Always on the lookout on ways to make a buck, I think I found one. I like how Jonathan put the Intrade futures quote board on the frontpage of Chicagoboyz. But the spreads between the bid/ask have always looked huge to me. For example, the “DJIA closes at/above 10750 on Dec 31” future has the bid x ask at 28 x 31. Why not arbitrage it?
Here’s what you do. Buy a contract at $28, and short a contract at $31, or as close to the bid/ask as possible. Say the DJIA closes above 10750 on Dec 31. Your long contract will settle at $100, and your short contract will settle at $100 as well, meaning you need to deliver $100 to the buyer of the contract that you shorted. Your proceeds from the short is $31, so you lose $69 on the trade. But since your long also settled at $100, your gain on the long contract is $72. Hence your overall profit is $3. Since your committed capital is $28 + $31 = $59, so your return is about 5%. Not bad since you have zero economic risk.
Say the DJIA closes below 10750. Your short will settle at $0, for a gain of $31. Your long will settle at $0 for a loss of $28. So you still make the $3 spread, at zero economic risk except tying up capital. Not bad eh?
Update: Jonathan emailed me and raised a good point that with the bid/ask at $28x$31, you can’t sell at $31 and buy at $28. I should clarify and say that you would probably have to put offers out there for a little better than the market rate, for example, offering to sell at $30.75, and bidding $28.25 to buy. That way sellers who want to sell can get a price a little better than the bookmaker is bidding, and buyers who want to buy can get a price a little better than the bookmaker is asking for. So in a sense it would be trying to scalp a few points from the market. But since you have a paired long and short that will for sure settle, the arbitrage is to capture the wide spread in the market prices.