Financial betting is similar to Oddsmonkey on sports – except that you bet on a market outcome, instead of a match.
As with sports bets, with financial bets there is a:
• stake or wager – how much you are willing to bet
• payout – the amount you will receive if your bet wins
• return or odds – the ratio between the payout and the stake
• outcome – the “prediction” you are making
So, for example, you could make at bet as follows:
• wager – $10
• payout – $20
• return – 100%
• outcome – the FTSE (London Stock Exchange Index) to rise between 13:00 and 14:00 today
Pretty easy, huh?
So why bet on the financial markets?
• Because it is easy
• Because it less risky than trading (you can bet with as little as $1)
• Because it exciting
• Because you can make money
That last point is important. You *can* make money. But you *can* also lose money, of course.
In order to be profitable over the long-term, you need to find low-cost, mis-priced bets. What do we mean by that?
Financial betting services are businesses. And like any business, they have expenses to cover and investors to please, and so they try to make money. And they make money by effectively charging “fees” on their bets.
Except that they actually do not charge fees (such as $5 a bet) or commissions (such as 2% of the winnings), instead they use a spread or overround (two different ways of looking at the same concept, so we’ll just refer to it as a spread). This spread means that if the fair value of a bet is $x, they sell it at a price of $x + y, where y is their spread. On average and over time, their betting profits should be equal to the spread.
This is why it is critical to only place bets on those bets that have low spreads – eg “good prices”. If the spread is low enough, then you can be profitable in the long run if you make good predictions. If the spread is quite high, then you basically have no chance, no matter how good your predictions.
The challenge is that betting services don’t make it easy to figure out what their spreads are. So you need to understand how they price bets, and then you can understand the spread, and thus how good the price is. There is usually a very easy way to figure out the spread, and we’ll get to that in a minute. But first it is probably helpful if you understand how betting services determine the “fair value” of the bet, which they then add the spread on top of to give you the final price.
Financial bets are a form of option (in fact, they are also called binary options, because the outcome is “binary – you either win or lose, nothing in between). And there is widely accepted way of determining the fair value of an option – its called the Black-Scholes model. This model is widely used in the financial markets and other industries to determine the fair value of an option.
Although the model is pretty complicated, it can be boiled down to: the price increases as time increases and as asset volatility increases (volatility is a measure of how much the asset prices move per unit time). So if one bet is for a one hour period, and if one is for a one day period, the one day bet price will be higher. And if one bet is on a calm market, and one is on a stormy market, the stormy market bet price will be higher.