Now this is weird: there's a play money contract on Intrade on whether Fannie Mae common stock will be under $1 per share on Jan 20, 2009. The market there is placing about a 14% chance of it happening.
But then when we look over at financial markets, we see puts on Fannie (the right to sell Fannie shares) trading at $1.60 for a stike price of $2.50 dated right near that. Do the math. To make a profit on the right to sell Fannie at $2.50 when you pay $1.60 for it, the shares must be under $1 at that time, so the financial markets are placing -- at least if my understanding of options is in order -- over a 100% chance on that same event.
If there were a real-money contract on this, it would be a nice arbitrage opportunity. I'll let you figure out what the trades would have to be.
As for me, I snagged 325 contracts, average price $1.21 (payoff is $10/contract if the event happens). All in play money, keep in mind.
UPDATE: Okay, my understanding of options isn't in order. But the point stands: the market places a "very high" chance of Fannie shares being under a dollar by innauguration day, while the play money prediction markets place a "pretty low" chance.
A blog by Silas Barta
Showing posts with label prediction markets. Show all posts
Showing posts with label prediction markets. Show all posts
Monday, September 8, 2008
Monday, August 4, 2008
Profit opportunities for Silas: oil and GM
Back to the two most frequently discussed topics on this blog.
First, let's talk about oil. Though by the end of the day, this may change, the spot price temporarily went below $120. Time to strike when the iron is hot? If I bought the double-oil-return ETF discussed last week (DXO), and it were to return to its previous high, that would be a nice 46% return. (Btw, y'all oil options traders are accurately factoring oil's massive volatility into the implied volatility term in your options pricing, right? Okay, just checking.)
Second, let's talk about GM. I have been claiming, since studying GM's history back in '05, that a bankruptcy was near, and so my brother and I have been discussing an even odds bet that would pay off if bankruptcy happened, or some other even of equivalent lameness, such as: defaulting on any bond, PBGC takeover of legacy obligations, refusal to pay legacy obligations, or government bailout. I'm not sure if we ever agreed to a bet value and a time frame, but a few weeks ago I emailed my brother some news about GM, and he reiterated his position that there would be no bankruptcy, so if we haven't agreed to something, I could still get an even odds bet in.
While I did post some news about GM's lameness last Friday, I have some more. Here's a Reuter's article detailing GM's rising defaulting insurance premiums and falling bond prices. Right now, you must pay 47% of the amount insured, so $47 to insure $100 of debt. And you know what? Most people, facing that much to insure something, just don't buy it, and bear the risk themselves. Heck, that's what hospitals do for their liability insurance, which can get that high.
It also lists the prices of GM bonds, but strangely, Reuters prefers to list the cents on the dollar (click on "first vlog post") price, and never the yields, neither the current yield, nor the yield to maturiy. But my own calculations give about 12% current yields for short term bonds and 18% for long term bonds based on the numbers there
But strangely, the prices of GM bonds that I found on my Scottrade account gave a different story. (I can't seem to find a free no-hassle source for bond prices I can link.) I don't remember the current yield, but it listed GM bonds maturing in December of this year as trading with 9.3% yield-to-maturity, and bonds maturing in 2011 -- 3 years from now! -- as paying, and make sure you're sitting down, 29% YtM. Twenty-nine percent!!! There are banana republics right now that pay lower interest on their debt! There are reckless shoppers right now with lower credit card interest rates!
First, let's talk about oil. Though by the end of the day, this may change, the spot price temporarily went below $120. Time to strike when the iron is hot? If I bought the double-oil-return ETF discussed last week (DXO), and it were to return to its previous high, that would be a nice 46% return. (Btw, y'all oil options traders are accurately factoring oil's massive volatility into the implied volatility term in your options pricing, right? Okay, just checking.)
Second, let's talk about GM. I have been claiming, since studying GM's history back in '05, that a bankruptcy was near, and so my brother and I have been discussing an even odds bet that would pay off if bankruptcy happened, or some other even of equivalent lameness, such as: defaulting on any bond, PBGC takeover of legacy obligations, refusal to pay legacy obligations, or government bailout. I'm not sure if we ever agreed to a bet value and a time frame, but a few weeks ago I emailed my brother some news about GM, and he reiterated his position that there would be no bankruptcy, so if we haven't agreed to something, I could still get an even odds bet in.
While I did post some news about GM's lameness last Friday, I have some more. Here's a Reuter's article detailing GM's rising defaulting insurance premiums and falling bond prices. Right now, you must pay 47% of the amount insured, so $47 to insure $100 of debt. And you know what? Most people, facing that much to insure something, just don't buy it, and bear the risk themselves. Heck, that's what hospitals do for their liability insurance, which can get that high.
