How to Trade Coin Flip and Make Money
The basic question all traders must answer is when to buy, sell or hold during a given game/market with the always changing context of new and old information. Win Probability is a tool which measures and suggests a sports team’s chance of winning at any given point in a game. BallStreet has taken this idea and created their live exchange which allows users to interact and find a fair market value between buyers and sellers of a specific outcome instead of relying on raw statistics to define a percentage you might see on ESPN. To better understand when it’s profitable to buy or sell an outcome we will look at a basic coin flip to outline a clear motive when making a decision to enter a particular market.
A coin flip is always a 50/50 outcome; heads or tails. If a person bets $50.00 on heads their expected return will be $100 exactly 50% of the time. i.e. Breakeven
BallStreet markets trade based off of win probability ($0 to $100) set by the traders in the market with their buying and selling of shares. A 50% win probability would mean a $50.00 price in the market just like a $75.00 market price would mean a 75% to win according to traders in the market.
When we look at a coin flip in a market context we would simply be looking for a trade that would produce a higher rate of return than the expected probability. We would already know that the expected probability of the coin flip to be 50/50 so we would need a price better than (or less than) 50 to enter the market.
If the market was offering a price to buy heads at $49.00 you would be correct in buying this outcome regardless of the actual flip. By doing so you would be profitable by gaining $1 of value against the expected result. The coin flip is meant to illustrate opportunity in market conditions that present pricing that is outside of your expected probability. Its this type of opportunity that traders will need to take advantage of to profit through the game.
When making decisions you are simply looking for a positive expected value through an inefficiency in the market. When people are buying or selling too much and pushing a price beyond your expected probability. The skill will be developing an awareness to expected probability and executing on it.
Put into a sports market context:
NYM @ NYY - Tied at end of 8th inning
If we keep all things equal for the sake of argument of this post (no major pitching issues, injuries, etc) the home team (NYY) will be around a 54% favorite based on macro home vs away team statistical trends in MLB.
Our expectation would be a market of NYY $54 and NYM $46 based solely on home vs away metrics. So if the Yanks are trading anywhere below (or higher) than $54 before the first pitch of the 9th inning it would be a potential opportunity to buy/sell based on the expected value being different than the market is offering. The same can be said if the Mets are trading higher (or lower) than $46, you might want to consider entering a trade as Mets shares would be either over bought or over sold. Any pricing outside of these “norms” could be considered an irrational price and present the opportunity to find value.
Obviously there are spread, game and team specific details that should be taken into account when pricing but the basic concept remains that when the market is seemingly incorrect based on logic, it represents a great opportunity to take advantage and buy or sell accordingly when the other traders in the market are making mistakes.