The Math Of Profitable Sports Betting

 I promise to keep this as simple as possible.  First, let's start with the basics.  What do those odds that you see (like +125 or -140) really mean?  As you probably know, any odds with a "+" sign means you will win more than you risk, and a "-" sign means you'll win less.  Of course, the former is less likely to win.  Let's turn those odds into percentages.

Here's how to change odds into percentages.  For odds with a "+", you take 100 divided by 100 + the number.  So for +150 the percent chance of winning is 100/ (100 + 150).  That comes out to 100/250 which is .4 or 40%.  So +150 odds mean you have a 40% chance of winning. +200 becomes 100/300 which is 33%.

For odds with a "-" it's only slightly different.  Take the odds number divided by 100 + the number.  For example, -150 becomes 150 / (100+150).  That equals 150/250 which is 60%.  This matches up with the +150 we did above.  60% + 40% = 100%.  -200 would be 200/300 which equals 66%.  Again, that matches with the 33% of +300.  

Ok, so now that we have that down, let's discuss what we're actually trying to do to make money.  Just like trading options, or anything else, the goal is to have a true winning percentage that's better than what you're getting from the market.  For instance, you'd love to get +150 (40%) odds on something that you're really +100 (50%) to win.  Doing trades like that over and over again results in guaranteed long-term money.

The whole point of using a service like OddsJam (linked below) is to find the spots where markets are mispriced.  Let's say we find this situation like I did today:

You can see FanDuel has the Over at +220.  But this is way out of line with everyone else.  The others are all around +125 for the over and -165 for the under.  They're basically saying fair value is about 145 (halfway between 125 and 165).  Let's see how we do here. we're getting +220 when fair value is probably around +145, which is 100/245, or 41%.

Now let's find out how profitable this is. Imagine we did this bet 100 times for $100 each time.  We should win 41 of those times, since 41% is fair value. 41 times we win  $220 each time (since we're getting +220),  59 times we lose $100 each time, since that's how much we risked and we lost. 41 * 220 is $9020.  After 100 times, we totaled $9020 in winnings and lost $5900.  Total profit is $3120.  Divide that by 100 (since we played 100 times) and you get $31.20 per bet!  That's a whopping 30% return.  Just an insanely good bet.

To be fair, there aren't too many bets that are quite that good.  But you can routinely get 10-20 percent returns.  It's really an incredible opportunity.  If you're reading this, then I'm sure you're no stranger to risk.  This is certainly worth the risk.

Again, the key to all of this is getting the data on every market for every bet.  It's way too big a job to do yourself, and you'll have to pay for it.  I use OddsJam and I love it.  They give a free trial and offer a 3 month money back guarantee.  I can't see any reason not to try it.  It takes some getting used to, but I can certainly help with that if you want it. Click the link below and get started. You won't regret it if you like to trade.

OddsJam

The Right And Wrong Approach To Making Money Betting Sports

 I've taken a lot of interest in sports betting recently, and if done correctly it feels exactly like trading.  First, let's go over the wrong way to look at it, which is how most people do it.  

I think the biggest hurdle to being successful is being a fan of the sports you want to bet on.  Let's use football as an example.  Most people who watch football every Sunday (and Thursday and Monday) have an opinion on how good each team is.  They have an opinion on what the spread in a game should be (or the over/under, etc.).  Unfortunately, they have a strong belief in that opinion and that's where the trouble comes from.  No matter how big a fan you are, no matter how much football you watch, you will never be better at making an accurate betting line than the sportsbooks.  Let me repeat that.

YOU WILL NEVER BE BETTER AT MAKING A LINE THAN THE SPORTSBOOKS.  As soon as you accept that, you can start winning.  Much in the same way your opinion on how to value AAPL stock doesn't matter compared to the big banks, your opinion on what the line should be doesn't either.

FanDuel is worth 20 billion dollars.  They are investing millions in creating these lines.  Planting yourself on your couch every Sunday does NOT qualify you to compete with them.  They make very accurate lines, and they also price in their profit (or juice, or vig, or whatever).  The advantage in making the correct line is all theirs.

