We had discussed how an options trader can think of himself as The One Man Insurance Company (TOMIC.) Now Warren Buffett has gone out and insured a $1 billion basket ball contest.
The contest
The National Collegiate Athletic Association’s (NCAA’s) tournament consists of 63 games. A contestant who accurately predicts the outcome of each of those games wins $1 billion. The contest is sponsored by Quicken Loans. Warren Buffett’s Berkshire Hathaway has insured the prize money.
The ods
A blind guess has a one in 9.2 quintillion chance of winning.
If the average person submitting a bracket had a 78.6% chance of getting each game right, and the maximum 10 million people sent in their brackets. What is the likely number of correct brackets? One.
Buffett keeps the premium
Aleph Blog:
Every tournament has significant upsets. Someone who has a good understanding of how good the teams are will know how to pick the most likely team to win. It is tough to pick the upsets, and tougher to pick all of the upsets. There is no good model for upsets, or they wouldn’t be upsets.
This is the proverbial “fat pitch” of options trading. The chances of winning are so low but the payoff is so large, that both the option buyer and the option seller can agree on a reasonable premium and get the deal done.
Sources:
Tough for Buffett to Lose this One
Warren Buffett Bets $1B You Won’t Pick Perfect NCAA Tournament Bracket
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