Contract on America: The Capitol Trader Considers Hedging Two Swing States
Among political junkies, there are two well-known factoids about Ohio and presidential elections that the national media resurrect every four years when they’re looking to fill space. One is that Ohio has produced more presidents (seven) than any other state in the nation; the other is that no Republican president has ever won office without carrying Ohio since the party was founded in 1854. Equally worth mentioning is that only two 20th-century presidents (JFK was the last) have been elected without carrying Ohio. Does Ohio’s status as a presidential breeding ground give it some swame-like insight into what it takes to be a leader? As I have pointed out before, history isn’t everything, but it is hard to dismiss a 150-year streak. So let’s assume for a moment that the GOP’s dependence on the state is going to continue.
Ohio was a toss-up between the two candidates through August. Then the Republican convention happened, and Bush has polled consistently in the lead ever since. The issues that the Buckeye state faces from a campaigning perspective (weak economy, 200,000 jobs lost, unpopular Republican governor, for example) are by now well documented and easily accessible from any news outlet covering the campaign on a national scale. Furthermore, unlike New Jersey, the issues do not constitute any part of the basis of the betting strategy I will explore for Ohio, so I will not spend any more space discussing them. What is of greater interest is how the markets in the Bush-Ohio contract and the Bush reelection contract are playing off of each other.
As of September 29, the contract on Bush’s reelection was trading at a bid/ask of 66.1/66.8 while the contract on Bush to win Ohio was trading at a bid/ask of 72/74. Suppose we buy 10 contracts on Bush to win reelection and sell short Bush to win Ohio. The numbers break down as follows:
Buy Bush reelection: 10*6.68= $66.80
Sell short Bush-Ohio: 10*(10-7.2) = $28.00
Total cost basis: $94.80
Now suppose Bush wins reelection AND wins Ohio. The profit and loss breaks down as follows:
Bush reelection: 100-66.80 = $33.20 Profit
Bush-Ohio: $28.00 Loss
Net: $5.20 Profit
If Bush loses reelection AND loses Ohio, we have the following:
Bush reelection: $66.80 Loss
Bush-Ohio: 100-28.00 = $72.00 Profit
Net: $5.20 Profit
If the GOP’s Ohio streak is broken and Bush wins reelection but loses Ohio, we have a $33.20 profit on the reelection and a $72.00 profit on losing Ohio, resulting in a net profit of $105.20. The only net loss scenario is if Bush loses reelection but wins Ohio, in which case we take a loss of $66.80 on the reelection and a loss of $28.00 on Ohio, resulting in a net loss of $94.80.
All of these projections obviously assume that the contracts would be held through the finish. I’m not convinced that the most likely payoff (i.e., $5.20 per 10 contracts traded) is worth tying up my capital just yet, but I’ll be keeping an eye on this one.
A contract exists in which one can bet on Kerry carrying all of New England. On August 28, I bought 50 of these contracts at a price of 57, costing me $285.00. As of this writing, the Kerry-New England contract was most recently traded at 39, giving me an unrealized loss of (57-39)*50 = $90.00. The principal reason for the price drop is the bump that Bush has been riding in New Hampshire since the GOP convention, though two separate polls conducted last week showed the two candidates to be tied.
A quick aside: I also hold a small short position on the Bush-Maine contract. The price was high enough to make it worth trying to pick up a few extra bucks, but considering that GOP voters in Maine are a lesser threat to Kerry’s bid for the region, I will ignore it for now.
The fact that independent voters are the largest voting bloc in New Hampshire (38 percent vs. 34 percent GOP and 28 percent Democrat), and that the GOP controlled just about everything in the state before the Clinton years, should tell you something. The state’s “Live Free or Die” motto, coupled with its residents’ overarching preference of lower taxes and smaller, non-intrusive government fit nicely with pre-9/11 Republican orthodoxy. While the Democrats made serious inroads into the state’s power chambers during the 1990s, the GOP has since resumed control of the state house, both senate seats and both congressional seats, though by now the state is widely considered up for grabs. Simply put, the state matters enough that John Edwards saw fit to visit Manchester before heading down to New Jersey on Tuesday and Bush will visit the state the day after the first presidential debate for the second time in as many weeks – this, after a brief visit by the Bush twins and Grandma Barb, who were spotted pressing the flesh at UNH earlier this week.
As with any swing state, the issues New Hampshire’s voters consider crucial are by now accessible in several outlets, and David Broder spelled them out nicely in a September 29th piece in the Washington Post, so I won’t repeat them here. The editorial pages of the state’s two largest newspapers, the Concord Monitor and the Manchester Union-Leader, appear to take opposing views on the campaigns. However, the Monitor, despite being highly critical of Bush, doesn’t exactly seem ready to give Kerry a free pass for being Anybody But Bush. The most recent polls show alternate between showing Bush with a very slim lead and showing the two candidates tied.
The bottom line? Yes, the state has me a bit rattled. I bought 30 Bush-NH contracts on September 29 at a price of 58, costing me a total of $174. I could have bought more at that price, but I’d rather save my money for some other items to be covered in the upcoming weeks. I may add to the position depending on how things play out. Either way, I’m not holding both the Bush-NH and Kerry-New England positions through to the finish – one of them will definitely be sold off before all the votes are in.
In the next column, The Capitol Trader examines market reactions to the presidential debates.
