A Presidential Election Arbitrage?

We have noticed an interesting anomaly with respect to the U.S. Presidential election in the political betting markets over at PredictIt.org. We’ve been trading on this site since the 2004 election. 

The site is pricing the Democratic Party to win the presidential election at $.54 (think of it as a probability), with the Republican Party priced at $.48.   However, PreditIt has Donald Trump priced at $.46 to win the election with President Biden priced at $.42.

Not So “Risk-Free”  

Doesn’t that present an arbitrage opportunity?   Sell the Democratic Party at $.53 and buy Biden at $.43, banking $.10 no matter the final outcome?  But risk-free?   Not so fast. 

It seems the market is pricing a significant chance of Biden dropping out of the race and being replaced by a stronger candidate with a better chance of beating Trump.  That is so far off the conventional wisdom’s radar it will shock many. 

Nevertheless,  the market is pricing Biden with only a 74 probability of being his party’s nominee versus Trump’s 91 percent.  

If you have strong conviction it will be Biden and Trump on the ballot on election day, do the arbitrage.  Even better, sell all the other candidates,  which could bank you more but at a larger potential loss. 

We heard a friend say this weekend,  ‘There is no way in hell it won’t be Biden and Trump on November 5th.”  We asked if he would like to bet on it.  The response was a resounding no.  That would have been easy $.30 plus if he bet us straight up, hedging with a buy of both Biden and Trump to win their party nominations.   

Risk-free arbitrage opportunities are rare and include counter-party risk, which many overlook or don’t consider.