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Who pays winners at time of expiry?
Who pays winners at time of expiry? Obviously no one wants to buy contracts when they've reached 100, so does Intrade pay people who hold winning contracts?
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Inappropriate?When a trade takes place on the exchange there is always a buyer and a seller. The buyer thinks the contract proposition will happen and the contract will expire at 100, while the seller thinks the contract proposition will not happen and the contract will expire at 0.
So when a contract expires at 100 those who bought the contract will have a winning position, and those that sold the contract will have a losing position. The money lost by the sellers becomes the profit for the buyers (and vice-versa)
Here is a simple example to help explain this better...
One contract is sold for 55.0 ($5.50 in real terms). The buyer stands to lose $5.50 if the contract expires at 0 and will win $4.50 if the contract expires at 100 ($10.00). The seller stands to lose $4.50 if the contract expires at 100 and will win $5.50 if the contract expires at 0.
So if the seller loses then his or her loss of $4.50 becomes the $4.50 profit of the buyer, and vice-versa.
I hope this helps explain things. -
Inappropriate?Sorry, I don't really understand. If the hypothetical contract expires at $10.00, where does the $4.50 actually come from? The seller has cashed out and won't be paying further. Are you saying that if I hold a winning contract, I still have to try to find buyers near $10.00 in order to get paid at all? If not, does Intrade pay me the $10.00?
I’m confused
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Inappropriate?Sorry, I should have explained this better Anthony.
The exchange requires short selling - the selling of contracts without actually having to won them first. If you think the contract proposition will not happen then you sell the contract to trade into a negative position.
As an example, lets use the contract for Obama to become president...
Trader A thinks he will be president and so looks to buy 20 contracts. Trader B thinks Obama won't become president and so sells those 20 contracts to Trader A. Trader A now has a position of +20 and Trader B has a position of -20.
Trader B has sold the contracts even though he does not own them, and they can be baught back at a later time of his choosing or when the contract is expired. By trading into a negative, or "short", position then he has taken the ossposite side of the contract proposition - that Obama will not win the presidency.
There is always a balance between the number of negative positions and the number of short positions. For example...
Trader B may decide to reduce his exposure and buy back 15 contracts. He does this by matching a sell order from Trader C. So now Trader A has +20, Trader B has -5 and Trader C has -15. Both sides are in balance.
This means that when the contract is expired the losses from one side become the profits for the other side. -
Inappropriate?That's making a bit more sense. Now, let's see if I understand the implication. That means that at the very beginning of a contract, the first time it is traded, there must be at least one buyer and one short-seller present, right? It's not Intrade that sets the opening prices or sells the first contracts, then; the opening price is just what the first buyer and short-seller can agree upon. Am I getting it correct, now?
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Inappropriate?Thats absolutely right Anthony. The initial trade on any listed contract requires a buyer and a short-seller. And the price of this initial trade will be set by those traders - not by Intrade.
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