However, that doesn't mean you can't gain an edge.  Unlike the stock exchanges, each sportsbook is a separate entity and they do everything independently.  That allows for some very good opportunities.  As good as the sportsbooks are, they don't always agree.  Imagine if the NYSE was pricing AAPL at $173 and the BATS exchange had it at $172.  You could immediately buy it for 172 on one and sell it at 173 on the other.  Or, just as importantly, if 6 exchanges had it priced at 173 and 1 exchange had it at 171, you could just buy it for 171 and keep it knowing that you have tons of positive expectancy.  It's much more likely that the 6 exchanges are correct and that the 1 exchange screwed it up, so you buy it at the incorrect price and hold it.

The key part of it is getting the data.  There's no way you can monitor the betting lines for every bet on every game on every exchange.  For that data, you'll have to pay.  Fortunately, it's not overly expensive and obviously the hope is that it will make you money.  I have one service that I use and I like it a lot. They give you the data and filter it so that the good opportunities are listed at the top.  I'm putting a link at the bottom.  It's called OddsJam.

I'm not a part of the company, just a satisfied customer.  They do offer a small referral bonus, so if you subscribe to them using my link I'd be willing to teach you how I use it to make money.  They have a free trial, which is how I got started.

That's it for this blog.  Next time I'll go into some of the math of sports betting, and how much you can expect to realistically make.

OddsJam Link: https://oddsjam.com/?ref=mjjiztyk

Vol Study Update

Here is an update of the current performance of the 2 vol study sheets we sent out.
Remember, this is all based off doing only 1 contract per trade, so people with bigger accounts could easily have played bigger and multiplied the profits.  We did 10 stocks per sheet, so this shows the results of only 20 contracts.  Here are the results if you did 1 contract in each name for both of the sheets:

Once again as expected, straddles showed the greatest profit, and $593 on only 20 contracts for 2 weeks is a pretty impressive win.  Surprisingly, the 1 SD actually show a loss.

Now, lets take a look at what the results would be if we were more careful in which names we traded.  Here are the results if we only traded the top 4 predicted stocks in each report.  To do that, we look at each report when it was done, and pick the 4 stocks that historically would have shown the highest profit, and only make those trades. So for the first VolStudy, we use EWZ, IBM, XLE, and XOP.  For the second one we use EWZ, PBR, DO, and GLNG.  Here are the results:

Now those are some serious profits.  Almost $1600 for 8 contracts in the straddles!  In only 2 weeks!
This is real research producing real results.

One point to remember is that each value for the straddles and strangles is based off the bids.  We did not use mid-mkt.  So all of these calculations are based off of how much the bids changed.  Its not perfect, but most of these stocks don't have wide option spreads so its pretty accurate.

Obviously, keep in mind we are not giving advice or making any sort of recommendations on trades for anyone.  We are simply showing our research and tracking its performance.

A study of volatility

**This blog comes with a spreadsheet, but we can't figure out how to upload it to the blog.  Email us at optionsgeeks@gmail.com  and we'll send it (its an excel file).  Also, if anyone can tell us how to upload it, that would be awesome. **

Volatility is finally back.  While most people will tell you that this a time to scale back and be more cautious, we're here to tell you that this is when you should be doing the most trading.  And we have some studies as proof.

We took 10 stocks (or ETFs) whose volatility is elevated.  We then compared three trades.  The at-the-money straddle, a strangle consisting of both the 25 delta call and the 25 delta put (as close to 25 as there is anyway), and a 1 standard deviation strangle.  (Note that due to skew, the strangle calls and puts are not the same distance from the at-the-money strike).  Since there are 30 days to expiration now, we looked at all the dates with 30 days to expiration dating back to January 1st, 2010.  We then checked to see how the current implied percentage moves in today's vols would have fared for each date.  And we put all the results into a spreadsheet.

Go open the spreadsheet, and then continue reading to understand what its doing.

