Quote:
Originally Posted by the steam
A local bookie set the O/U on gold price to close 2011 at $2085. I have 1 week to bet this. Thoughts?
This has to be adjusted for vig and commissions, but...
Take the under for $2000 and buy $2000 worth of call options on gold futures, or on something that tracks gold, like GLD, which may be more convenient.
For example, 2 GLD 183 Jan '12 calls will cost you about $1980. You break even if the GLD calls expire worthless since you win the bookie bet. You make money if your GLD options finish in the money but not high enough to make you lose the bookie bet. You break even if you barely lose the bookie bet, and you make money if you lose it by a lot.
The blue line below is the P&L from the options alone, and I added the red line, which is the P&L when the bookie bet is added. (this assumes that GLD at 203 will roughly correspond to gold at 2085, which the current ratio of gold to GLD suggests)
(note there is still some risk that needs to be managed with this position, since the bookie bet ends on 12/31/2011 but the options don't expire until 1/21/2012, and the possibility that GLD will fail to track gold well enough)
Last edited by TimM; 09-01-2011 at 12:20 AM.