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Wednesday, June 19, 2024

234 · The Information Edge: Winning in Prediction Markets w/ Domer

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While many are only hearing about prediction markets for the first time, for near a decade, anonymous trader Domer (@Domahhhh) has been at the frontier of profiting from outcomes of unknown future events.

Political and economic matters are Domer’s specialty, although he doesn’t shy away from the rather abstract events either—for example; trading on the outcome of Britney Spear’s conservatorship and the Suez Canal obstruction!

Now at a point where he’s netting PnL of several hundred thousand dollars a year (across multiple exchanges), much of Domer’s winnings are due to his ability to garner an information edge and rejection of the Efficient Market Hypothesis.

Topics & Timestamps:

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  • 03:50 – Leaving full-time employment: playing poker, trading stocks.
  • 10:35 – Mechanics of prediction markets: timing/pricing of contracts, exchanges.
  • 23:25 – Growth of prediction markets: capacity for larger size.
  • 28:45 – Research process: filtering events, acquiring information.
  • 39:10 – Trading: market price vs. true price, bet sizing, trade structure.

Links & Resources:

Additional Comments – Domer:

Let me just offer one piece more of clarity on the stocks, to not paint too rosey of a picture…

On stocks, I remember specifically also doing a YHOO/BABA trade where the BABA shares that YHOO owned was worth more than the market cap of YHOO – their cash or something like that lol. That was the first big run-up, and then into SAFM the chicken company. I probably did a few more both negative and positive that I am not remembering, but the big negative one I did was a leveraged oil company (very sensitive to oil prices) that initially doubled because it was way too shorted, and then oil tanked and the stock collapsed and the shorts got the last laugh. To be precise, I ran $35k to about $225k at its peak, and then about $150k after about 18 months, at which point I was already transitioning back to betting and kind of left stocks behind. Those are rough approximations.

The other big negative reason I transitioned out of stocks was the tax treatment. As an individual trader in the US trading your own portfolio on a short-term basis, it’s really kind of shit and you have to jump through a lot of silly hoops in order to qualify for better tax treatment. I had to think a lot about timing my sells with the calendar tax year, and I realized that I could have wild swings in income and wild swings in tax brackets. For instance, I paid a lot of taxes in 2013 because my short-term stock gains were large, and then when I made that negative play and realized the losses in 2014, I couldn’t go back in time and pay less in 2013! And carrying forward the losses is cumbersome. So tl;dr the tax treatment of gains/losses was another main reason to head back into the comfortable bosom of prediction markets. I still do trade stocks from time to time, but mostly as an extension of what I do. For instance, I made a decent chunk buying S&P puts as I saw the initial COVID surge in China. That’s a good example of a low-risk, high-reward bet where I should’ve been betting much more! And one of the impetuses to be a little less cautious.

One final thought that I didn’t get a chance to mention is that it’s interesting to me that there is pretty much a prediction market in the stock market right now with this TWTR/Elon deal. I realize trading mergers/acquisitions is a whole subfield, but this one in particular has captured the public’s attention and the stock/options have been moving wildly in reaction to Elon tweets. Which is very analogous to how a prediction market functions! You can imagine someone talking to their friend like: “I was thinking there was a 70% chance this deal gets done, but after that Elon poop emoji tweet to Parag, now I’m thinking we’re down to only 50% chance it gets done. What do you think, did that poop emoji change your thinking at all?”

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