Saturday July 31, 2010
1.54 to 2.40 (Centrebet), implied probability of an ALP win now down to .61:
I conjecture that if Newspoll gives a similar result to the Nielsen poll, then we’ll see the Coalition become the market favorite.
In fact, we’re already at a point where one could insure a “long-odds” position one might have taken on the Coalition not so long ago, say, when they were trading around $4.00 or higher. One could have bought the Coalition at $4.25 at Centrebet as recently as July 25. Today Labor is at $1.54 (with more easing to come, I suspect). The under-round there is substantial: 1/4.25 + 1/1.54 = .88.
In turn, this means you can insure a $4.25 bet on the Coalition — assuming you had the gall or foresight to make it — with a bet on Labor, locking in a minimum profit. A $100 bet on the Coalition at $4.25 gets you a $425 payout ($325 profit) if they win. With Labor at 1.54, you could place $200 on Labor and profit (a) $425 − $100 – $200 = $125 if the Coalition wins, or (b) 1.54*$200 – $300 = $8 if Labor wins. Either way you are not losing money, provided you got on the Coalition at odds as long as those.
These arbitrage scenarios are hardly breath-taking, but might get more lucrative if Labor’s price continues to ease.
And note that the particular situation I’m describing is only available to punters who took the Coalition at long odds. It is quite possible that these people have the courage of their convictions and don’t see any need or value in laying off like this; they’d rather (a) the lottery over $325 profit and a $100 loss versus (b) tieing up an extra $200 for the lottery between $125 profit and $8 profit.
Indeed, if you thought the true probability of a Coalition win was .5, then the expected profit of your $100 bet at 4.25 is $325/2 – $100/2 = $112.5, while the expected profit flowing from buying $200 “insurance” is $125/2 + $8/2 = $66.50.
Then again, if you really thought the Coalition was even-money, then you know something the betting market doesn’t, which at the (current) $2.40 to $1.54 is equivalent to a .39 probability of winning. In this case perhaps the best thing you could do is to get (some more?) on the Coalition.
Last thought on this for now: on Dec 2nd 2009, at the height of the Liberal leadership kerfuffle, the Coalition reached $5.15. If you took that position you have even more headroom for locking in risk-free profits. Congrats.