Based on my performance the last 5 weeks I should have just went to cash in mid March and done my American Idol Trade - it's turned out to be a big winner. I wanted to update this ahead of tonight's final 3... back in mid March when there were still 11 competitors I outlined in [Mar 13: American Idol Trading: Adam Lambert v Danny Gokey] how a very profitable trade could be put on, with a big payoff in a short amount of time.

There is a service called Intrade in which people can make bets ala the stock market on many things in society - generally it has been used for making wagers on political outcomes

One thing you can bet on is the eventual winner of American Idol and I propose there might be a very easy trade here. First a quick background on this year's season - there are only 4 people who I can see having a reasonable chance of winning the whole thing - Adam Lambert, Danny Goeky, Lil Rounds, and a potential wildcard in Allison Iraheta. With that said, I think the odds are 95% that the winner is either Adam Lambert or Danny Goeky.

So far so good -- both Lambert and Goeky are in the final 3, except the 3rd guy came out of the blue (Kris Allen) and has a decent chance to win based on good and preteen appeal. Now there was a twist this year that made this bet even more low risk...

Now here is the kicker... in previous years sometimes the hands down favorite met a stunning premature ending. An obvious example is Chris Daughtery who has gone on to be a huge mainstream artist but left a few weeks before the season finale. Guess what - that is no longer an issue. In a new twist introduced this week the judges are able to save one contestant in case the audience gets it wrong. So your risk of surprise exit drops substantially.

So let's see what the odds were THEN and what they are now

So let's go back to Intrade - they have a category for American Idol Winner... with Intrade you can buy and hold to the end or as the show continues on, sell in the future before finding out the ultimate conclusion. If you hold to the end you either win or lose - by winning your contract is worth 100... if you lose it turns to 0. So you have risk to carry all the way to the end - a more conservative way to play is to buy early favorites and then hope the contract value increases as other contestants are eliminated and the pool gets smaller.

As we look today (when I write this) Lambert has a bid of 31.5 & ask of 32.4; Gokey has a bid of 25.2 & ask of 27.7. Effectively you can do a pair trade and buy both guys for 60 bucks. So as I stated above, you can hold both during the competition but sell them maybe 2-4 weeks before the finale if they continue to be leaders and as others drop out - both their contract values should increase to some degree.... unless one of the 2 major leaders on the female side turns into a rock star the a month or two from now.

But the easier bet, if you truly believe one will win is simply hold both contracts until the end. One will turn to 0, one will turn to 100. You paid 60 to buy both their contracts. You win 40 no matter what happens or 67% return on your money in under 3 months. Obviously if neither wins - you lose. But I believe it would be a low probability event from what I've seen so far.

I'm neither long Lambert or Gokey but am seriously considering this proposition. We'll check back in a few months to see how it would of worked out.

So there were really 2 trades I outlined, you pay 60 to buy both Goeky and Lambert's contracts and then could sell today before the final 2 are announced (if you are conservative) or go all the way to see who the winner is if you are a risk taker. I think on talent Lambert would win, but on how America votes Goeky has a good chance.

Here are the current odds

  1. Lambert bid 70.1/ask 71.0
  2. Goeky bid 15.0/ask 18.1
  3. Allen bid 15.1/ask 15.5

So to repeat, you could buy both Lambert and Goeky for 60 in mid March... today you could hit the bid on both and cash out at 85. Thats a 41.7% gain in 2 months and its risk less at this time.
Or as long as you don't believe Kris Allen will win, you can find out tonight (if he is eliminated) or next week if either Lambert or Goeky wins, and you get paid 100. The only way to lose this one is for Allen to win the whole thing - the market believes there is a 85% chance that does not happe... it could, but it's not probable. If he does not win you get 67% return for 2 months work; or you lose all your money if he pulls off the upset.

I'd walk away here and take my guaranteed 41.7% return in 2 months. I only wish I had done this for real or my model portfolio could of done this.

(if you are curious on volume, the Goeky/Lambert contract traded about 8000 volume in the life of the competition with the Allen contract trading 4000, so you could of done this trade even up to $30, $40K without disrupting the market materially)