Arbitraging Ron Paul's Online Odds
I admit I haven't personally participated in any of this stuff, so I can't speak from experience. But it seems that there are several gambling web sites with often different odds on Ron Paul. With the possibility of shorting a Ron Paul contract on Intrade, one can make a guaranteed profit (assuming the transactions costs aren't too high). Let me give a quick example.
According to this article, there are sites out there that still have 25-to-1 odds against Ron Paul's nomination. (Note: You should be careful that this is indeed for the GOP nomination, not to become president.) That means if you bet $50 on Ron Paul, they would pay you $1300 if he got nominated.
On the other hand, at Intrade right now a Ron Paul contract (which pays $100 to the owner if RP wins the nomination) is selling for around $6. So if you sold 10 of these contracts, you would raise $60. Out of that, you could pocket $10, and use the other $50 to wager on RP at the site offering 25-1 odds.
So if Ron Paul doesn't get the nomination, you're still up that initial $10. If Ron Paul wins it, then you get $1300 from the first website, and you owe $1000 to the people who bought your 10 contracts at Intrade, leaving you with an additional $300 profit.
Obviously there are transactions costs and timing issues, but you get the point. If a site is offering better odds than Intrade, you can short the Intrade Ron Paul contracts and use some of the money to wager on Ron Paul. That's the beauty of Intrade; you can go either way.
Disclaimer: I haven't personally used any of these sites, so I can't vouch for them.
Comments (8)
I have used Intrade (TradeSports) and I can vouch for them. Shhh.
Published: October 11, 2007 1:57 AM
beautiful how the market equalizes inter-site prices!
Published: October 11, 2007 2:05 AM
I plan on waiting until Ron Paul's intrade numbers get high enough where I can short him with as much money as I can possibly put together. (My every last cent, as Stephanopolous would bet against him).
Then, if Ron Paul wins I lose all of my money but I win something so much more valueable...my freedom. And from that I will gain much more money than I had before.
If, on the off chance, he loses. Then I will make a large profit which I can then use to buy as much freedom as I can while the country goes to hell.
Published: October 11, 2007 11:20 AM
Robert_Murphy: When you sell a contract, you don't immediately get the money. You must put up the $100/contract, minus what you sold it for. So you'd have to put up $590 total. Then you'd have to wait about a year and then, most likely, make $10 plus a small probabily of makign more. The interest cost at money market rates, is $30.
Published: October 11, 2007 1:06 PM
Person,
I believe that they take your money to make sure you can pay off the contract. But doesn't it roll over in a MMF with them? I'm pretty sure that's how other futures markets work. I.e. I don't think people habitually get screwed every time they short a futures contract. Otherwise, for example, you would see a lot more trading in very short term contracts, and I think it would be pretty obvious that they would correct for that.
But as I said in the original post, I've never actually used Intrade so I don't know the specific mechanics of it. Maybe you're right, regarding Intrade. But it sounded like you were making a general statement.
Published: October 11, 2007 3:29 PM
Bob_Murphy: Yes, they hold your money so they can be sure you'll be able to pay off the contract, and yes, they put it into short-term high-grade bonds. But all political betting sites pocket this interest for themselves; they don't let you keep any of it.
Published: October 11, 2007 3:44 PM
Hi, good call Bill, about the odds arbitraging, I was actually working on this as a dissertation topic but there is a few things that one must remember before proceeding, 1) Check out the contract expiration date because you have to wait until then to get your $ back (sorry I'm not from the US so I don't know when the GOP choose there candidate but I'm figuring about Feb. next year) and you must calculate in the opportunity cost or the discount rate just like with derivatives, 2) Some of the online bookies have been known to go bust so be mindful of this, I think Centrebet is taking odds on the US election and they are publically listed on the ASX. I hope the following link is helpful http://odds.bestbetting.com/specials/politics/usa/republican-candidate-2008 It lists all the known bookies offering odds on the GOP candidates. I also noticed that BetFair is taking bets on the Pres. race, note that this is the biggest and most liquid exchange so you can Arb. between them and intrade. Isn't it illegal for Americans to bet? So much for the land of the free. America needs someone like Ron Paul to remove these crazy laws. 3) You might also be able to arb. other candidates as well, thus ensuring larger profits. 4) Check the betting exchange rules and fees before submitting any trade. 5) This type of arb. requires a double capital outlay thus halving the actual return on investment, unlike other financial markets where you can short something and put THAT $ into another financial instrument.
Matt
(sorry for sounding a bit dull folks)
Published: October 13, 2007 6:00 AM
So, I'm new to the notion of arbitrage but a relatively long-time follower of Ron Paul's campaign and InTrade. I think this post's analysis is correct but oversimplified. The part about betting on 25:1 odds makes sense. But the 'short' side is missing the following: A share on Intrade is trading at--not six 'dollars'--just six. It's a reasonable assumption to make but the full contract value is actually $10 not $100. Thus the price of a contract is currently trading at SIXTY CENTS real money.
That is not the biggest issue though, if it is one at all (still good to know the pricing scheme). If I want to buy $60 dollars worth of stock (10 shares in your example, 100 in actuality) I have to post the entire margin of my potential stock for each share/contract. That's 9.4*100 or 94*10 and in both cases $940.
Suddenly arbitrage has an opportunity cost. This money will IN FULL be HELD by InTrade until the contract expires. I'm not sure what InTrade's policy on accruing interest is but in the best case scenario you're earning 3-5% and out almost a grand.
I'm not sure how this changes the analysis but it seems important. Any further comments?
Published: November 1, 2007 3:07 AM