The presidential election betting has made headlines in a unique way in this 2024 election marathon. So has stock option trading. Some speculate that the two have become interrelated. Here’s some food for thought.
I was struck when Jim Bianco discussed the betting markets in detail during his October 14 conference call. Jim has developed a lot of information on this subject and has an extraordinary grasp of it. He noted that there is evidence of election-related betting from much earlier times and that in olden times newspapers would report the betting odds in NY during election cycles. Jim noted that this was in the era that preceded polling.
Jim also noted that the size of betting markets has grown to billions and now exceeds the total amount spent on the elections by the candidates and their proxies. I found that a fascinating tidbit. More money is wagered on the election outcome than spent on the election itself.
What struck me from Jim’s tutorial is how little the public really understands the mathematical probabilities involved in the betting markets. The math is intricate but understandable once one does the investigation and if the tutor is as knowledgeable as Jim Bianco. The bottom line for me was that one must take betting-market statistics with curiosity but not depend on them to predict election outcomes. Below are some reading list items on this subject.
Let’s segue to the stock options market.
This is the first time that a presidential candidate has owned a majority of shares in a company that is in the business of advancing his social media enterprises. DJT is the symbol for that company. The roller coaster price swings of its stock during the election period have demonstrated huge volatility. The stock has traded below 12 at the low and in the high 70s at peak. Trump owns over half of the shares. Other founders of the company liquidated their shares at the first legal opportunity. That stock story is wild enough on its own. The company is losing money, and its stock price seems to rise and fall on the political outlook for Trump.
A wrinkle is the put and call options on DJT and particularly the options with a stated maturity of November 15. Here is where it really gets to be a wild new chapter in American financial history.
I consulted Eric Hale. He is CEO of Trader Oasis, a specialized options trading firm (https://traderoasis.com/), and an expert in stock options math.
On Sunday October 20, Eric and I looked at the Nov. 15 options. Eric described how the “implied volatility” derived from these huge option premiums was at levels that are truly rare. From that pricing, a skilled practitioner using the math can derive the likely range of price swing probabilities and fluctuations. Eric walked me though how he arrived at a 1-standard-deviation range of 12 low and 72 high on the day when the stock price was about 30. That is really a wild set of numbers.
I asked Eric how he was trading this, and he described strategies that were fascinating.
(Eric added these details in a follow-up email:
Looking at DJT options, it’s notable that the November 15, 2024 expiration has significantly more open interest than the November 8 expiration. This suggests traders are factoring in a few extra days to account for uncertainty in the election results. For the November 15 options, the implied volatility stands at an astonishing 309%. With DJT at $29.58, this translates to a +1σ bullish move to $72.04 or -1σ bearish to $12.22. These price levels align almost perfectly with the 52-week high and low.)
Interestingly, the greatest open interest is at the 12.00 strike put. However, I’d advise caution in interpreting open interest data to determine a bullish or bearish bias. Often, these trades reflect hedging against positions rather than signaling outright directional speculation. Plus, the greatest open interest for calls is at 25. That is more bullish than the puts are bearish.
I have crunched some numbers based on the existing call open interest. There are 149,792 call contracts expiring on November 15. If DJT moved to $72, the net value of these calls would be over $495M.
Then I asked Eric a second question.
Eric, I said, what if someone is trading the option markets on the stock while offsetting or hedging in the betting market? What if they are using cryptocurrencies in the betting market to maintain anonymity? Could that explain the huge sums being wagered in the betting market being coincident with the unprecedented options premium prices? We looked at what data we could find. We even tried to map out possible trading strategies that combined these two forms of betting on the winner or loser of a presidential election.
In the end, my conclusion is that we don’t know. But we do know that this election cycle has added new elements in betting market and option market that had never appeared in previous elections.
Disclosure. I haven’t bet on the election, and I don’t trade options on DJT. I don’t own DJT and haven’t traded it during the election period.
Fascinating time.
Reading List
“DJT is a volatile stock: How options can help manage the risk,” https://finance.yahoo.com/video/djt-volatile-stock-options-help-213744873.html?contentType=VIDEO
“Commentary: The Trump trade is getting wild,” https://finance.yahoo.com/news/commentary-the-trump-trade-is-getting-wild-194822599.html
“What to know about the potential $30 million whale moving betting markets toward Trump,” https://www.businessinsider.com/trump-election-odds-polymarket-whale-kamala-harris-polls-betting-markets-2024-10
“4 Theories Why Trump Is Winning Big in the Betting Markets,” https://nymag.com/intelligencer/article/trump-election-betting-odds-polymarket-theories.html
“Large bets in election prediction market are from overseas, source says,” https://www.reuters.com/world/us/large-bets-election-prediction-market-are-overseas-source-says-2024-10-18/
“Prediction Markets Tell a Different Story From the Polls,” https://www.nytimes.com/2024/10/15/business/dealbook/prediction-markets-trump-harris.html?smid=nytcore-ios-share&referringSource=articleShare
