Selling Teenies

I wanted to pass along this fun article  from ESPN magazine.

Bob Hamman runs SCA Promotions which essentially provides insurance to promotional contests throughout the sporting world.  The contests range from basketball shots at halftime of NBA games to hole in one contests at golf tournaments.  Chances are you’ve either seen these contests or participated.  They’re all good fun but what happens when someone actually wins?

SCA was founded in 1986 and is now the world’s biggest insurer.  When a contestant wins the promoter pays out the prize and if they’re insured with SCA collects on the amount of the prize.  In exchange they pay a premium for this protection just like insurance.

Hamman’s background is as an actuary and like Warren Buffet he is one of the top bridge players in the world so he’s well versed in statistics.  The article does a good job explaining the mechanics of how they assign probabilities.

In the trading world we call this selling teenies.  Teenies refer to contracts that are very far out of the money and have a low probability of finishing in the money.  In many cases selling these is similar to selling insurance but is also as close to picking up nickels on a train track as you can get.  Like Hamman’s these best are highly asymmetrical in a negative nature.  While they might provide steady income generally the one or two that do end up losing you money will with a high probability negate any previous returns and quite possibility bankrupt you.  People have gotten rich from selling these things but they don’t normally stay that way for long.

The big difference with Hamman is that his downside is limited by the notational amount of the payout so he knows his risk.  Depending on the odds he will charge between 3-15% of the prize value.  In the 25 plus years of doing this he has collected fees on over $10 billion in prizes and paid out only $170 million in winnings.  So if he collects on average 9% for each bet he’s got $900 million in fee revenue and $730 in profit with an 81% margin.  Not bad business if you can get it.

It’s an interesting business and one that I know many traders try to emulate however it’s more than likely they fail to understand their risks unlike Hamman and SCA.

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