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Fantasy Strategy Ideas from the Guru
MLM & Risk-Free Rates
You undoubtedly know that if an offer sounds too good to be true, then it usually is. Well, in this case, it really is true - but the opportunity is only available for Major League Market (MLM) money.
Each of the individual stocks and commodities available in MLM carries a certain degree of risk. But it does appear that you can create a package of investments that has minimal price risk and a certain income stream. You can do that by owning the same number of shares in each of the 30 team stocks. By owning every team, you know exactly what your dividend income will be. Every game has exactly one winner, and since you own both teams in each and every game, you know that one or the other will earn the winner's dividend for that game. So it should be clear that the income stream of this package is guraranteed. (I'll ignore the possibly of rainouts which are never rescheduled - there aren't enough of those to be material.) The remaining issue, then, relates to price risk. How stable is the aggregate value of this 30-team "unit"?
If one had bought a unit on opening day, and reinvested dividends in additional units (ignore the fractional limitations for now), the cumulative return through May 17th would have been 23.5%. If I extrapolate a daily price change of 0.1% for the balance of the season (which is slightly lower than the experienced daily price return of 0.13%), the expected return for the entire season - with dividends reinvested - works out to 110%. If you were to start by buying a unit on May 17th, the projected return for the rest of the season is 70%. Using this projected return, the discounted value on May 17 of a dollar to be received on September 28th - the day after the final regular season game - is approximately 58.7 cents. This "risk-free discount factor" (RFDF) will have useful implications in assessing the relative value of individual player stocks and commodities.
What about the post-season? Team stock dividends increase to $75 per game during the post-season. Frankly, this element introduces some risk to the unit price and return. Although we know how many games will be played during the regular season (ignoring rainouts), we don't know how many post-season games there will be. If each post-season series is swept, there will be only 18 games. If each goes the distance, there will be 31. That difference of 13 games, in dollars, is $975 per unit. While that will certainly be a meaningful factor in the price of the playoff teams at the end of the season, when spread over the value of today's unit, it only represents roughly 3% in potential return uncertainty.
Additionally, it seems that the post-season dividend premium only offers upside from the baseline I've established above. Maybe some or all of the fractional upward drift in the daily unit price reflects an accrual of that post season benefit. For today's analysis, though, if we use just the regular season return components to determine the risk-free rate, at worst we might be modestly lowballing the "true" rate. For now, then, let's assume that any post-season price influence is speculative, and not related to the risk-free rate.
What's the relevance of this risk-free rate? If you can achieve an assured 70% future return by investing in a 30-team unit, then investing in any player or commodity, which presumably carries some risk, can be compared against this standard. I think it is this comparison which helps to explain why some of the "obvious" short-selling opportunities are anything but "slam dunks". Let's pick an example.
The PMARS (Pedro Martinez strikeouts) commodity contract was recently quoted at a price of 41.88, which implies 418 strikeouts upon delisting. Now, I doubt that anyone really believes that Pedro will strikeout 418 - and I have no idea how the price could have been pushed up to this level. Some have suggested that this is a "guaranteed money maker" for short sellers. And they are probably correct. But how much return should a short seller expect? Suppose Pedro matches his 1997 total of 305 K's. The PMARS contract would delist for 30.50, and a short sale today would produce an ultimate gain of 11.38 per contract. On an initial capital outlay of 41.88, that equates to a return of 27%. Now, why would you want to capture an uncertain return of 27% when you could lock in a risk-free return of 70%? For a short sale of PMARS at 41.88 to return 70%, it will need to delist at a value of 12.50, which equates to 125 strikeouts. Probably not a good bet to take. So while I certainly wouldn't recommend buying PMARS at 41.88, I also think it's a very unattractive short at that price. You can get far better returns elsewhere with much less risk.
There are more ways to use this risk-free return concept to assess the relative value of stocks, but I've gone on long enough for now. Maybe I'll pick this up again later. Or maybe I'll just let you do your own thinking, instead.
RotoGuru is produced by Dave Hall (a.k.a. the Guru), an avid fantasy sports player. He is not employed by any of the fantasy sports games discussed within this site, and all opinions expressed are solely his own. Questions or comments are welcome, and should be emailed toGuru<firstname.lastname@example.org>.
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