Sunday, October 12, 2008

The Arbitrage Opportunity

If you knew that two bookies had differing spreads on a game, what would you do? You could make the bet with the bookie who gave you the better outcome for your team. Or you could make opposing bets with the bookies. With this latter option, you would capture the arbitrage as the two spreads come back to equilibrium and become the same.

There are two markets that trade futures on the election. On Intrade and Betfair you can make a bet whether Obama will win, for instance. You would expect the values to be equal. They are presently Intrade - 78% and Betfair - 82%.

If you favor Obama, Intrade is a better value. However, you could double the win by making opposing bets on the sites while removing the downside. If you place an Obama bet on Betfair and a not-Obama bet on Intrade, you will either come out a wash or double the bet. You win double when the two market values are equal.

1/1.22 = 82% (Oct 14, 2008)
Sports -> Politics -> USA -> Next President

78% (Oct 14, 2008)

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