The derivatives market is like if they let you buy insurance on anyone without ah insurable risk.

So I could decide that I think your house is likely to burn down, so I buy insurance on it.

That's what enables the gambling. If the only people who could buy puts or calls were people who had insurable risks in the underlying; it would be a lot smaller market and less gambling.

Good point. The flip side is that allowing anyone to transact in options makes the pricing far more efficient.

Regulating participants to only those who have a purpose and meaningful reasons, would mean higher bid-ask spreads, less liquidity and less turnover, which then means those markets would probably cease to exist. Gamblers in these special markets are a net-positive, non-gamblers are happy to give some gamblers a payday or some drink money, since it allows non-gamblers to focus on their main activity, instead of doing their activity and gamble that everything turns out fine.

Of course they're happy to have the gamblers! Almost by definition the gamblers are subsidizing their risk management strategies!

> So I could decide that I think your house is likely to burn down, so I buy insurance on it.

which makes the insurance premium grow higher, reflecting the information that such a house has a high risk of burning down.

It doesn't matter that the buyer of the insurance has no material connection to the house. I can't see why such "gambling" shouldn't be allowed to happen, provided that there's enough regulation and monitoring so that you cannot then go and burn down someone's house to collect the insurance!

casinos are based on pure chance which nobody cares about (what does it matter to the outside world if a coin came up head or tails?) and the house still takes a cut.

financial markets are based on stochastic events which do matter very much, such that paying a broker is worth it. If it's not worth it to somebody, they should not participate, but in that sense they shouldn't participate in casinos either.

Some derivatives can be fairly consistently good bets, because you can take real-world probabilities, while your counterparty (the bank) deals with "risk-neutral" probabilities implied by their hedging, which can differ quite substantially and persistently from the real-world probabilities.