Futures markets were born out of a desire for businesses to hedge against the uncertainty of various factors affecting their business. As futures and derivatives have become ever more important to business stability, more and more markets have been created. It was only a matter of time before markets were created around the expected outcome of political campaigns.
Intrade.com bills itself as “the future of trading.” The genius of this site is that it is the first company that has successfully created and captured the market for political event outcomes. In effect, members of the market exchange are putting their money where their mouths are in terms of whom they expect to win the presidential election, providing quite a different perspective than any Gallup or CNN/Time Warner poll on whom the likely winner of the campaign will be.
Here is how it works. If you choose to buy one George Bush re-election contract, currently priced at 65.9 “points” and he does win the election, that contract settles at 100 points. Each point costs a dime. In other words, you can buy a contract for $6.59 and, if Bush wins, get back $10.00 for each contract purchased, creating a profit of $3.31 per contract (minus a 4 cent per contract commission). The post-debate market currently puts the odds of a Bush victory at roughly 66%.
John Kerry options are currently priced at 36.0 points and are neutral two hours after the debate. That puts the potential profit at 6.40 per contract, with the market-determined odds of a Kerry victory significantly less than his opponent. That’s a nice return, if you can get it. But there is a reason why greater risks demand greater returns.
We will soon see how accurate a gauge of political reality the market makers utilizing Intrade.com are. I suspect the pundits have new competition: options traders.