How Blow Outs Create Trading Opportunity
February 5, 2017.
Super Bowl LI.
We were all there, Super Bowl parties breaking up as people started heading home or just getting going with people really starting to drink and enjoy everything besides the game. If it wasn’t the Super Bowl would anyone have actually even kept the game on in the background?
Unless you live in Atlanta or maybe New England, definitely not.
It presents a basic question, how profitable should markets be when one team has a big lead?
The short answer, very!
You have to consider the rate of return “ROI” on every trade so when the prices are so far out because the market has “gapped” and priced in a conclusion (I would consider a market trading north of $90 and under $10 to be gapped and priced in) you have to look at the opportunity the market presents and the potential for mistakes by other traders.
With Super Bowl LI we had a market trading at around ATL $97 - NEP $3
Your focus should always look to trade the market first and the game second. This scenario offers up the possibility of huge upside with each NEP score so you should be looking to play off of any NEP drive that looks promising. A scoring drive has the potential to drive this market and double your money (100% ROI) with a minimal price move to only $6.
Why would the price react with NEP still down by 2 scores in the 2nd half? Well, for those traders who own ATL they can look to take profits at $95+ and have little downside by giving up the $5 ($95 to $100) if ATL wins the game. They can then also take a small amount of their bank and take a flyer on NEP getting great odds at $3-$5 which will both push ATL shares lower and drive NEP shares higher. This creates a great opportunity for NEP to get overbought in the short term after a deep drive or score. In this scenario you have both market and game forces creating a perfect price squeeze set up.
In the actual game NEP ends up scoring a TD but missing the extra point:
ATL 28 ($90)
NEP 9 ($10)
The market started to sell off ATL at $90 and buy NEP through $10 after ATL gave the ball back. While the risk of NEP falling apart was always present the reward is magnified because you have both the market action being strengthened by the game information. In the span of a couple possessions ATL had completely come apart while NEP was driving to eventually tie the game.
ATL 28 ($50)
NEP 28 ($50)
The original NEP entry point of $3-$5 with the big ATL lead created a 13-15X return on the trade if you held the shares to the tie. Even if you sold along the ride up believing NEP wouldn’t complete the biggest comeback in Super Bowl history you would have had made many multiples on your original trade.
The clear takeaway is even if the game is seemingly uncompetitive on the field BallStreet markets always hold the ability to trade the market and be successful in creating P&L opportunities especially when markets prematurely call a winner. Every game is tradable and those games which seem to be over on the field will likely offer the best P&L prospects for those savvy players able to recognize the opportunity.