Question for gambling experts

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Question for gambling experts

Postby Tomas on Tue Oct 30, 2012 10:11 pm

Since I don't have US Passport yet, and I don't know how legal internet gambling is, I won't pursue the following strategy, but, out of curiosity, where do I make a mistake?

I noticed that you can sell contract against Obama on Betfair.com at a rate 1.44/1 (i.e., you pocket $1,000 and create liability in Obama wins at $1440) with a reasonable depth (when I looked at it, you could enter more than $3,600 worth of such contracts). BTW, that rate implies almost 70% of Obama victory.

At the same time, Intrade prices on Obama are around 63%. I believe if I bought $1,000 of Obama contracts, based on the depth I'd probably pay an average price of 63.5%

So here is my strategy:

Sell $1,000 against Obama on Betfair, and immediately hedge the potential payout by buying $1440 worth of Obama contracts at the price of $1440*0.635 = $914.40

So, right now, I pocket $1,000-$914.40 = $85.60

I also know Betfair takes 5% of the profits, while Intrade charges a very small fixed monthly fee, but no profit cuts (I think it's $20, but I'll consider it a sunk cost of being on Intrade, and probably trading like crazy).

If Obama wins:
I make loss with Betfair (so no payment to them), and I pay the BEtfair counterparty with my $1440 I won on Intrade. I keep the 85.60 I made today
If Romney wins:
I make $1,000 profit with Betfair, they take 5% ($50), I am thus left with $85.60-$50 = $35.60

Either way, I make a pretax return between 8.56% (if Obama wins) and 3.56% (if Romney wins) - risk free, instantaneously. With the possibility of repeating, until the both prices converge. Even if I have to keep my money deposited, that market will close very soon, with elections 1 week away.

Now, I would think that in terms of taxes on winnings, I pay the taxes on the NET profits (profits - losses), i.e. I'd be taxing either $85.60 or $35.60.

Where did I make a mistake? (Otherwise I see no reason why people would not do this already.)
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Re: Question for gambling experts

Postby mikey287 on Tue Oct 30, 2012 10:25 pm

Seems like it checks out...you might find this interesting, if you didn't write it yourself :lol:

http://www.pbs.org/newshour/rundown/201 ... rkets.html
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Re: Question for gambling experts

Postby steelhammer on Tue Oct 30, 2012 10:38 pm

I was strongly considering doing a 10 grand bet on Intrade yesterday. Price temporarily dropped to $6.10 a share. Now it's back up. Still might.
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Re: Question for gambling experts

Postby Pavel Bure on Tue Oct 30, 2012 10:46 pm

In the U.S. internet gambling is completely illegal. Home of the free.
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Re: Question for gambling experts

Postby Froggy on Tue Oct 30, 2012 10:46 pm

sounds like a lot of work for a small payoff
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Re: Question for gambling experts

Postby ulf on Tue Oct 30, 2012 10:53 pm

a 3.6% return, worst case is not small. bank accounts get like .25-.5% right now if that.
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Re: Question for gambling experts

Postby Tomas on Tue Oct 30, 2012 10:56 pm

Froggy wrote:sounds like a lot of work for a small payoff


I'd say it's EXACTLY the opposite. Granted, you'd have to open and fund two investment accounts (but you'd have to do exactly the same if you wanted in invest in stocks, bonds..). After that, each transaction would be like 4 clicks, and you cound execute both well under 1 minute.
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Re: Question for gambling experts

Postby Froggy on Tue Oct 30, 2012 10:57 pm

yeah, but i'm incredibly lazy, so i stand by my assessment
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Re: Question for gambling experts

Postby Tomas on Tue Oct 30, 2012 11:01 pm

ulf wrote:a 3.6% return, worst case is not small. bank accounts get like .25-.5% right now if that.


actually, that's 3.6% in [however long the market's would let you take profits out]!

Assuming the elections will be officially resolved in 2 week, and you can withdraw the money then, the annual equivalent of that return is (there are roughly 24 bi-weekly periods in 1 year):

(1+0.036)^24 - 1 = 133.7%

[A little less in reality, because I'd think Betfair would require to keep the whole potential liability, i.e. $1440 until the market is resolved, but still]
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Re: Question for gambling experts

Postby ulf on Tue Oct 30, 2012 11:05 pm

Wow didn't even think of it annualized
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Re: Question for gambling experts

Postby mac5155 on Wed Oct 31, 2012 12:28 am

Isn't all this assuming O wins?
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Re: Question for gambling experts

Postby Tomas on Wed Oct 31, 2012 1:06 am

mac5155 wrote:Isn't all this assuming O wins?


No, the beauty of the strategy (called "arbitrage" in finance) is that you end up with positive (sure) profits regardless who wins. As I wrote above, if Romney wins:

1) My Obama contracts on Intrade will go worthless, but
2) I'll still keep the $1,000 from the SALE of Obama contracts on Betfair, and will have no obligation to pay anything to whomever bough the contract on Betfair from me.

Ultimately, in case Romney wins, whenever the winner is certified, I'll have
$1,000 from the sale, less 5%*1,000 (Betfair's cut from all the winnings), less 914.40 (what I spent on Obama's contracts on Intrade) = $36.60 sure profit

Edit: BTW, the "arbitrage" strategy is no rocket science. What we are doing is simply selling the relative overpriced Obama contracts on Betfair (odds 1.44 imply 69.44% chance of Obama victory - so you have to pay a lot to get little), while simultaneously buying the relatively underpriced (at 63.5%) contracts on Intrade.

Note that in the real world, very few "arbitrage" opportunities should exist. Even in our case, we can be profitable only temporarily - our sells on Betfair would drive Obama value down, whiile our buys on Intrade would drive the Obama value up - precisely until the contract values would be equal in both markets.
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Re: Question for gambling experts

Postby Tomas on Wed Oct 31, 2012 1:28 am

mikey287 wrote:Seems like it checks out...you might find this interesting, if you didn't write it yourself :lol:

http://www.pbs.org/newshour/rundown/201 ... rkets.html


Awesome find. I just went through it. I don't have to teach this term (hooray, sabbatical!) but if I did, this would be mandatory reading in my class.
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Re: Question for gambling experts

Postby Tomas on Fri Nov 02, 2012 1:57 am

Update: If you thought that with the elections coming, the spread between Betfair and Intrade would shrink - you'd be wrong. As I am writing this, you can sell - up to $90,000 !!!! - worth of Obama contracts at 1.33 odds (corresponds to 75.2% victory). Meanwhile, you can buy Obama victory on Intrade for as low as 65.7% (and all together, about 2,000 contracts are available under 67% ). The 8+% difference is incredible.... Even factoring that buying Obama would cost more and more, I think it's very possible that if you sat in Europe (and were allowed to use Internet gaming sites), you could probably make 5% return in less than 2 weeks on at least $10,000 investment.
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