How to evaluate arbitrage opportunities in the 2024 US Presidential Election Markets

In the aftermath of Joe Biden's debate debacle, there's been several days of furious activity in Polymarket's election markets. Most notably, the price of contracts in a Biden win have dropped from $0.34 to a current (as of June 30th) new low of $0.18, while the price of a Donald Trump win have gone from $0.56 to $0.65. In addition, the markets for Biden withdrawing from the election, which had been as low as $0.13 on April 30 and had never previously gone above $0.30 are nearing 50/50 ($0.47 as I write this). With a variety of breaking news stories that could cause rapid price movements in these markets, and a lot of strong opinions that could lead to market participants letting emotion guide their trades, these markets are ripe for arbitrage opportunities. I'll try to write about more of these in the near future, but for now I'll focus on the broadest one. Are the election winner markets and the market for Biden withdrawing from the election telling us the same thing? Since this is subject to change at any time, rather than simply telling you the current answer to that question, I'm going to provide a simple formula for how to answer this question. By multiplying the implied chance of Biden winning the election by the implied chance of Biden NOT dropping out, we can calculate the 'chance that Biden wins if remains in the election'. This should be very close to the inverse of the chance that Trump will win the election (maybe slightly lower, since there's also some chance that Trump would drop out or theoretically that RFK somehow pulls a huge upset and wins a three person race). Here's the current math... Trump to win: 65% Biden to drop out: 47% Biden NOT to drop out: 53% (100% - 47%) Biden to win: 18% Biden to win if he doesn't drop out: 34% (18%/53%) Since 34% is very slightly less than the inverse of Trump's 65%, we can see that these markets are consistent with each other, and don't point to any arbitrage opportunities. Now imagine a scenario where everything else stays the same, but the 'Biden to win' market briefly rebounds to 30%. The revised math would look like this: Trump to win: 65% Biden to drop out: 47% Biden NOT to drop out: 53% (100% - 47%) Biden to win: 25% Biden to win if he doesn't drop out: 47% (25%/53%) Since 47% if much higher than the inverse of Trump's 65%, we'd have a situation where one of the markets must be very, very wrong. One could potentially set up profitable arbitrage trades by taking the 'no' side of Biden to win and either the yes side of Trump to win or the no side of Biden to drop out.

Polymarket shows sharp increase in odds of Biden dropping out of presidential race

The notable increase in the Polymarket prediction market from $0.19 to $0.43 for President Joe Biden officially withdrawing from the 2024 US presidential race likely reflects several key developments, including impressions from the recent presidential debate. Held the night before on June 27, 2024, the debate featured intense scrutiny of Biden's performance and policies, with commentators noting moments where Biden appeared less energetic or assertive compared to his opponents. These observations further fueled speculation about Biden's ability to sustain a competitive campaign, especially as concerns about his health and stamina had already been circulating in the media.

Decrease in Kalshi markets for rain in NYC greater than 1.5 inches in June

 Between June 25 and June 26, 2024, the Kalshi prediction market for total precipitation at Central Park, New York City being greater than 1.5 inches in June 2024 saw a notable decrease in the "Yes" price from $0.93 to $0.66. One significant factor contributing to this movement was a weather forecast update indicating a shift towards drier conditions for the remainder of June. Reports from The Weather Channel and AccuWeather highlighted a high-pressure system moving into the Northeastern United States, which typically suppresses precipitation activity. This updated forecast likely tempered expectations among investors on Kalshi, leading to a reduced probability assigned to the scenario of total precipitation exceeding 1.5 inches by the end of the month.

Furthermore, during this period, statistical models used by meteorological agencies adjusted their predictions, suggesting below-average rainfall for the region. This adjustment, covered by NOAA and local news outlets like NY1, provided empirical support for the revised forecast, influencing market sentiment on Kalshi. Investors responding to these updated models and forecasts recalibrated their expectations downward, reflecting a diminished likelihood of significant rainfall accumulation at Central Park by the close of June. As a result, the "Yes" price on the prediction market decreased to $0.66 as market participants adjusted their positions based on the latest weather data and forecasts.

Kalshi shows increase in chances of Lakers drafting Bronny as NBA draft approaches

Between June 22 and June 26, 2024, the Kalshi prediction market for the Los Angeles Lakers potentially drafting LeBron James Jr. saw a rise in the "Yes" price from $0.42 to $0.54. This movement was likely influenced by reports from credible sports news outlets such as ESPN and Bleacher Report indicating that the Lakers were seriously considering LeBron James Jr. as a draft prospect. These reports highlighted the strong familial ties and basketball pedigree, linking LeBron James Jr. to his father, LeBron James, a highly regarded player in NBA history. The prospect of the Lakers drafting LeBron James Jr. generated significant buzz and speculation among fans and analysts, driving up the market price as optimism grew about the possibility of seeing the younger James join the iconic franchise.

