I've received a few emails in regards to my last post, telling me that InTrade.com does allow shorting of contracts.
Well, yes and no. Yes, you can benefit from a candidate's failure to get nominated, but you cannot "borrow to sell", which is required to truly short a contract. At InTrade, however, you can purchase the "opposite outcome" of a contract. Let me explain:
First, each InTrade contract pays $10.00 if the event happens, $0.00 if it does not. The traditional way to buy an event contract is to simply purchase it and wait for the event to happen -- if it does you get full value (or you can sell it to somebody else). If I bought 100 shares of "Ron Paul wins GOP Nomination) for 5.5 per share, it would cost me $55 (plus commission) with a potential payout of $1,000 (minus commission)-- a return on investment of 1,718%.
The alternative way to buy a contract on InTrade is to buy and hold for the "opposite outcome", as NewsFutures.com calls it. In this case, I would buy a "negative" contract and hope for that candidate to lose. I'll use Fred Thompson as an example. Thompson is currently trading at 25.0 per share. If I wanted to buy 100 negative shares, it wouldn't cost me $250.00, but $750.00. If Thompson failed to get the nomination, I would be paid $1,000-- a return on investment of 33.33%. If Thompson's stock dropped to 12.5 (50% drop), I could sell it for $875.00-- a return on investment of 16.67%. If it were a true short with a margin account, it would be a 100% return on investment ($250/$125).
Currently, it doesn't make sense to buy the negative outcome of "everyone with a chance except Paul". At current prices, buying 100 negative shares each of Benito, Thompson, Romney, McCain, Huckabee, and Gingrich would cost you $5,050 with a maximum return of $6,000--a max ROI of 18.8%. If you instead bought 600 shares of Paul at 5.5, it would cost you $330 with a max payout of $6,000.
Finally, I got an interesting idea from Rod, an InTrade.com Ron Paul supporter. He bought enough shares of Ron Paul to cover the amount of money he donated to the campaign if he wins. Since he donated $350, he bought 35 shares to cover. For a maxed-out donor ($2,300), it would cost you $126.50 for the shares needed to cover. Talk about putting your money where your mouth is!
