You can’t do it at all; I’ve checked it out in previous cases. You have to be able to cover all possibilities and make a profit. So any combination that covers A and ~A will be more expensive to bet on than any return. No amount of leverage will correct this.
It appears to be possible in theory with the current 2012 Republican Presidential Nominee market. The current bids sum to quite a bit more than 100 so by selling contracts on every outcome you should receive more than 100 and you will never have to pay out more than 100 so you should have a guaranteed profit.
The problem is that the rules for this market say
This market is not linked to allow cross-margining of positions. You will be margined individually on each position, long or short.
which suggests to me that you would be required to put up margin to cover the possibility of losing every bet which is clearly not a possible outcome. That makes it impractical to take advantage of the arbitrage opportunity.
Liquidity might also be an issue in this case—you might not find buyers for all your contracts at the quoted market price.
You’re correct about Intrade’s requirement to front the money to cover your position in all cases until the contract ends or your sell it.
However:
The current bids sum to quite a bit more than 100 so by selling contracts on every outcome you should receive more than 100 and you will never have to pay out more than 100 so you should have a guaranteed profit.
That doesn’t follow. Even if the bids sum to more than a hundred, you have put up the other fraction of $10 for all of those n contracts. With a lot of the bids very low, then in order to cover all possibilities, you have to put up over $9 on many, and so it looks like you will have to front more than $10*(n-1), making it a loss from the beginning.
Yes, I ran the numbers in several cases like this in the ’08 election.
That doesn’t follow. Even if the bids sum to more than a hundred, you have put up the other fraction of $10 for all of those n contracts. With a lot of the bids very low, then in order to cover all possibilities, you have to put up over $9 on many, and so it looks like you will have to front more than $10*(n-1), making it a loss from the beginning.
Aren’t you just restating the margin problem? The reason this strategy is impractical to implement is that you have to put up a lot of money to cover the payout on every contract you sell, even though at most one of them will pay out. The fact that Intrade don’t pay interest on deposits makes that a poor use of your money but you will get most of it back once the nominee is announced. You also get to keep the (100 + n) you got from selling the contracts and only pay out at most 100 leaving you with a profit of n.
Unless I’m misunderstanding something about the way Intrade works you will make a profit, but to do so you will have to tie up a relatively large amount of funds in a non-interest-paying Intrade account for the duration of the bets. With interest rates so low at the moment that’s not such an issue as it might be under more normal interest rates.
You can’t do it at all; I’ve checked it out in previous cases. You have to be able to cover all possibilities and make a profit. So any combination that covers A and ~A will be more expensive to bet on than any return. No amount of leverage will correct this.
It appears to be possible in theory with the current 2012 Republican Presidential Nominee market. The current bids sum to quite a bit more than 100 so by selling contracts on every outcome you should receive more than 100 and you will never have to pay out more than 100 so you should have a guaranteed profit.
The problem is that the rules for this market say
which suggests to me that you would be required to put up margin to cover the possibility of losing every bet which is clearly not a possible outcome. That makes it impractical to take advantage of the arbitrage opportunity.
Liquidity might also be an issue in this case—you might not find buyers for all your contracts at the quoted market price.
You’re correct about Intrade’s requirement to front the money to cover your position in all cases until the contract ends or your sell it.
However:
That doesn’t follow. Even if the bids sum to more than a hundred, you have put up the other fraction of $10 for all of those n contracts. With a lot of the bids very low, then in order to cover all possibilities, you have to put up over $9 on many, and so it looks like you will have to front more than $10*(n-1), making it a loss from the beginning.
Yes, I ran the numbers in several cases like this in the ’08 election.
Aren’t you just restating the margin problem? The reason this strategy is impractical to implement is that you have to put up a lot of money to cover the payout on every contract you sell, even though at most one of them will pay out. The fact that Intrade don’t pay interest on deposits makes that a poor use of your money but you will get most of it back once the nominee is announced. You also get to keep the (100 + n) you got from selling the contracts and only pay out at most 100 leaving you with a profit of n.
Unless I’m misunderstanding something about the way Intrade works you will make a profit, but to do so you will have to tie up a relatively large amount of funds in a non-interest-paying Intrade account for the duration of the bets. With interest rates so low at the moment that’s not such an issue as it might be under more normal interest rates.
Horrible. If you can get access to it—use Betfair. It’s probably blocked in the states though.