Academy Award Best Picture Bet - TradeSports

The Bet

With two movies breaking away from the pack and the rest of the films with only small chances of winning at current levels, we can make a safer bet than by just picking one film by playing the odds. ‘Brokeback Mountain’ and ‘Munich’, trading at 40 and 32 respectively, are the clear favourites and although I'm rooting for ‘Brokeback’, we can lower the risk and lock in profits by betting smarter.

The contracts in this market are binary and will only end up at either 100 (where each contract pays $10) or 0. With only one winner and two favorites, we can think of the bet as to a presidential election where the two candidates are trading in the 40's (the level of trading are the approximate odds that the bet will pay off). Since we know one will win, as long as the contracts are trading low enough we can arb the market for a safe profit.

As present levels if Munich wins, the contract pays 6.8 and we lose the premium on Brokeback of 4.0, but lock in the spread. As long as the Buy side of both contracts is trading lower 100 total (absent of transaction costs) the opportunity exists.

Some issues with the trade exist, the most obvious being a surprise victory of one of the other films. The closest contract right now is ‘Good Night and Good Luck’ trading at 10 (a level I’d sell at all day) but that seems very unlikely to win. On a practical level the issue is liquidity, the market has very little depth which may be the reason that the opportunity even exists in the first place.