McCain Options

So there is a new meme going around the internet saying that McCain is in a lot of trouble. The Democrats are (according to the conventional wisdom) tearing themselves apart, McCain is being treated very favorably, and the topics of debate are flag pins and some geriatric radicals from the 60s – yet his national polling numbers aren’t breaking any new ground.

I trade heavily in the political options markets. I was debating whether or not to change up my McCain positions, which I hadn’t looked at since he won the primary, when I saw a video of Rush Limbaugh doing an impression of McCain as a doddering old fool fuming about his Vice President choices.

It’s pretty funny (“with honor”), in a very mean way. With even Rush not afraid to pull “he’s too old” jokes and play a bully in mind, I thought McCain may be in quite a bit of trouble. So I pull up McCain’s intrade record and see the option on him winning the nomination. It’s trading at 94.9 as I write this. That means that the political market thinks it is 94.9% likely he will be the GOP nominee, and 5.1% likely he will not. That’s a huge margin considering he has already won it.

My immediate reaction was: “Oh. My. God. They are trading options on whether or not McCain lives to see the primary.” Then I saw a special “(not expired until convention – see rules) ” with a disclaimer “Clarification (20 March 2007): In the unlikely event of the untimely death of one of the named individuals all trades will be unwound and feess refunded”, and then thought fees and transaction costs cover all that difference. I then did some quick back of the envelope calculations, and no, they are trading McCain lives options. Sadly we can’t back out how likely it is that McCain makes it from market information.

Let’s assume markets are rational – in so much as that if there appears to be a free money, it is attributable to how risky it is. Free money isn’t left on the table. Free money – great song, doesn’t exist in markets for very long. (There’s a joke about economists finding a $20 bill on the sidewalk and saying “if it was real, someone would have taken it by now.” That’s what I mean.) Political markets may have poor predictive value in times of chaos, but they should be fine in equilibrium. Accounting for all the transaction costs and the opportunity costs – there’s still 20cents of free money there.

What could cause it? McCain could not get the nomination or he could pass away (in which you should have put that money in your checking account). 2 unknowns and only 1 equation -
here (pdf) gives us the expentency of a 72 year old white male to pass away during the next 121 days is ~.9667%. Plugging that into an equation I made gives us a a market estimate that it is 2% likely that McCain will still lose the nomination somehow. Conservatives are that not excited about him, they are leaving leaving free money around hoping that they get another nominee.

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One Response to McCain Options

  1. Ed 2.0 says:

    It’s my understanding that McCain has a 50/50 shot at the nomination: he either gets it or he doesn’t.

    Isn’t it funny that the political party rhetorically in favor of free markets doesn’t know what to do with free money?

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