Intrade

A couple of Intrade contracts:

Obama winning the election: 61.5

McCain winning the election: 34.6

USA and/or Israel to execute an overt Air Strike against Iran by 30 Sep 2008: 21.4

On the last one--say what? Does this seem like free money to anyone else? I know the one Israeli official made a remark about bombing Iran the other day, but still, the price seems awfully high.

Also, I might be missing something here, but does the fact that the prices of the contracts for Obama and McCain don't add up to 100 represent some sort of arbitrage opportunity?


Edit: Arthur points out the uncertainty in electing either candidate. Either could get shot, have a heart attack, or have a scandal. If this is the cause of the fact that the contracts don't add up to $100, then the sums will never add up to $100 since there is uncertainty about each candidate. This makes sense.

If on the other hand the cause is simply "Brownian motion" in an illiquid market, then the sum will bounce around about $100, sometimes above, and sometimes below, and this indeed is a potential arbitrage play.

I'll be watching the prices more closely in the future.

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I could be wrong

Also, I might be missing something here, but does the fact that the prices of the contracts for Obama and McCain don't add up to 100 represent some sort of arbitrage opportunity?

I think they allow for 3rd party candidates.

I guess I don't understand how these work

At this point in the race, the only viable candidates are McCain and Obama. I'm sure 3rd party candidates are running (though I have no idea who they are) but I can't imagine their contracts being worth any more than fitty cent, certainly not the $5 or so difference between $100 and the sum of the contract prices.

I realize these contracts are independent, but I'd think that there would be some sort of 'intrinsic efficiency' in the way they behaved, i.e., if one goes up, the other goes down; if one goes up a lot, the other goes down a lot, etc. Thus, I would also think that their combined values should approach $100.

One strategy I'm thinking of is buying one of each contract (in this situation) on the theory that at some future time, their sum will indeed approach $100 and thus you'll make $5. Similarly, if the contracts add up to >$100, then short one of each.

I'd think that the greater the disparity of the sum from $100, the greater the likelihood of making money.

I'd also think that this disparity would be greater in illiquid markets than liquid ones (which makes sense in another way: illiquid markets provide more arbitrage opportunities).

But who knows? I have no experience trading futures.

You are discounting the

You are discounting the possibility that a candidate might die. As a matter of fact, I think Obama has a relatively high chance of being assassinated (an extremist muslim who doesn't like him renouncing Islamic faith, a white supremacist, Hillary, who knows)

Also look at the order book for Iran... there's no volume, it isn't worth the trouble of assessing the probability correctly.

hmmm....

You are discounting the possibility that a candidate might die.

I can understand this criticism against buying of any contract for either presidential winner.

But how does this explain the 'gap'?

Transaction cost?

If no one can make a profit using your scheme, then the reason you gave for finding the gap improbable goes away, since that reason was the possibility of profit by using your scheme. One reason you may not be able to make a profit might be some transaction cost that might be involved. For example, as an outsider who hasn't bought any chips yet (or whatever they call the betting markers), if you have to pay $110 in order to buy $100 in chips, then you won't be able to profit by using your scheme.

Could be.. but that's not

Could be.. but that's not it. Hillary is still at 5.1... that seems a bit high to me, but there is a chance that Obama will withdraw from the race (death, illness, scandal, etc).

Ah, I get it

Ignore the other message.

That's what they said

Does this seem like free money to anyone else?

That's what they said. :-)