We determined that an interesting analogy that we can draw in the financial and betting markets is futures, specifically commodity futures and win totals.
When you are putting your hard earned down on a wager at your favorite sportsbook sometimes it is good to step back and assess how that line was put together in the first place.
One of the more interesting analogies that we can draw in the financial and betting markets is those of futures, specifically commodity futures and win totals. Now, a commodity futures contract is the right, or option, to purchase a set amount of a commodity at a certain price on a certain date. The contract trades on the market right up until date that the option closes. As more information becomes available regarding the underlying value of the commodity the value of the contract goes up and down. Most commodities contracts are not exercised, but sold to realize the difference in price as profit (or loss).
The Effect of Information
Dan Aykroyd and Eddie Murphy so eloquently demonstrated a classic example of this in the 1980’s comedy, Trading Places. In that movie, they gave their nemesis a fictional report regarding the possibility of a drought in Florida, which if occurred, would greatly increase the price of the commodity concentrated frozen orange juice. Aykroyd and Murphy gladly sold contracts at a high price to the bad guys who had the false report, and when the true report indicated that the weather would be fine, were able to buy the orange juice contracts back at rock bottom prices. Selling high and buying low, they were able to keep the difference in the value of the commodity contract as profit. In a case where life imitates art, the SEC actually created a real “Eddie Murphy Rule” in the late 2000’s, to make the dissemination of false information with the aim to effect commodities prices illegal.
Another more publicized example of success with commodities futures contracts is the popular airline, Southwest. In early 2007, the plucky airline locked in oil contracts at $51 per barrel through 2009. Later that year, when oil was trading at $90 per barrel, Southwest was able to bring in huge profits as the entire industry raised prices to coincide with the cost of oil – a cost that Southwest was not realizing. In all, the hedged oil contracts were a two billion dollar windfall for the airline and helped it avoid bankruptcy as other airlines were forced to restructure in light of raising labor costs.
The Role of Information in Team Totals
Unlike commodities contracts, if you wager on an NFL win total at a sportsbook, you do not get to sell it at a partial loss if negative information comes to light. The contract itself may change (i.e. the line), say reduce by a half or full game, but the early bettor is stuck in that contract with only a binary result possible, win or lose. A great example of information that comes available when this market is open is the draft, preseason injuries, and suspensions. Tom Brady's four-game suspension is an excellent example of information that an early futures bettor on the New England Patriots would love to have known before making a win total bet.
One must also consider that the public’s perception will gravitate towards the most recent information given to them. In win totals, it will be the previous year’s results. Teams that played well last year will have a positive perception and positive information ‘baked into’ the win total. Likewise, teams that played poorly will have that negative information affecting the win total that Vegas publishes. For this reason, it is hard for a winning team to have a positive ‘surprise’ that would affect a futures line – but it would be easy for them to have a negative surprise, such as an injury to a key player. Likewise, a line on a team with a negative perception can likely only go up when new information comes to light, as only positive information will move the needle at all.
While not based on the profit motive, a sports fan can use a futures bet as an emotional hedge. I’m sure some of you out there have thought about, if not bet against, the home team as a way to get a consolation prize if they lose. This is especially useful in futures win totals when your hometown team is on top of the world. A Seattle Seahawks fan taking under 11 wins is getting paid if their team doesn’t make the playoffs. Think of it as insurance.
How to Use the Information Stream to Create Value
The theme that only readily available information affects a futures contract or line is one that we can use to create value as lines move. If things are rosy when the futures line comes out, it is likely at its highest point and there is inherent value is in wagering the under. When negative information comes out to affect the line, and only negative information will have an effect at this point, the line will move in your favor. If it moves far enough, a middling hedge could become available to the savvy bettor. Likewise, taking the over on bad teams early is the way to go, as the line has nowhere to go but up. As bad teams draft big names early and play their first teams in preseason games to a winning record; the opportunity could present itself to hedge under the new line value. Get a big enough swing with either of these strategies, and you could be the owner of two contracts that cashes at a certain win total.