Investing Caffeine

Trading Obama, Romney and Extraterrestrials

June 16, 2012 at 4:50 pm Leave a comment

Source: Photobucket

Investors vote on stocks every day by buying shares in favored positions and selling shares in those out-of-favor. But shouldn’t voting on stocks be different from voting for politicians? Actually, no! Now, politicians can be traded just like traditional stocks or other liquid securities. If you don’t believe me, then you should check out www.Intrade.com. Intrade is an online trading platform that is home to various prediction markets that forecast the probability of outcomes of various real-world events, including who will win the 2012 U.S. Presidential election. Just like investors can trade IBM on the New York Stock Exchange (NYSE) or Apple Inc. (AAPL) on the NASDAQ exchange, so too can individuals trade election shares in Barack Obama (ticker: OBMA) and Mitt Romney (ticker: RMNY) on the Intrade platform (see chart below).

Source: Intrade.com

By definition, the trading mechanics of Intrade involve a resolution of a particular event structured as a binary “Yes” or “No” result. Similar to a sports bet, Intrade eventually declares a winning or losing outcome – but there are no ties. For example, by November 6, 2012, we will know whether Obama’s shares will be trading either at $10 per share, if he becomes re-elected, or $0 per share if he loses to Romney. Just like a stock, traders can go long Obama shares, if they think he will win, or short Obama shares, if they think he will lose. Analogous to stocks, holding periods may vary too. Traders can either hold their position until the event expiration, and realize a gain or loss, or instead traders can lock in shorter-term profits/losses by closing a position before the official outcome ends.

Another great thing about Intrade’s prediction markets is that each event share price can be quickly converted to an outcome probability. So as you can see from Obama’s Intrade chart above, the current $5.28 share price signifies a 52.8% probability of Obama winning the 2012 Presidential election. No need to worry about distracting stock-splits, share offerings, or stock buybacks that could distort the true underlying dynamics of the Intrade event fundamentals.

Bizarre Bets and Over-the-Top Trades

Crazy Super Bowl “prop” bets have been around for ages, and the senseless nature of the bets did not disappoint this year, if you consider the following ridiculous Super Bowl XLVI prop bets:

• Will it take Kelly Clarkson longer or shorter than 1 minute 34 seconds to sing the National Anthem?

• Will Madonna’s hair color be blonde when she begins the Super Bowl Halftime show?

• How many times will model Giselle Bundchen be shown on TV during the game?

• What Color will the Gatorade be that is dumped on the Head Coach of the Winning Super Bowl Team?

I think you get the idea from these examples, and I believe Intrade figured out the quirky benefits as well. Betting on unusual or strange outcomes can be a lucrative endeavor.

Here are just a few of the bizarre and remarkable events you can trade on Intrade:

• NASA to announce discovery of extraterrestrial life before midnight Dec. 31, 2012

• Arctic sea ice area for Sep. 2012 to be less than 4.3 million square kilometers?

• Magnitude 9.0 (or higher) earthquake to occur anywhere before midnight Dec. 31, 2012  

• The Dark Knight Rises to break the all-time opening weekend box-office record   

• The US debt limit to be raised before midnight Dec. 31, 2012 

• Bashar al-Assad to no longer be President of Syria before midnight Dec. 31, 2012  

• The US Supreme Court to rule individual mandate unconstitutional before midnight Dec. 31, 2012  

• Higgs Boson Particle to be observed on/before Dec. 31, 2013  

Rules of the Game

You may be asking yourself, “All this betting/trading sounds like fun, but isn’t this Intrade thing illegal gambling?” If your thought process went in this direction, you are not alone – I asked myself the same question. I’m no attorney, but the apparent loophole for Intrade’s business operation appears to be tied to its foreign incorporation in Ireland. Less apparent is how American law applies to Intrade as referenced in a recent New York Times article that states, “It is unclear whether American law applies to Intrade.”

Although U.S. residents may not be able to trade legally on Intrade, roaming the site may provide some quirky entertainment and provide profound answers to critical questions like, “Do extraterrestrials exist?; How much money will the new Batman movie make at the box office?; And which President are we going to get stuck with for the next four years?” Surfing around on Intrade can be a blast, but if it gets too boring, you can always go back to trading regular stocks.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and Wade Slome have no affiliation with Intrade. SCM and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in NYX, IBM any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Politics, Trading. Tags: Barack Obama, elections, Intrade, Intrade.com, Mitt Romney, probabilities, Super Bowl prop bets, Trading.