Friday, October 12, 2007

Ron Paul and arbitrage

Great little posting on the blog that combines Ron Paul and the economics of arbitrage:

Arbitraging Ron Paul's Online Odds
Robert Murphy

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.

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