Wednesday, May 14, 2008

Mental Math Champion

Sometimes, being a nerd is good. As a former 7th and 8th grade champ in the high art of doing simple math problems in my head, this skill has carried forward into my daily life as I daydream of ways to make money. As promised, I sketched out a hedge for the upcoming presidential election on assuming percentages from yesterday of Obama 55.2% and McCain 37.8% to win (I assumed you'd have to pay full asking price, but this is an open market and negotiable). All percentage gains include the 5 cents/contract price.

Obama 520/McCain 500* yields $389 either way, or an 8% return

Pro M: Obama 350/McCain 400* yields $18 for Obama, $679 for McCain or in easier terms, a push on Obama and a 19% McCain return

Pro O: 400 Obama/350* McCain yields $431.50 for Obama, -$68.50 for McCain or 12% Obama and a mere 2% loss if McCain wins

*Note: Simply using these same ratios will produce the same percentage return, just different dollar amounts.

There are 2 catches. One, if Hillary wins the nomination, you're f'ed, but could still collect if you're pro M and he wins. Two, if it becomes apparent closer to election time that you're candidate will win, you can still trade your contracts like options and not take a complete loss on those contracts. For example, if McCain makes a huge run, Obama contracts might trade at 5, not 55. You could take the 10 point loss and still collect 150% on your M bets. Pretty interesting I think.

I'll talk more tomorrow about the current market. Nice to see COF take a $5.50 dive in the last week. Volatility rules.

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