A Thought Exercise into Trading Sports Bets

Photo by Tyler Prahm on Unsplash

My favorite professional basketball team, the Minnesota Timberwolves, were listed at +25000 odds to win the NBA championship this year. This means that a $100 bet would yield $25,000 dollars if the Timberwolves won. The (+x) notation in sports betting means for every $100 wagered, the yield will be $ x . The bet is only paid out if the wagered outcome is achieved (Timberwolves win), and all other scenarios pay out $0.

Fast forward to today (April 11th, 2022) and the Timberwolves have somehow exceeded expectations and are on the cusp of the playoffs. Now, the new odds are +11,000, still abysmal, but almost double the odds at the beginning of the season. Today, a $100 bet on the Timberwolves to win the championship will yield $11,000.

But I’ve become a lot wiser over the course of the basketball season, and I realize that as much as I love the Timberwolves, the +25,000 bet I made probably isn’t going to pay out. So my options are either:

1. Pray to the basketball lords that the Timberwolves win
2. Hope that the sportsbook will offer to cash me out, aka allow me to recoup a portion of my initial wager. But this option is rarely available and only to recoup a portion of the initial wager

But what if there were a 3rd option — what if I sell my bet to to someone else?

Suppose my friend Peter, another Timberwolves fanatic, is extremely confident that the Timberwolves will win the championship this year. He’s kicking himself because he didn’t place a bet before the season and now has a much lower expected payout. He could take out a $100 bet with a sportsbook at the current odds (+11,000), but I have an existing bet (+25,000) that would yield much more money if it wins.

My initial +25,000 bet is worth more than $100 now that the odds have gone up to +11,000.

Me, Seller: Holder of a +25,000 bet that is no longer buyable on the current market, because the Timberwolves have outperformed expectations. Looking to sell my original $100 bet to capture appreciation of bet value and exit the bet.

Peter, Buyer: Wishes he could go back in time and buy the +25,000 bet, and now willing to pay a premium to purchase it now and take on all future risk. Whether or not the bet cashes out is his problem.

And now we have a market! Peter is interested in entering this bet, and I am interested in exiting — at the right price, we can make a deal. In this example, I am looking to make a profit because the odds went up, but really as long as Peter and I can agree on a price, we have a market, regardless of any profit/loss.

What Peter and I have done is taken a contract and traded it before execution on a secondary market.

Sound familiar? This model is very similar to the trading of options contracts. An option contract consists of a strike price, expiration date, and price. An options contract is the right, but not obligation, to buy 100 shares of a stock at the strike price on the expiration date. The price of the options contract is the premium you pay to have the optionality. More background on options here.

Suppose $Apple’s stock price is $150 today. Let’s say I buy the following call options contract:

• Price: $100
• Strike Price: $160
• Expiration Date: 4/11/2023

Now on 4/11/23, I have the right to buy 100 shares of $AAPL @ 160 dollars. There are 2 possible scenarios:

1. Stock price > $160: My options contract gives me the right to buy AAPL @ 160 dollars, which is cheaper than the market price.
2. Stock price < $160: My options expires worthless, my right to buy AAPL shares @ $160 is worthless because anyone can buy AAPL for cheaper in the current market.

But options contracts can be traded before expiration.

This allows sellers to exit (either profit or loss) before the expiration date. Let’s say that $AAPL crushes earnings tomorrow, and now the $AAPL is trading at $200. Now the option contract that I’m holding is even more attractive and has gone up in value. I can either hold the options contract until expiration, OR I can sell it to someone else at the higher price.

We now enter the same scenario as with the Timberwolves above.

Seller: Holder of a options contract that has appreciated significantly. Looking to sell my options contract before option execution, “lock-in” my profits and exit all future risk.

Buyer: Willing to pay for a premium for the option and take on the future risk.

Why can’t we trade sports bets before expiration?

In the Timberwolves example I’ve laid out above, we have a bet that has astronomical odds and a long “expiration” date. I placed the bet in October and have to wait at least 6 months until the season is complete to determine the outcome.

But, I’m imagining a world as robust as options trading, where bettors can trade bets instantly and capture gains/losses before the bet outcome is determined.

There are obviously a lot of technology requirements to getting this idea off the ground— for example, how will I obtain the sports bets that are being sold? Is there an open source API that I can use to integrate with the sports books? These things must be considered when determining if this idea is feasible or not.