Option Trading on Election Outcome

Topics: Futures contract, Commodity Futures Trading Commission, Commodity market Pages: 2 (405 words) Published: May 25, 2013
Options Trading on Election Outcomes
The North American Derivatives Exchange (Nadex), a small trading exchange in Chicago, has recently asked federal regulators for permission to sell options that are tied to the outcome of various 2012 elections in the US – elections that include the US presidency and control of the US Senate and House of Representatives. Options trading on the US elections would work like this: A trader buys an option on Former Massachusetts Gov. Mitt Romney winning the presidency for $45 and if he wins, the trader gets $100 or a profit of $55. On the other hand and if Romney looses the election, the trader would get nothing. Traders would also be able to sell their options before the election. In other words, if a trader buys a Newt Gingrich or Ron Paul option for $10 and it moves to $15, the option could be sold for a profit. However, it should be noted that there is already a limited options trading market for the US elections run by the University of Iowa’s business school and known as the Iowa Electronic Markets where betting is capped at $500. (but anyone can wager). On the other hand, the proposed Nadex election options trading market would be different as there would be a $100 minimum, no maximum and a fee of 90 cents per transaction. In addition, their elections market would be subject to federal regulation. Nevertheless, Nadex still needs to win approval from the Commodity Futures Trading Commission (CFTC) and one of its five commissioners is already opposed to the idea because he thinks its “political poker.” It should be noted that the recent Dodd-Frank financial regulations passed by Congress forbids US futures that are based on war, terrorism or unlawful activity. However, there is nothing in the law that forbids futures based on elections.



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