The "Main" tab shows the results for each trade in each stock.  On it you'll see the win percentage for each trade in each name, along with P&L numbers.  All of the P&Ls are based on doing a 1 lot only.  It shows Total P&L (if you did a 1 lot every time), Avg P&L per 1 lot, and your biggest loss.  We made sure not to pick any stocks with earnings within the next 30 days, as elevated vol is to be expected for that.  Also, keep in mind that all of these trades assume you SOLD ON THE BID, which almost never has to be done, so these P&L numbers are actually lower than what they would actually be.  Commissions are NOT factored in.

The individual tabs show you the results for each stock.  In the top left area you see the current markets for the three trades and the strikes for the calls and puts. It then shows the percentage move implied on each side (since the calls and puts are NOT equidistant from the ATM strike). For example, EWZ closed at 41.35.  The 25 delta call strike is 48.  The 25 delta put strike is 37.5. That strangle closed at a BID of 2.10.  So if EWZ goes up, your break even price is 50.1 (48 + 2.1). On the downside your break even is 35.4 (37.5 - 2.1). 50.1 implies a 21.2% move, and 35.4 implies a -14.4% move.  So for the past dates, we checked for up-moves of 21.2% and down-moves of 14.4%. 

Columns M, N, and O show the equivalent straddle values from the past dates using today's implied moves (the equivalent strangle info are in the next columns).

So, in EWZ, on 8/20/14, stock closed at 51.04. For the 25 delta strangle, the current strike is ~1.16 the value of the stock (48 / 41.35), which means the equivalent strike on 8/20/14 is 59.25 (48 / 41.35 * 51.04).  The equivalent put strike is 46.29 ( 37.5 / 41.35 * 51.04). And the equivalent strangle price is 2.59 (2.1 / 41.35 * 51.04).  We then compared that to how the stock actually did.  Lets look:

On 8/20/14 it was 30 days before expiration date 9/19/14. Stock closed on expiration at 47.75. Since our equivalent strangle put strike was 46.29, stock stayed between our strangle strikes and this was a full win of $2.59 (P&L shown in column K).  We then repeated that for each date.

You'll notice that, as expected, overall the 1 standard deviation strangle wins the highest percentage of the time, but also yields the smallest profit. It's the least risky of the three trades.

Analyzing all of the names we tested, it appears as if EWZ and XOP represent the best values.  Since 2010, EWZ has only moved more than today's straddle percentage 5 times out of 56. Today's implied moves would have represented a whopping total profit of $30,936.  ON 1 LOTS!!!  Thats $552 per 1 lot! And that was hitting bids!

There's your study.  Just remember, option sellers take on unlimited risk (theoretically) so don't make any 1 play too big.  Keep it small so a crazy 2008-like move won't kill you.

These are NOT trade recommendations, just some of the research that we do.

Good luck.

Why Most Retail Option Traders Lose

Whether they admit it or not, the truth is that most retail investors lose money trading options.  The professionals will tell them that it's because they're not savvy enough or they don't understand options well enough.  We don't really believe any of that is true.

Yes, maybe the professionals have a deeper understanding of the math behind options pricing, but we don't believe that prevents retail traders from winning.  And these days, the technology available to individuals is absolutely good enough for anyone to win with.  Choices like LiveVol and ThinkorSwim are cheap enough (or free) for anyone to afford, so that is not a valid reason for losing, either.

The truth is much simpler than that.  The real reason most people lose is because they're almost always buying options.  That's it.  That's the whole answer.  And it's not even their fault.  Brokerages won't allow most people to sell options and will almost always tell you that selling options carries a huge amount of risk and should be avoided.  They scare people away from it.  While it's true that selling options is riskier than buying them, we believe that anyone can easily be taught that risk, and that selling spreads can alleviate almost all of that extra risk.

Not believing us yet?  Ok, here's a little bit of research to back up our claim.  We took 11 different high-volume stocks and back-tested 2 years worth of data.  For each day, we looked at the IV30 (taken from LiveVol) and then looked ahead 30 days at the HV30 (also from LiveVol) to see how they compared to each other.  The results will amaze you.

1. AAPL - total of 471 days checked.
       IV30 was higher than HV30 - 62.00%
       HV30 was higher than IV30 - 38.00%

       This means that if you picked any day in the last 471 trading days, there's a 62% chance that the 30 day         implied vol on that day predicted bigger moves than actually happened.  And keep in mind this time               period included AAPL dropping from 700 down to 500!!

