Super Bowl Slippage

Malt Liquidity 30

Since today is Super Bowl Sunday, here is a fun way of looking at a principle behind options outside of the stock market.

Think about what happens to an option as it approaches the money (a 50/50 whether it will expire in the money or not). The gamma of the option goes to infinity as the time to expiry goes to zero, as the tick right before settlement could be the tick that pushes the option ITM or OTM.

A money line bet can work the same way. “At the money” is the over/under, the spread to cover, or any other binary bet. Ideally, the bookie doesn’t want to take any risk on the event - the “spread” they charge is the vig, which is why an even bet pays -105 instead of 1:1. However, this is in an ideal world, and even in highly liquid bets - like the Super Bowl line - you aren’t going to ever be guaranteed an equally timed even amount of money flowing in on both sides. Thus the line shifts towards which side is being bet on more as a “dynamic hedge” of sorts to disincentivize the continued flow of people betting on one team rather than the other. The only difference is, unlike an order book, you can’t see the flow of bets unless you are the bookie itself.

But nowadays, there are live odds as well, which are far more interesting, because the flow in, say, a football game can only exist between plays. The live money line is ideally a 50/50 line that expires when the ball is snapped, which is within 40 seconds. The real time shifting of the line pre-snap is the same as gamma sensitivity of an ATM option right at expiry! So if a ton of flow all of a sudden comes in on the Chiefs after Mahomes get sacked on 3rd down, the live money line has to shift extremely rapidly to adjust. Thus, you might get better odds than the “true 50/50” as the bookie has had to impact the line based on the incoming bets. Sound familiar? It should, because that’s a fundamental movement of options.

This is the beautiful part about the sensitivity of moneyness — much like the ideal gas law allows us to practically deduce things, but the ideal gas can’t exist itself. You can see this in sports books, in crowded Vegas buffet lines (if those ever open again), in traffic, wherever some actualization of the concept of “liquidity” itself can exist.

TLDR:

Also, yearly reminder that Terrell Owens is a third ballot Hall of Famer, and that I will be rooting for Romo, not Brady or Mahomes.