Hacker News Reader

Comment by verteu | Hacker News Reader

> I had an absolutely disgusting thought today: Robinhood should offer parlays. Sell customers a call option on multiple assets. For example a call option to buy Apple at $250, NVDA at $190, GameStop at $25 and Bitcoin at $120k, but only if ALL of them are in the money. Robinhood could buy offsetting calls on each individual asset, then sell the parlay “bundle” to retail. Risk-free profit for Robinhood, and their customers would love it.

I don't see how this is risk-free - surely it involves some opinion on the correlation between the assets?

View on HN

I think you’re correct. There is a saying something like: in a crisis, all correlations go to 1. I believe it’s likely one of those things that’s okay most of the time and then, every once in a while, causes extreme and systemic problems. Therefore, Robinhood will probably do it because the incentives are aligned.

It requires the correlation if you are going to price it accurately. But with a parlay people just look at the high payout and estimate the chances wrong. By like, a lot.

It's the fact that's easy to sell that makes it attractive, not that it's easy to price.

It is truly risk free. You always buy the call using the customer's money but you only give them the call if every part of the parlay is correct. Assuming they charge a commission in addition to the asset price to cover transaction processing they shouldn't lose money

Edit: I don't really know how pricing these things usually works but I could see taking some risk on to price these attractively

I get that Robinhood's business model is stealing from the poor and giving to themselves, and their customers are mostly unsophisticated, but why wouldn't the customers just buy the underlying call options if the price to buy the parlay is the sum of the underlying options?

Because, to quote your comment, "their customers are mostly unsophisticated."

And, part of the appeal of the product, is they only pay out if *all of them are in the money. Hence the "lotto-like" return profile.

While Robinhood users are unsophisticated (seriously use another brokerage…) I think that they would see through this.

Why would anyone ever take that bet? It has to be leveraged, which is where the risk comes from.

Reply on news.ycombinator.com