2. GOOG - 471 days checked.
    IV30 was higher than HV30 - 82.38%
    HV30 was higher than IV30 - 17.62%

3. PCLN - 471 days.
    IV30 was higher than HV30 - 73.891%
    HV30 was higher than IV30 - 26.11%

4. SPY - 471 days
     IV30 was higher than HV30 - 78.77%
     HV30 was higher than IV30 - 21.23%

5. GLD - 471 days
    IV30 was higher than HV30 - 62.21%
    HV30 was higher than IV30 - 37.79%

6. FB - 326 days
    IV30 was higher than HV30 - 44.65%
    HV30 was higher than IV30 - 55.35%

    This was the only stock in the study that had HV30 at a higher percentage, almost definitely because of         the disaster of an IPO that they had, followed by a huge drop in the stock, and has recently had a huge         rally.  And with all that it still didn't win by much.

7. TSLA - 471 days
    IV30 was higher than HV30 - 58.39%
    HV30 was higher than IV30 - 41.61%

    Amazing.  This stock has had a furious rally, and still IV30 was consistently too high.

8. EEM - 471 days
    IV30 was higher than HV30 - 79.41%
    HV30 was higher than IV30 - 20.59%

9. QQQ - 471 days
    IV30 was higher than HV30 - 77.49%
    HV30 was higher than IV30 - 22.51%

10. IWM - 471 days
      IV30 was higher than HV30 - 88.75%
      HV30 was higher than IV30 - 11.25%

      Yeah, good luck buying options in this thing.

11. GS - 471 days
      IV30 was higher than HV30 - 71.34%
      HV30 was higher than IV30 - 28.66%

There's not really much else to say here.  The results are very clear.

Does this mean that you should just start selling options in everything?  Of course not.  Keep in mind that in the end the only thing that matters is whether you win or lose money, and our study here did NOT measure whether those times that HV30 outperformed IV30 would have caused option sellers to lose more than their gains.  A more extensive study involving looking at the PNL of actually trading options each day would be needed to determine that, but considering how far most of these are away from being 50/50 we think its pretty safe to assume that selling options is the more profitable strategy.

Does this mean we never buy options?  Once again, of course not.  We buy options all the time.  But we only do it when we believe they're under-priced, and we have our own pricing models that we use for that.

Even after looking at this, we still don't want to tell you to just go out and sell a bunch of options, especially in smaller accounts.  But selling out-of-the-money verticals or selling Iron Condors is certainly a good strategy.  The risk is limited to the width of the strikes, and it won't eat up most of your capital.  The real trick is determining when is the right time to do it.

Our newest idea is to put about $50,000 in a separate account (we figure that's a good estimate of the average account size), and trade it the way we would most like a retail investor to trade it.  We'll tweet every trade we make, both opening and closing, and keep a spreadsheet on the PNL.  You can play along if you want, or just observe for a while to see if what we're doing is working.  Given the limited amount of risk this account will be allowed to put on (we won't have portfolio margin), this will be quite different from our current strategies.  We're incredibly excited to see how this goes.

A Basic Example On Gambling, And How It Relates To Options

From what we've seen, the majority of retail traders, and even the tv anchors and guests, all approach option trading from a different point of view than we do.  They mostly do their analysis of which direction they think a stock will go, and then they create an option strategy around that.  While that is a perfectly reasonable strategy, it is something we almost never do.  We approach our trading from a purely gambling perspective and usually have no opinion whatsoever on the direction of the stock.  In fact, a good portion of the trades we make are in stocks that we have no idea what the company even does, and some of them we don't even know the name of the company.

Let's start with a very basic gambling example (no intricate math here), and then we'll relate it to option trading.  Consider a game played with 1 die.  If you roll a 6 then you win $10, if you roll a 1,2,3,4, or 5 then you lose $1.  Sounds like a great game for you, right?  1 out of 6 times you win $10, and 5 times out of 6 you lose $1.  So on average, every 6 rolls you make $5 (your $10 win minus five $1 losses).  You make about 83 cents a roll (on average).  I'd play this game all day every day if I could.
One important thing to note, however, is that on each individual roll you are expected to lose.  A 6 is much less common than a 1,2,3,4, or 5.  But the big win on those occasions where you get your 6 makes up for the more common losses.  That is how we look at trading options (and life, for that matter).

