Contract on America: The Capitol Trader Introduces Himself
“If you’re 20 and you’re not a liberal then you have no heart; if you’re 40 and you’re not a conservative then you have no brain.” – Winston Churchill
If you’re 30 – as I am – and have accepted that a capitalist democracy is the least bad societal structure available, then look no further. If you prefer dealing with the way things are over dealing with the way things ought to be, then you have come to the right place. Regardless of who takes the presidential oath of office in January, this column aims to use politics to address any voter’s economic concerns over the next four years by the most free-market of enterprises: gambling.
Not much has been written about the advent of futures markets on political events, and even less on how to actually go about wagering hard-earned money on such happenings. This is the aim of The Capitol Trader. Each week, I will incorporate current events around the nation into speculation on a particular aspect of the political futures markets. This is not a CNN-style token look at the predictive tendencies of professional political forecasters. This is not a forum for me to tout my political views (for the record, I am a registered independent who has never donated time or money to any political cause, campaign, party or candidate). Instead, this is a sincere attempt to apply the tools and intuition of financial analysis to the political arena. The opinions and conclusions will be based on continuous scrutiny of news already in the public domain. When applicable, my personal finances at stake will be completely disclosed. Think of me as a Sunday morning talk show pundit--but with the crucial difference that unlike McLaughlin, Matthews and Stephanopoulos, I actually put my money where my mouth is.
On to brass tacks. Tradesports.com is by far the most diversified and most liquid market for political futures around, and is also the only place in which I have an active account and a growing portfolio of positions. As such, it will be the most used resource for prices and strategies. Based in Ireland, Tradesports.com is an exchange in which individuals can open real accounts with real money and trade futures contracts on anything from sports to Oscar winners to the financial markets. This column, of course, is only concerned with politics futures.
A large majority of the politics futures contracts trade on a 100-point basis. A quick primer: consider the most basic way to bet on this year’s elections, the Bush reelection contract. As of September 28, the bid/ask spread on this contract was 66.3/67.5. This means that the minimum wager – one contract – to bet on Bush winning reelection would cost $6.75 (buying 10 contracts would cost $67.50, 100 contracts = $675.00, etc.). If Bush wins, the trader gets $10, netting a profit of $3.25. If Bush loses, the trader loses the entire $6.75.
To bet on Bush NOT winning the election, one would sell short the Bush reelection contract at a price of $6.63. The cost of this transaction is calculated by subtracting the bid price from the upper price limit, which in this case means $10-$6.63 = $3.37 for one contract. If Bush wins the election, the trader loses $3.37 per contract. If Bush does NOT win, the trader gets $10, netting a profit of $6.63.
It is worth noting that the holder of the contract does not have to keep his or her position in it until the election is over. For example, if I were to buy 1 Bush reelection contract now at $6.75, and the market price of the contract rose to $7.25 next week, I could sell off the position and walk away with a $0.50 profit if I didn’t ultimately believe that Bush would win reelection. Conversely, had I sold short the contract at $6.63 and the market price rose to $7.13, I could buy back the contract if I believed that Bush was ultimately going to win, thereby cutting my loss to $0.50, rather than taking the full $3.37 hit at the end of Election Day.
The Bush reelection contract is just one of several available on Tradesports.com for the current political cycle. In due time, this column will address some of the other, more complex ways to bet on the elections.
The Iowa Electronic Markets (www.biz.uiowa.edu/iem) are the oldest and most commonly referenced political futures markets around. They are also the only other political markets involving real money. The University of Iowa Tippie College of Business began them as an educational and research experiment in 1988 to determine if a real-money futures market could predict an event with equal or better accuracy than a poll. The IEM have enjoyed a fair amount of success in predicting election outcomes over the years, but there are several major operational drawbacks. First and foremost, it limits the amount one can bet to a range of $5 to $500. Second, gamblers are limited to only betting on who wins the presidency and who will have control of the House and the Senate. And while it uses the same futures contract structure employed by Tradesports.com, the user-unfriendliness of the site’s design is a dead giveaway that the website was created by academics for academics.
The egghead perspective is always nice to hear, but it isn’t likely to help us make money except in the unlikely event that its prices diverge enough from Tradesports.com to yield a profitable opportunity. Otherwise, the IEM will most likely be used as a periodic contrast against movements elsewhere in the markets.
After Tradesports, Presidentialmarket.org has the most diversified contracts on offer, but its biggest downside is that it only allows for fictional money to be wagered. It does, however, offer the grand prize of a round trip ticket to our nation’s capital during inauguration week, along with a few nights’ worth of lodging and invitations to various inaugural events, including a few inaugural balls. While this prize is certainly a suitable substitute for money, the stock market structure of the website makes serious profit-taking extremely difficult for anyone entering the contest this late in the game. Perhaps we’ll give it a try in 2008.
Newsfutures.com, politicalstockexchange.com and the Foresight Exchange (www.ideosphere.com/fx/index.html) are three other sites offering “virgin” versions of gambling on politics. Newsfutures distributes a fictional currency known as “X$” to traders which can be accumulated and used to bid on prizes such as Amazon.com gift certificates, DVDs and the odd Sony Playstation 2 system. I have yet to discern exactly what the prizes are for the other two websites, but there is no way they are as cool as a trip to D.C. during inauguration week. This is the last time I will mention these virgin sites. This is the last time I will mention these sites as they basically strike me as the gambling equivalent of drinking non-alcoholic beer.
In the next column, The Capitol Trader takes aim at his home state of New Jersey.
