How I Made Some Easy Sheckle on Osama Bin Ladin

I've been asked to explain this SO many times that I've finally decided to write it down.

One by-product of society's current obsession with gambling and auction style commerce are "current event" markets. Just apply the protocols of sports betting to other uncertain topical outcomes like elections, judicial rulings, weather, or military incursions and you've got yourself a near endless supply of wagerable events!

Trading contracts are assigned to event that have binary outcomes due at a predefined expiration date. At expiration the contract is either worth $0 or $100, depending on the outcome. While the event is still uncertain the contract price will fluctuate according to the probability of that event occurring.

Let's take an example:

Bird Flu <> 31Mar06
This contract will be valued at $100 if by 31mar06 a confirmed case of bird flu is reported in the United States. If no cases are reported the contract will expire at $0.

Currently the market for this contract is 12.5 @ 15

This market is implying that there is a 13.75 percent chance that this event will occur (just average the 2 numbers above). The market above also tells you that someone is attempting to "buy" the contract @ 12.5 while someone else is trying to "sell" the contract @ 15. Just as in the stock market or any similar dutch style auction there are always buyers and sellers, and when a buyer and seller agree to a price there is a trade. Remember that in this type of market participants wager WITH EACH OTHER. There are no bookies, oddsmakers, or intermediaries involved here. The exchange makes money by charging a commission each time you roundtrip a contract.

Here's how it breaks out:
You can buy 1 contract @ 15 (there is someone attempting to sell a contract @ 15)If no bird flu occurs you lose $15 (the contract expires @ $0)
If bird flu occurs you win $85 (the contract expires @ $100 so you've won $100 minus the initial price)

You can sell 1 contract @ 12.5. Note that you don't have to previously own a contract in order to "sell" or "go short" it.
If no bird flu occurs you win $12.5
If bird flu occurs you lose $87.5

Make sense?
Now to Osama Bin Ladin...
Osama Bin Ladin <> (assume that today is 20Mar03)
A. 31Jun03: 37 @ 38
B. 31Dec03: 38 @ 40
C. 31Jun04: 39 @ 41
So what's wrong with this market? Remember that if at anytime Osama Bin Ladin is captured all of these contracts will be worth $100. But if he is not captured by each expiration that contract will expire at $0. The trade opportunity here was pretty obvious - sell contract A and buy contract C in equal amounts. Let's say today is 20Mar03 and you are able to sell $1000 worth of contract A and buy $1000 worth of contract C.
You sell $1000 of A @ 37 (risking $630 to win $370 if Osama is not captured)
You buy $1000 of C @ 41 (risking $410 to win $590 if Osama is captured)

As 31Jun03 approaches contract A will slowly leak towards zero if Osama is not captured while contract C will retain most of its value since expiry is still so far in the future.

So here is a snapshot of the market on 31Jun03...

Osama Bin Ladin <> (assume that today is 31Jun03)
A. 31Jun03: 0 @ 0
B. 31Dec03: 25 @ 27
C. 31Jun04: 36 @ 38
So we've made $370 by betting that Osama would not be captured by 31Jun03 (by selling contract A @ 37). And on contract C that we bought @ 41... Well, it's now only worth 36 but we can sell it out @ 36 at a loss of only $50. You can repeat this trade by selling contract B and buying contract C, but it's no longer as attractive because the term structure has correctly "steepened" back out. Originally the term structure was too "flat" assigning too little probability for the same event but with more time until expiry.

Favorite Music of 2005

2005 Favorite 10 Album Releases (in order)

1. Architecture In Helsinki - In Case We Die
Australia : Pop : Bar None

2. Sufjan Stevens - Illinois
USA : Singer/Songwriter : Asthmatic Kitty

3. Andrew Bird - The Mysterious Production of Eggs
USA : Singer/Songwriter : Righteous Babe

4. The Rosebuds - Birds Make Good Neighbors
USA : Pop : Merge

5. M83 - Before the Dawn Heals Us
France : Electronica/Shoegaze : Mute

6. Bloc Party - Silent Alarm
UK : Post-Punk : Atlantic/Wichita/V2

7. Of Montreal - The Sunlandic Twins
USA : Pop : Polyvinyl

8. Mice Parade - Bem Vinda Vontade
UK : Post-Rock : Bubble Core/Fat Cat

9. The Magic Numbers - The Magic Numbers
UK : Pop : Capitol/Heavenly

10. Mew - And the Glass Handed Kites
Denmark : Pop : Sony/BMG

Other much liked albums:
Sigur Ros, The National, Antony & The Johnsons, Fischerspooner, Vitalic, Mountain Goats, Menomena, Bright Eyes

Favorite 3 Concert Performances:
1. The Dears @ Maxwell's - Hoboken, NJ (March)
2. M.I.A. @ Coachella Music Festival - Palm Springs, Ca (May)
3. Arcade Fire @ Coachella Music Festival - Palm Springs, Ca (May)

Favorite Cover: Take Ecstasy with Me - Magnetic Fields covered by !!!

