Selling everybody short
My Intrade contracts for the Democratic nomination just expired (short Hillary Clinton and Al Gore). Looking around for my next bit of edutainment action, I added up the bids for the top 8 Republican VP candidates and found that there was a 120% chance that one of them would be chosen. Can you say “arbitrage”? Sell all 8 for +120, lose one for -100, for a net of +20.
It’s not quite that easy. With this many contracts, the commissions really add up. In fact, they eat up about half of the +20, leaving me with +10. I have to put up margin for all 8 contracts, even though at most one of them will lose. This dilutes the +10 to a little over 1% return on investment. It’s hard to get excited over a complicated trade that nets a 1% return. On the other hand, these contracts will expire in about a week, and 1% in one week is 50% annualized. Alternatively, I can think of this as “topping off” the Hillary-Gore trade with an extra 1%.
I’ve over-simplified the numbers a bit. I make the worst-case assumptions on the commissions going in, then I try to improve on that in practice. I also find that prices are volatile enough that I can trade against my position a bit. I’m short 8 different candidates, but it doesn’t matter which 8. All that matters is that 120 is more than 100. If it’s suddenly advantageous to cover Mike Huckabee, for example, and short Fred Thompson, I end up with 122 being more than 100. I’m having fun with this. It’s easy to be decisive when you’re tweaking a sure thing. As Nixon would say, I’m negotiating from a position of strength.
Update: the news about Sarah Palin is out, and it looks like I’ll be up almost 2%. The short on Palin is a total loss, of course, but the gains on Romney and Pawlenty make up for it.