What is a sports option?

A sports option is a purchase of the right, but not the obligation, to back (buy) or lay (sell) a bet at a specific point in time in the future known as the expiry date. In reality we do not receive the bet at the expiry date. Instead we have a ‘cash settlement’, meaning we exchange the profit and loss given by the difference between the agreed odds (the ‘strike price’) and the odds at the expiry date. The agreement can be traded at any time before the expiry date.

Example 1.

I want to make a bet that Roger Federer will win Wimbledon in 2013.
I go to my local bookmaker and he says that he will accept my bet at 4.50 to 1, i.e. he will pay me $4.50 for every dollar I am willing to bet if Roger Federer wins, and if he does not win, I will lose my entire bet.
OR, he says to me, instead I can offer you 3.50 to 1, but you don’t have to pay me now. You can pay me a premium, say 20c per dollar, for the amount of dollar contracts you would like to bet, and then you can choose to place the bet, or not, at any time up until the start of the 2013 Wimbledon Grand Final match.
Therefore, if I want to have the right to bet $100, I have to pay a $20 premium to the book maker now, and this gives me a right, but not an obligation to make a $100 bet at any time up until the start of the match, and then receive $350 in return, or nothing.

Example 2. Something a bit more interesting

The Lakers Strangle

The LA Lakers made a lot of trades last season
They have acquired huge talent, but the players have never played together. This says to me that it is going to be a great season, or a shocker, definitely not half way.
The Lakers are paying 4-1 to win the NBA. I buy 3 month options at 20c per $1 call strike 3-1 and 18c per $1 put strike 5-1.
This is the right to purchase a bet at certain odds at or before a specified date.
Today the Lakers are at 18-1. I close the position.
By paying only 20c and 18c for every $1 bet I obtain the benefit of leverage.

Payoff Structure for a bet strangle

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	Odds