Attention, actuarial sports fans

For years, I’ve told people that the most expensive sports ticket in history will be the one that gets them into the next World Series game in Wrigley Field.

Wrigley, sports fans know, is home to the Chicago Cubs, who haven’t played a World Series since Oct. 10, 1945. Chicago is such a sports-hungry town, and the Cubs have a nationwide following, and they play in a little bitty ballpark. Surely the next WS game at Wrigley would bring out the scalpers like no event before or since.

And I always thought somebody could make a buck by buying call options in April on Chicago Cubs World Series tickets.

A call option, as all actuaries know, is the opportunity to buy something at a certain price. Here, you would own the option to buy a World Series ticket at Wrigley at face value. And if the Cubs actually made it to the World Series, those tickets would be gold. To give you an idea, former Vikings football coach Mike Tice sold Super Bowl tickets for $2,000, and the Super Bowl is played every year – in a stadium that holds 70,000 people.

For the first Series game at little bitty Wrigley since before Ernie Banks – that ticket would sell for thousands more than face value – maybe $10,000 more? And if you paid, say, $20 for the option to buy that ticket, that would be a heck of a deal. You could buy the ticket for $150, say, then sell it for $10,000 and walk away with a few thou.

Well, the people running Major League Baseball must have been walking through my dreams, taking notes. They’ve started selling options on playoff tickets. For $10, you get the rights to buy a seat at a first-round game. For $15, you get rights to a second round ticket. For $20, you get to buy a Series ticket. If the team doesn’t get that far, well, you’re out the money.

But that’s OK. I’m a financially sophisticated actuary, so I can figure out how to arbitrage the system – buy the options and make money without risk.

Here’s how: Suppose a Cubs World Series ticket would have a face value of $100 (obstructed view) and would sell for about $3,000 on the black market. You could buy a $20 option on the Cubs making the Series. If they win, you buy the ticket for $100, then sell it on the black market for $3,000. Your profit: $2,880, a cool 2,400% return on equity.

But frankly, the Cubs ain’t going to win this year. Vegas has them at 50:1 underdogs to make the Series. However, you could use Vegas to insulate you from loss, or even guarantee a profit – regardless of whether the Cubs won or lost. You’d bet against the Cubs winning the pennant.

Suppose you bet $50 against the Cubs winning the pennant at 50:1 odds and at the same time buy a $20 option. Two things can happen:

• The Cubs lose. You win $50 from your bet but are out $20 for the option. You are ahead $30. Hey hey! Hey hey! Or ……..
• Cubs win! Cubs win! Sure, you have to pay up $2,500 for being on the short end of a 50:1 bet, but you can spend another $100 for the WS ticket, then turn around and sell it for $3,000. You’ve spent $2,500 + $20 + $100 = $2,620. You are $380 ahead.

Voila! Heads you win, tails you win. The magic of arbitrage.

Of course, I’ve ignored transaction costs (shipping and handling on the tickets and the vig on the bet), but people always do that in the textbooks. And you’d have to understand the market dynamics really well – would those tickets really sell for $3,000? I think so, but you do bear risk. In that sense, Cubs tickets aren’t a free ride.

But Yankees tickets would be. The Yanks are 3:2 favorites to win the pennant. Last year, they sold an obstructed view Series ticket for about $50 and those tickets were getting between $400 and $900 on StubHub. I’m not going to go through the math again, but you’d take the same steps as with the Cubs tickets. Because your loss on a Yankee bet isn’t nearly so large as on the Cub bet, you don’t have to command such a high price for the scalped ticket. Heck, it would be about the easiest buck to make in the world ……..

…….. which is probably why baseball is only selling options on 29 teams. You can’t get an option on the Yankees.

There’s also a limit of two options per household, so the arbitrage suffers from high opportunity costs, but that’s for a different lecture.

Details here (via si.com and walkoffwalk.com). Buy the options here. Find your own bookie.