It also lists the prices of GM bonds, but strangely, Reuters prefers to list the cents on the dollar (click on "first vlog post") price, and never the yields, neither the current yield, nor the yield to maturiy. But my own calculations give about 12% current yields for short term bonds and 18% for long term bonds based on the numbers there
But strangely, the prices of GM bonds that I found on my Scottrade account gave a different story. (I can't seem to find a free no-hassle source for bond prices I can link.) I don't remember the current yield, but it listed GM bonds maturing in December of this year as trading with 9.3% yield-to-maturity, and bonds maturing in 2011 -- 3 years from now! -- as paying, and make sure you're sitting down, 29% YtM. Twenty-nine percent!!! There are banana republics right now that pay lower interest on their debt! There are reckless shoppers right now with lower credit card interest rates!
Thursday, July 31, 2008
I just don't get no respect -- about prediction markets
You've heard of prediction markets like InTrade, right? Basically, like gambling, but on real-world non-sporting events, so as to aggregate the market's knowledge about the future, and reward those who know and "share" their knowledge. GMU professor Robin Hanson did a lot of the work in formulating them and encouraging their development.
Now, if only he could recognize the insights of others.
Back in January, his blog posted Peter McCluskey's idea to use prediction markets to unveil another kind of information: how a presidential candidate impacts prices in financial markets, such as oil futures, government bond yields, etc. And how does he propose to do it? The prediction market would host a bet on a measure of their correlation. Which measure? The (modified) ratio of how much the candidate's contract price (i.e. market's estimate of chances of winning) changes to how much the financial security's price changes ... on election day. ( a so-called "shock response future")
Great idea, I thought -- but wrong measure. Election day by itself is unreliable. After all, more than just the election will influence the financial security's price that day. Plus, the market has already largely incorporated the influence of whoever's expected to win except in very close races. Worse, it's way too easy to manipulate: want to "prove" Democrats make interest rates low? Eat a loss by buying treasuries at an absurd price at a critical time, just like that gentleman who ate a loss on oil just to be the first to buy oil at $100/barrel.
So, I told them exactly that and suggested a better measure: don't just look at election day: measure the correlation all the way up through election season. Find how often e.g. oil's price goes up as a Democrat's chances of winning go up, and look at how closely they track each other, each day or week. That's far more robust against manipulation, and extracts much more relevant information. Yet arguing the point with McCluskey and Hanson was like talking to a wall: they were responding to distortions of my idea that seemed to have only a partial understanding of it. For example, Hanson argued that no, no, no, silly: we need a metric available before the election ... which mine is. No no no, Hanson really meant something completely different from what he actually said.
Well, McCluskey went ahead and launched his inferior futures market on the InTrade site. And, just two days ago, Hal Finney launched a celebration of those futures markets' "success" with a blog post that developed the implications of the prices those contracts traded at. Major posters gave McCluskey a good pat on the back.
(Re-)Enter Silas.
I remarked that I had suggested a better metric on the earlier thread, and asked if the people there would be more interested in a futures market for my idea. A few were, and one major poster reluctantly admitted that I had a better metric and deserved acknowledgement.
A major implication of my criticism, let's not forget, was that too many other forces impact a financial security's price on any given day (including election day) and the market has already incorporated most of the impact of whose expected to win (or, of course, Senate/House elections could impact as well...). This means we should expect the market McCluskey made to be rather useless -- traders will view the correlation on just election day, as effectively random -- a 50/50 chance either way. And what do we see? Yep: "49.9-50.1" -- or an implied 50/50 chance.
As Finney sheepishly avers: "These values are so close to the 50% mark that it appears that the markets do not expect any significant movement in oil prices or interest rates on election day, that can be attributed to developing information about which party will win. As critics have noted, this could be because they don't see much effect of political parties on these values, or else because they expect that the election day results will be a foregone conclusion and there will be no surprises in that regard."
Or, reading between the lines, despite all the kudos we're giving McCluskey, he created a market that provides completely useless information, even though I told him long before how to make it useful.
Hanson tried to save face by replying again, so I had to gently correct his misguided attempt to trivialize my insights. Okay, not so gentle -- but when you're so wrong, and for such wrong reasons, why do you expect a huge amount of respect right back? Especially when you're the one always complaining about how stupid it is that you have to gain social status just to get people to listent to your good ideas!