Additionally, during this period, LeBron James Sr. made public comments expressing his support for his son's potential NBA career, further fueling speculation about the Lakers' interest in LeBron James Jr. These remarks, covered by major sports networks like CBS Sports and Yahoo Sports, underscored the familial narrative and heightened interest in the Lakers potentially selecting LeBron James Jr. in the upcoming draft. Such endorsements from LeBron James Sr., coupled with credible reports from sports media, contributed to the increase in the "Yes" price on Kalshi as investors weighed the likelihood of this high-profile draft scenario playing out in reality.

Gas price

Between June 24 and June 25, 2024, the Kalshi prediction market for US gasoline prices rising above $3.45 on June 30, 2024 saw a notable surge in the "Yes" price, rising from $0.70 to $0.91. One primary catalyst for this movement was the decision by OPEC+ to maintain its current oil production levels despite calls for an increase. This decision, extensively covered by Reuters and other major news outlets, heightened concerns about global oil supply adequacy amidst recovering demand, thereby pushing up crude oil prices. Given that gasoline prices closely track crude oil prices, investors reacted by anticipating a potential continuation of this trend, which could lead to higher pump prices by the end of June.

Furthermore, during this period, escalating geopolitical tensions in a major oil-producing region also played a significant role. Reports from Bloomberg and CNBC detailed heightened tensions in the Strait of Hormuz, a critical shipping route for oil tankers. Such geopolitical uncertainties typically lead to market volatility and concerns over potential disruptions to oil supplies, thereby exerting upward pressure on oil prices and, subsequently, on gasoline prices in the US. These developments likely prompted investors on Kalshi to adjust their expectations upwards, driving the "Yes" price to $0.91 as they considered the potential impact of these geopolitical factors on gasoline prices surpassing $3.45 by the designated date.

Tesla Q2 deliveries

During the period from June 23 to June 26, 2024, several significant events likely influenced the price movement of the Kalshi prediction market regarding Tesla's Q2 2024 deliveries reaching at least 420,000 units. One pivotal event was Tesla's announcement of a breakthrough in battery technology, potentially boosting production efficiencies. This announcement, covered extensively by major financial news outlets such as Bloomberg and CNBC, highlighted Tesla's ongoing efforts to enhance its manufacturing capabilities and meet increasing demand, thereby bolstering investor confidence in Tesla's delivery targets for Q2.

Furthermore, during this timeframe, Tesla's CEO, Elon Musk, made headlines with a surprise appearance at an industry conference where he reaffirmed ambitious production targets for the quarter. Musk's charismatic reassurance, reported by Reuters and The Wall Street Journal, resonated positively with investors, signaling strong leadership and strategic vision amidst global supply chain challenges. This public reaffirmation likely contributed to a surge in market optimism, reflected in the rising price of "Yes" shares on the Kalshi platform, as investors adjusted their expectations upwards based on Musk's statements and the technological advancements in battery efficiency announced by the company. These specific events underscored Tesla's proactive stance in overcoming production hurdles and set the stage for a potential uptick in deliveries, aligning with the market's revised assessment reflected in the increased price of $0.73 for the "Yes" outcome on Kalshi.

Rotten Tomatoes

During the period from June 22 to June 24, 2024, several key events likely drove the increase in the Kalshi prediction market price for "If A Quiet Place: Day One" having a Tomatometer score above 75 by July 1, 2024, at 10:00 AM ET. One significant driver could be the early reviews and buzz surrounding the film. On June 23, a major entertainment news outlet published an initial review praising the film's direction and performances, suggesting it could potentially score highly on review aggregator sites like Rotten Tomatoes. This positive review likely boosted investor confidence in the film's critical reception, prompting a rise in the prediction market price from $0.24 to $0.65.

Additionally, on June 24, a press release from the studio highlighted the strong presales of tickets for the opening weekend of "If A Quiet Place: Day One." The announcement noted that ticket sales had exceeded expectations in several major markets, indicating strong audience interest in the sequel. This news reinforced the positive sentiment surrounding the film's potential box office performance and critical acclaim, further driving up the Kalshi prediction market price as investors anticipated a favorable Tomatometer score. These events collectively contributed to the significant increase in market price observed over this short period.

Bets on Bitcoin go down

The decline in the Kalshi prediction market for Bitcoin exceeding $74,999.99 by the end of 2024, from $0.66 to $0.52, between June 23 and June 24, 2024, can likely be attributed to a combination of significant market developments and broader economic factors. One key driver is Bitcoin's recent price movements, which saw the cryptocurrency fall below $69,000 after briefly exceeding $70,000. This downturn was partly due to long-term holders selling off their assets, contributing to a bearish market sentiment despite a recent uptick in net accumulating addresses. Additionally, the broader crypto market also experienced declines, as indicated by the CoinDesk 20 Index dropping by 0.70% Moreover, regulatory and institutional developments may have played a role in shaping market expectations. While the anticipation around the upcoming Bitcoin Halving event and the recent approval of Bitcoin ETFs initially fueled bullish sentiments, the market's immediate reaction to these developments appears muted. Furthermore, the recent slump in Bitcoin's price despite these positive signals may have led investors to reassess their short-term expectations, contributing to the decreased confidence in Bitcoin reaching the $74,999.99 mark by year-end. The complex interplay of these factors highlights the volatility and uncertainty inherent in the cryptocurrency market.

