Jun 22, 2020
Negative Risk on PredictIt (Arbitrage Profits from Politics)
Introduction to PredictIt
PredictIt is a legal political platform that allows interested individuals to place wagers on political events ranging from the 2020 Presidential Election to the leader of North Korea on 12/31/2020.
Unlike traditional betting, PredictIt allows the individual to take a “Yes” or “No” position, both quoted between $0.01 to $0.99 per share. Suppose we believe Joe Biden will win the Presidential Election, we can either wager “Yes” on Joe Biden winning or a “No” on Donald Trump/any other candidate options available.
At the termination of the market, the winning options will be paid out $1. However, if the investor would like to exit their position prior to the termination of the market, they can simply sell or cover their position at the current market price.
Below is a sample image with the market structure:
Introduction to Negative Risk
Negative risk is a pure arbitrage strategy that allows an investor to gain profits with zero risk and immediate payoff.
The concept is quite simple. If there are multiple buckets in a given market and the “Yes” prices sum to over $1.08, the market is over bought and provides a free profit for taking on the “No” position.
Here is an example. If a market has three buckets with the prices of each “Yes” at $0.40, hence the “No” at $0.60 (in actuality there could be a disconnect in prices due to bid-ask spreads), an investor would purchase all the “No”s for $1.80 (3 times $0.60). However, since a market can only resolve “Yes” in one bucket, the investor is guaranteed $2 for correctly picking “No” in two out of three markets. Hence, PredictIt will credit the account $0.20 ($2 less $1.80, $0.18 after considering profits). While $0.20 may not seem like a considerable amount, each account is restricted to a $850 limit per bucket per market. Therefore, in this hypothetical an investor could purchase approximately 1,400 shares of each bucket, making the total profit for this example $280 with no risk and immediate credit to the PredictIt account.
Is this Actually Possible?
There are multiple markets on PredictIt that currently contain negative risk available.
Below is a screenshot of one of my personal negative risk profits from a specific market.
As seen above, I have been credited $150.25 in the Democratic VP market regardless of the eventual pick for the VP.
While it says I have “lost” $30.52 currently, this loss can be ignored since this is a paper loss and will affect your cash balance at termination of the market. However, if you are fortunate enough to have a gain with your negative risk, it could actually pay a positive amount at termination. This is due to the fact that PredictIt will credit the account the ‘floor’ and any upside is still available. For my business readers this is similar to a call option, except a premium is paid to you.
To be able to determine if there is negative risk in a given market, a quick but helpful website: pibucks.cash
Furthermore, I have created a dynamic Excel calculator to determine profits based on specific share price and shares bought. If you are interested please leave a comment below with your email and I will send you an email.