Favorite Remix: It's Not the Worst I've Looked - Two Lone Swordsmen remixed by Lali Puna

Favorite Lyrical Verse: Banking on a Myth - Andrew Bird
"Deals in commodities of the abstract sort
Buys them in bulk but then he sells it short
Talent, genius, love, even signs of affection
He floods the market, there's no price protection"

Favorite Song: Hope There's Someone - Antony and The Johnsons

Notable Icelandic Quotes

19oct05

@ Airport as Kh & MA were about to miss their flight (then not miss, then miss, then not miss...)

"Wanna just go to another country (like Sweden)?"

-M

20oct05

"I have no integrity"

-Anonymous

21oct05

@ Endless line to see Architecture in Helsinki

"Pass me my viking suit!"

-M

"Have there ever been any deaths associated with crowds at this music festival?"

-K

"No, but there were 2 flying monkeys last year."
-Heavycoat #3

22oct05

@ Krua Thai Restaurant

"... Yes, it does look like you go to the gym, you are very fit"

-K

"Yes, I am fat, I recently had a baby"
-Restaurant owner very matter of factly

"No no, FIT not FAT!"

-K

@ Endless line to see Zoot Woman, Clap Your Hands, Ratatat, ...

"We're running out of liquid courage."

-M holding empty Stella bottle

Regarding Icelandic tapwater

"They said it's the purest water you can drink."

-K
"Yeah, they said a lot of things."

-M

@ Kaffibarin ~3am

"You're holding all the cards!"

"You're holding all the cards!"

-Anonymous Icelandic hipster

"Stop saying that, what do I do?"

-K

23oct05

@ Hotel Klopp ~11am

"It's an earring, right?"

-K

24oct05

@ Geysir ~1pm

"I think those girls are British"

-K

"I'm gonna say something in a British accent, see if they turn around"

"A big boo for Man United!"

-M

"How many photo do you need of this thing!"

-Anonymous frustrated young British girl

"Ok, now let's go and get 8 types of Salmon."

-K

25oct05

@ Sirkus ~12:42am

"Our only hope now is to walk up, order a drink between the two of them in English, and pray."

-K

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Top 5 Bands We are Glad to Have Missed

1. Cynic Guru

2. Hjalmar

3. Dr. Disco Shrimp

4. Ske

5. Dr. Mister and Mr. Handsome

Top 5 Bands We Came to See but Couldn't

1. Architecture in Helsinki

2. Clap Your Hands and Say Yeah

3. Zoot Woman

4. Ratatat

5. Jeff Who?

10 Things I Learned in Iceland

1. The shattering of glass is a popular ritual practiced by many angered Icelandic men outside Reykjavik's 3 bars on weekend nights.
2. When accepting dried flavorless aquatic snacks from flea-market merchants who are hairdressers don't get meat from the tough posterior side of the fish.
3. The rules of the kitchen are the same as the the rules of geysirs, if something is steaming it's likely too hot to stick your hand in.
4. If you're hungry on a weekday night eat before midnight unless there is curry flavored ramen on your person.
5. Pizza King is really good pizza!
6. During Iceland's annual woman's day parade it's best as a man not to point to signs and chuckle because the language looks funny.
7. Icelandic beers Viking, Egils, and Thule all secretly come from the exact same pilsner recipe.
8. Elves, trolls and other related creatures are not real.
9. Tonar, one of Iceland's record labels/musik stores/coffee shops enjoys giving strangely informed recommendations of experimental electronica bands that are signed to their record label over complimentary strong coffee. Please note: they are not aware of the band "Boards of Canada."
10. Brennivan (aka Black Death) is a cumin flavored schnapps that costs $70/bottle in town liquor stores but $15 in the airport.

10 Things I Learned In Ethiopia

1. There are 2 primary medications prescribed to help prevent/treat malaria, one can cause permanent psychosis while the other has the not-so-pleasant effect of making one supersensitive to sunlight.
2. Boiled river water from the Simian Mountains has a smoky, mesquite-like flavor. This is much less appetizing than it sounds.
3. Dust is not Ethiopian's primary cash crop.
4. Ras Dashan, Ethiopia's highest peak (4620 meters), is the third highest peak in Africa after Kilimanjaro (5900m) and Mt. Kenya (5200m).
5. Ethiopians eat their traditional "injera" based meal for breakfast, lunch, and dinner*. Yes, this can get repetitive.
6. Mules carry much more weight than donkeys. It's not advisable to stand within one hind leg's distance behind either, especially when agitated.
7. 100 percent of Ethiopian women you meet out in the capital city are prostitutes. Note: I am aware of this not from personal experience but rather from guide and local wisdom.
8. Many children in the countryside have mohawk or protruding "tuft" styled haircuts. People believe that this way if the child dies God will have an easier time picking them up from heaven (see photos).
9. Westerners trek wearing about $500 worth of gear, native Ethiopians trek wearing about $1 worth of gear. See also Nepal, Tibet, ...
10. Khat is an evergreen shrub (Catha edulis) native to tropical East Africa, having dark green opposite leaves that are chewed fresh for their "stimulating" effects.

* Injera is the national food staple, serving as a bread base for every meal. Injera, made of the local wheat-like tef, looks like a thin pancake and tastes a little sour. Vegetables, meat, and various sauces are heaped on top of this pancake and eaten with the right hand using the injera as your "spoon." Injera is served at a communal tray at a Mesob (mushroom-shaped table). See photo HERE