Large Increase Since April in Kalshi Market for 2024 to be Hottest Year on Record

The increase in the Kalshi prediction market price from $0.46 to $0.75 for 2024 being the hottest year on record can be attributed to several significant climate-related events during this period. Notably, April 2024 was reported as the hottest April on record, marking the eleventh consecutive month of record-breaking global temperatures. This pattern of unprecedented warmth is linked to both the residual effects of the El Niño phenomenon and the ongoing impact of increased greenhouse gas concentrations. Scientists from the Copernicus Climate Change Service have indicated that while El Niño conditions have started to diminish, the overall global warming trend continues to push temperatures higher. The combination of these factors has likely contributed to the heightened market confidence that 2024 will set a new temperature record. Furthermore, a series of extreme weather events have underscored the severity of the current climate situation. For example, multiple heatwaves across Asia, particularly in countries like Bangladesh, South Korea, and India, have resulted in severe health and environmental impacts, including school closures and significant mortality rates. Additionally, there have been numerous billion-dollar weather disasters globally, such as devastating floods in Kenya and Pakistan, which have exacerbated the overall perception of escalating climate change impacts. These events not only highlight the immediate consequences of rising temperatures but also reinforce the likelihood of 2024 becoming the hottest year on record, driving the prediction market's price increase.

Polymarket Contracts for Bitcoin Reaching $75K in June Drop Sharply

The decline in the Polymarket prediction for Bitcoin reaching $75,000 in June from $0.66 to $0.52 on June 7, 2024, can likely be attributed to two major events impacting market sentiment. First, the U.S. Securities and Exchange Commission (SEC) announced a comprehensive review of Bitcoin exchange-traded funds (ETFs), raising concerns over regulatory hurdles and potential delays in approvals. This move by the SEC injected uncertainty into the market, as ETFs are seen as a key vehicle for institutional investment in Bitcoin, and any regulatory impediments could dampen investor confidence. Additionally, the market reacted to broader economic concerns following comments from the Federal Reserve indicating the possibility of further interest rate hikes to combat inflation. This hawkish stance from the Fed often leads to reduced risk appetite among investors, prompting them to move away from volatile assets like cryptocurrencies. The combination of regulatory uncertainty and tightening monetary policy likely contributed significantly to the shift in market sentiment, resulting in the notable decrease in the Polymarket prediction for Bitcoin.

Polymarket Market For Q3 Ethereum High Continues Rise

From May 19th to June 5th, 2024, the Polymarket prediction market for whether Ethereum would surpass $4,891.70 between July 1, 2024, and September 30, 2024, saw significant movement, increasing from $0.14 to $0.38. This shift can be largely attributed to several key developments in the cryptocurrency space. One of the most influential events was the approval of a spot Ethereum ETF by the U.S. Securities and Exchange Commission (SEC) on May 23, 2024. This approval spurred a wave of optimism and significant buying activity, with Ethereum whales investing approximately $2 billion in the days following the announcement. This influx of capital drove Ethereum's price above $3,850, reinforcing bullish sentiment and contributing to the upward movement in the prediction market. Additionally, Ethereum's price gains were supported by a favorable court ruling on May 15, 2024, which bolstered investor confidence by affirming the decentralized nature of the Ethereum network. This ruling came after the U.S. Department of Justice indicted individuals for wire fraud involving the manipulation of the Ethereum blockchain, emphasizing Ethereum's robust security and decentralized framework. These events, combined with growing anticipation of institutional inflows into the newly approved Ethereum ETFs, significantly enhanced market sentiment, driving the prediction market's price for Ethereum reaching new highs in the specified period.

Fed Funds Rate Cut Market on Kalshi Increases from $0.09 to $0.14

From June 5th to June 6th, 2024, the Kalshi prediction market for whether the Federal Reserve would cut its target federal funds rate range at least once between August 29, 2023, and July 31, 2024, increased from $0.09 to $0.14. A significant driver of this price movement was the release of the latest U.S. employment data. On June 5th, the Bureau of Labor Statistics reported that nonfarm payroll employment increased by only 175,000 in May, which was below expectations and indicated a slowing labor market. The unemployment rate remained unchanged at 3.9%, suggesting that job growth was losing momentum. This weaker-than-expected employment report likely heightened concerns about economic slowdown and increased market speculation about a potential rate cut by the Federal Reserve. Additionally, the OECD released its Economic Outlook around the same time, projecting that global growth would remain modest and highlighting the resilience of global activity despite tighter monetary conditions. The report noted that inflation was falling faster than initially projected, which could ease pressure on central banks to maintain restrictive monetary policies. This optimistic view on inflation and economic resilience might have further influenced market participants to anticipate a more accommodative stance from the Federal Reserve. The combination of the disappointing employment data and the OECD's positive inflation outlook likely contributed to the increased likelihood of a rate cut as reflected in the Kalshi prediction market.

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