strategy to replicate this sort of payoff in options markets.Since I am noy dynamically hedging the optin position so here the trick should be dynamic entry/ exit which will help generating profit over a certain no. of trades. Eagerly waiting for some invaluable inputs.Regards,Wasp

don't understand your question fully, but this is kind of what market makers do - try to keep a balanced book so they can make money on the spreads - don't think there is any high falutin' theory behind it.

The problem with trying to replicate a casino payoff in option writing is that casinos deal with completely uncorrelated risks. In options, while there are myriad particular risks, there also are general risks that affect a lot of different securities, and sometimes those general risks are not apparent at first. Some times, in fact, the general risks are almost entirely psychological, so there is no real way of identifying them a priori with a reasonable degree of certainty.Lots of people have attempted to recreate the casino situation of lots of little profits that easily offset the rare large losses, but most of these we have heard about only because they blew up fantastically. Niederhoffer and LTCM can probably be placed in this category. And the reason, I would say, is that it is very difficult to recreate the real casino situation of ALWAYS having lots of little profits that easily offset the rare large losses; instead, you end up USUALLY having lots of little profits and barely any losses, and then one day having lots of large losses and being ruined.

QuoteOriginally posted by: wasp In typical Russian roullette the odds in favior of a player is 1/38 with a payoff of 35 times if one wins. That's American roulette. In European roulette, Pr(hitting single number) is 1/37, with same payoff.In Russian roulette, if you lose you die, so given most utility functions, the objective edge against the player is infinite. Unless the casino really, really hates the player, it's probably a negative sum game.