Tuesday, January 10, 2006

Options Markets For Tickets

Yesterday I wrote that Tickets Are Like IPOs. Now I find out that tickets are optionable. So, like George Costanza, it seems that my two worlds (College Basketball and Finance) are colliding. Here's an interesting application of markets (and derivatives) in a new setting.

A Chicago company, Sports Reserve, has opened up an options market for tickets to major sporting events. For a fee, you can buy an option (they call them "Fan Forwards") to purchase a ticket to a sporting event (like the Super Bowl) for a particular team. So, if you've got the good sense to be a UConn Huskies fan, you can currently buy two Fan Forwards to the 2006 Final Four at a current price of $245 each. This gives you the right to buy two upper deck seats to the Final Four at their face value of $140 each if UConn makes it. If not, the Fan Forwards expire, and would be worthless.

Based on finance theory, the value of these contracts should be the expected probability of their being "in the money" (i.e. of UConn making to the Final Four) times the expected amount that their market price will exceed face value if the option is in the money.

But, there might be different economics at work here. Two Fan Forwards for the Evil Empire are selling at $399. In an efficient, rational market, this could reflect a higher probability of Duke making it to the dance than UConn, or a higher expected price of the tickets conditional on their actually making it. But, we know that Duke fans aren't entirely rational, so there's probably a mispricing there, and a chance to make money off them (and, if so, someone certainly should).

I think it would be an interesting research project to see how prices in this market react to changes in rankings, announcements of tournament pairings, etc...

If I didn't already have so much on my plate, I might do it myself.

HT: Marginal Revolution

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