What we are trying to do

In 2008, there was a rule change in professional football: Coaches whose team won the opening coin toss could defer receiving the ball until the second half, instead of being forced to take the ball first. There were two ways of thinking on this scenario: most coaches, including the Colts' Tony Dungy, continued to take the ball first. A few coaches, such as the Jaguars' Jack Del Rio, opted to defer to the second half when they won the toss. This meant that when a coach in the Dungy camp played a coach in the Del Rio camp, you could predict fairly accurately who would get the ball first. However, some bettors and NFL prop betting sites had not accounted for the change, so there was a potential for some arbitrage on the bet "Which team will score first?" When the Jaguars played the Colts, a bettor could get much better odds on the Colts scoring first than he/she should have been able to, because the market did not realize that the Colts were certain to start with the ball. The astute bettor had an advantage. Let's call that arbitrage, positive expected value, or odds skewed in your favor.

Another example of the skewed odds: Some sportsbooks will take a 50/50 bet as to whether the total score will be even or odd. Seems fairly innocent, right? Let's look at the numbers. The most common football scoring margins are related to the ways a team can score: 1 pt, 3 pts (Field Goal), 4 points (TD over a field goal), 7 points (TD), 10 points (TD plus field goal), 14 points (2 TDs). If the difference between the scores is odd, the total score will be odd, and vice versa. You can see that in close games, the total is more likely to be odd, and in blowouts, the total is more likely to be even. When the line on the game is more than 12, you can take even on the total and in the long run make a very slight profit.

I don't bet on sports, but those are good examples to use because they have fixed odds with all-or-nothing type returns on investment. The problem with betting is the credit worthiness of the person/company that is backing the bet. It's illegal, and there's a chance that if you win they won't pay up. The point is, there are market inefficiencies in stocks just like in the football betting examples above. You have to find them and exploit them. These inefficiencies are often based on market bias or rule intricacies. The next post will examine a GAAP rule that might create a chance for stock market profits.