What's especially interesting is when Hanson alleges that, duh, of course he had considered my idea. It's just an obvious variation! And yeah, in a way it kind of is. But judge his attempts at response for yourself -- are those the remarks of someone who has considered the idea and rejected it? Would he constantly respond to misunderstandings of the idea? Make so many misstatements about it? Not notice his true complaints applying to his own idea?
Furthermore, even if he does think the election day correlation is so much more important, why didn't he suggest the further "obvious" variation of simply increasing election day's weighting in the correlation, which would still retain the measure's robustness against noise and manipulation?
His latest response to my damaging criticisms? Silence. A wise, wise choice.
Will they go ahead and belatedly implement my idea before I go ahead myself with it? It will be very, very funny when they do.
Now, if only he could recognize the insights of others.
Back in January, his blog posted Peter McCluskey's idea to use prediction markets to unveil another kind of information: how a presidential candidate impacts prices in financial markets, such as oil futures, government bond yields, etc. And how does he propose to do it? The prediction market would host a bet on a measure of their correlation. Which measure? The (modified) ratio of how much the candidate's contract price (i.e. market's estimate of chances of winning) changes to how much the financial security's price changes ... on election day. ( a so-called "shock response future")
Great idea, I thought -- but wrong measure. Election day by itself is unreliable. After all, more than just the election will influence the financial security's price that day. Plus, the market has already largely incorporated the influence of whoever's expected to win except in very close races. Worse, it's way too easy to manipulate: want to "prove" Democrats make interest rates low? Eat a loss by buying treasuries at an absurd price at a critical time, just like that gentleman who ate a loss on oil just to be the first to buy oil at $100/barrel.
So, I told them exactly that and suggested a better measure: don't just look at election day: measure the correlation all the way up through election season. Find how often e.g. oil's price goes up as a Democrat's chances of winning go up, and look at how closely they track each other, each day or week. That's far more robust against manipulation, and extracts much more relevant information. Yet arguing the point with McCluskey and Hanson was like talking to a wall: they were responding to distortions of my idea that seemed to have only a partial understanding of it. For example, Hanson argued that no, no, no, silly: we need a metric available before the election ... which mine is. No no no, Hanson really meant something completely different from what he actually said.
Well, McCluskey went ahead and launched his inferior futures market on the InTrade site. And, just two days ago, Hal Finney launched a celebration of those futures markets' "success" with a blog post that developed the implications of the prices those contracts traded at. Major posters gave McCluskey a good pat on the back.
(Re-)Enter Silas.
I remarked that I had suggested a better metric on the earlier thread, and asked if the people there would be more interested in a futures market for my idea. A few were, and one major poster reluctantly admitted that I had a better metric and deserved acknowledgement.
A major implication of my criticism, let's not forget, was that too many other forces impact a financial security's price on any given day (including election day) and the market has already incorporated most of the impact of whose expected to win (or, of course, Senate/House elections could impact as well...). This means we should expect the market McCluskey made to be rather useless -- traders will view the correlation on just election day, as effectively random -- a 50/50 chance either way. And what do we see? Yep: "49.9-50.1" -- or an implied 50/50 chance.
As Finney sheepishly avers: "These values are so close to the 50% mark that it appears that the markets do not expect any significant movement in oil prices or interest rates on election day, that can be attributed to developing information about which party will win. As critics have noted, this could be because they don't see much effect of political parties on these values, or else because they expect that the election day results will be a foregone conclusion and there will be no surprises in that regard."
Or, reading between the lines, despite all the kudos we're giving McCluskey, he created a market that provides completely useless information, even though I told him long before how to make it useful.
Hanson tried to save face by replying again, so I had to gently correct his misguided attempt to trivialize my insights. Okay, not so gentle -- but when you're so wrong, and for such wrong reasons, why do you expect a huge amount of respect right back? Especially when you're the one always complaining about how stupid it is that you have to gain social status just to get people to listent to your good ideas!
What's especially interesting is when Hanson alleges that, duh, of course he had considered my idea. It's just an obvious variation! And yeah, in a way it kind of is. But judge his attempts at response for yourself -- are those the remarks of someone who has considered the idea and rejected it? Would he constantly respond to misunderstandings of the idea? Make so many misstatements about it? Not notice his true complaints applying to his own idea?
Furthermore, even if he does think the election day correlation is so much more important, why didn't he suggest the further "obvious" variation of simply increasing election day's weighting in the correlation, which would still retain the measure's robustness against noise and manipulation?
His latest response to my damaging criticisms? Silence. A wise, wise choice.
Will they go ahead and belatedly implement my idea before I go ahead myself with it? It will be very, very funny when they do.
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