For our option trading, all we are concerned with is getting to buy something for less than it is worth (or sell for more than it is worth).  In our gambling example, anything less than 83 cents is a price we would definitely pay to roll.  Any price over 83 cents and we'll pass and move on to something else.  So for options,  if we see something offered at 25 cents and we think its worth 31 cents then we'll buy them.  And we won't care what the company does, or what some chart says.  All we care about is buying for less than fair value.
Remember, just like before, each buy of out-of-the-money options is one you are probably going to lose to. And also just like before, the profit on the times you win will outweigh your more common losses.  If you are winning every bet you make, that means that you are only betting on the sure things, and you are simply not betting often enough.

Unfortunately, especially for retail traders, while our dice game is very simple to find the fair value of, options are not.

Feel free to leave any questions in the comments section.  We'll try to answer anything you ask.

P.S. One thing that really drives us crazy are all the options "professionals" seen on tv who almost never recommend an option or a spread because it was offered too cheap, or it was bid too high.  Are they not concerned with price?  Does the implied volatility not matter to them at all?  All we ever hear from them is why they think the stock will move in a certain direction, and that is why they made the trade.  They're more like analysts who trade options than professional option traders.

Life cycle of large option trades

A lot of people aren't familiar with the process of how large option trades get done so I thought I'd lay it out for everyone here.
The first step is the order itself.  A customer (could be anything from a hedge fund to a rich individual investor) contacts either his bank or his broker and gives them the order.  If it's a bank they may decide that they like the order and are willing to trade with the customer themselves (a huge conflict of interest in my opinion but it happens all the time).  If they don't want the trade or only want part of it, they then shop it out (if it was a broker getting the order they shop it out as well).  The banks and brokers have a large list of contacts of professional traders.  Usually its a big list of market-makers and banks and trading firms.  They either call or instant message their list of contacts with the order the customer gave them and see if anyone wants to trade against it.  They may have one person wanting the whole thing or a bunch of people wanting small pieces.  When they get enough interest to cover the entire trade then it's time to execute it.

Every trade needs to print on an exchange, so the next step is getting it down to one of the floors.  Each floor has different broker firms who execute orders.  The upstairs broker holding this large trade will then call down to one of the floor brokers and tell them the order and ask them to cross it.  This means that they have both sides of the trade and do not need help from the floor traders.  The floor broker then walks into the option pit in which this stock trades and announces the trade.  The specialist and floor traders then get to look at it and decide if they want to trade it.  If they don't, then the broker crosses it and it gets on the tape.  If they do, then the broker has to find out if the people that were shopped the trade are willing to cut back a little to let the floor traders get some.  The floor traders cannot be bypassed if they want to participate on the trade.  If the upstairs people are willing to cut back, then the floor guys get their piece and the trade gets on the tape.  If they're not willing to cut back, then the upstairs broker will cancel the order on the floor and send it down to a different exchange in hopes of avoiding those floor guys.  Eventually they either find an exchange where the floor guys don't care, or they cut back the least that they can.

One last thing to discuss is if the option trade was tied to stock.  Most of the really big trades are tied to stock.  In this case, the last thing to do is cross the stock.  Once the trade is executed on the option floor, the broker must then call up a different broker to execute the stock portion (i.e. Cheevers or Libucki).  They then print the stock at the agreed upon price, and each person on the trade will get their portion of the stock.

That is the entire life cycle of a large option trade.  I hope it shed some light on the process.

P.S. Just in case anyone was wondering, the professional traders (market-makers and such) that get the phone calls and instant messages about the large trade are NOT allowed to act on it until the trade is announced on a floor.  If someone were to get shown a big trade that was buying a large number of calls, they might be tempted to go out and buy other calls on the board knowing that the big customer is doing that. This is called frontrunning and is against the law.