Tuesday, November 22, 2016

Derivative Betting Instruments Work ..... If You're Growing

I remember back in the 1990's I got a "hot tip" in the markets. Apple was going to be bought by Microsoft. This was not the craziest thing I had ever heard, because Apple was not doing so well, and Gates and crew would certainly be interested in it.

Apple was trading at $17 a share, and I had a choice - buy the underlying equity, or look at derivatives. The $25 calls, a few months out, were trading at a buck or two with plenty of liquidity, so I leveraged using those.

Options and futures markets work for many reasons, but the biggest one, is that the markets don't trade 100 million shares a day like the old days, they trade billions. The markets are all growing, and when they have, derivatives grow, as well.

In Vegas, US Fantasy is a new offering
It’s just like betting the horses. Instead of races, there are props. For instance, Prop No. 1 for Sunday’s NFL action was a group of 12 quarterbacks. You could have bet, say, Tom Brady to win, place or show.
There are daily doubles, pick threes, exactas, trifectas and superfectas available. There’s even a chance to win as much as $1 million on a $1 bet for correctly selecting the winner of seven different props.
The scoring systems are quite simple. Only yards and touchdowns count for football while points, ­assists and rebounds are used in basketball.
As with horse racing’s pari-mutuel system, payouts are determined by the total pool of money that’s bet on that particular prop, minus a 10-12 percent takeout (compared to 18-20 percent, if not more, with horses).
Knee-jerk reaction to this derivative of sports betting is that players will always choose to buy the underlying equity (if you think Tom Brady is going to have a great game, bet the Patriots). But I am not sure I lean this way.

Yes this might be a longshot to catch on, but derivative instruments like this do have a chance, because sports betting is growing, and it's bringing in more and more new users. DFS has surged, despite the levelling off of the last year or two. Fantasy players with strong opinions are in the millions. Fantasy geeks might not want to bet the Pats, but they might like the odds on Julian Edelman this week.

Horse racing (even today) tends to add more derivatives to the win place show pools, and when wagering was growing it made perfect sense. Adding more now does not. However, for the growing sports betting markets, I think we'll see a lot more of it. The obvious blue sky is that while horse racing can be bet in 43 states or so, this type of wagering is only offered in one. That is sure to change.

Have a great Tuesday everyone.

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