Cheap options aren't the problem. Holding them to zero is. Here's the math.

Everyone argues about whether cheap far-out options are dumb. Well...

If losers go to zero and you hold winners to target, the hit rate you need just to break even is set by the payoff:

|Winner pays|Break-even hit rate|
|:-|:-|
|3x|33.3%|
|5x|20.0%|
|10x|10.0%|
|20x|5.0%|

That's to go *flat*. Not to make money.

Now the part that actually matters. Losers go to zero is a choice, obviously.... Cut them at −50% instead:

|Winner pays|Hold to zero|Cut at −50%|
|:-|:-|:-|
|3x|33.3%|20.0%|
|5x|20.0%|11.1%|
|10x|10.0%|5.3%|
|20x|5.0%|2.6%|

Cutting at half roughly halves the hit rate you need. That's a bigger edge than any amount of better picking, and it's free. The problem is a 3-cent contract doesn't feel worth managing, so it gets held to expiry, and your real break-even is the left column instead of the right one.

Then the spread. On a 0.45/0.55 quote you're down 20% at fill. On 0.01/0.02 you're down 50% before you've done anything — your stop got hit the moment you bought. That's why this stuff paper-trades great and trades terribly.

So: 10x needs 10% holding to zero, \~5% if you cut, back to \~7% after a normal spread, and sub-10-cent contracts are basically unplayable.

Lotto tickets aren't automatically losers. But nearly all the edge is in the exit, not the entry.

Anyone actually track their hit rate on sub-$1 contracts separately? I'd bet it's a lot worse than your overall win rate is hiding.