Saturday, 3 April 2010

Malaysian Grand Prix – Yet again I want to oppose the market

Tomorrow is the third Formula One Grand Prix of the season and the third time that I have had a disagreement with how the market has been formed. Being someone who primarily opts to trade the market as opposed to taking positions this creates a dilemma for me in so far as how far I trust my instincts.

In the first two races, I have equalised my book prior to the race due to the fact that I would not be watching the first rain and in Australia, due to the rain which can render the race a lottery. However, if tomorrow’s race starts in the dry, and that is a big if, I will likely be more inclined to scatter my green in line with the view of the market.

To recap, in the first race, I disagreed with the market making Fernando Alonso favourite over the pole sitter Sebastien Vettel as I thought the new regulations could make the race more of a procession. Whilst Alonso did win the race and prima facie, support my decision to equalise, it should be noted that was only due to a reliability issue. The race did render a procession which supported my initial view.

In Australia, my main disagreement was with the price of Lewis Hamilton, although once the rain started to appear, a factor that was probably built into the price, I equalised but the race continued to throw up some prices that I disagreed with; the most memorable being Fernando Alonso a much shorter price than Felipe Massa despite being stuck behind his team-mate on a dry track.

So, what is wrong with this race?

In a nutshell, everything. Whilst rain does make the race a lottery, it also appears to provide some of the same opportunities as in qualifying whereby a driver’s reputation is more of an influence on the odds than his overall position.

How else can you explain Sebastien Vettel, starting behind his team-mate Mark Webber, being a shorter price? Webber lines up on the front row of the grid alongside Nico Rosberg who appears a far too appealing price at 8. He isn’t exactly in a Hispania car, and by way of comparison, is 8 to Schumacher’s 22, despite Rosberg comfortably outpacing Schumacher all season and qualifying 6 spots higher!

Nico Hulkenberg’s impressive qualifying showing also appears to have counted for little; the German being two spots ahead of team-mate Rubens Barrichello who, whilst no slouch in the wet, is shorter!

All of the above I could understand and probably equalise before the start. However, then we have the McLarens and the Ferraris who could not even out qualify a Lotus and a Virgin car.

After qualifying, I looked to lay these cars at 50 believing that this was more than fair odds.

However, I got it wrong. Majorly. (Although, thanks to other trades I have effectively managed to restore my pre-qualifying position.)

Jenson Button in 17th is available in the 30s, the same price as 4th and 6th placed drivers Adrian Sutil and Robert Kubica who are both good drivers and in competitive cars. Lewis Hamilton is 20th and behind Button but is as short as 20.

Now, Hamilton can be quick in the wet, but shorter than his team-mate whilst being 3 places down the grid is just something that is beyond me. Especially when you consider that if a pit stop is required at any point, priority is given to the higher placed driver which would only delay Lewis further.

The fact is that the market appears to have love for Hamilton and Fernando Alonso, who is the same price as Hamilton. However, the market appears to have no respect for Felipe Massa who is three times as big as Alonso despite being only one place behind him. We saw how Alonso could not pass Massa in the last race and it stands to reason that a good start like last time could see Massa leapfrog Alonso.

There is no question that in the wet, driver skill and the car comes more into play. However, it appears to me that these factors are being grossly overestimated. We saw last week how a quicker car and a better driver can be easily held up by a slower car, be it Alonso, Massa and Kubica or Schumacher and Alguersuari. The current market does not appear to be factoring this into play, although in fairness I should note that McLaren have a straight-line speed advantage that should help them to overtake the midfield in Malaysia.

Also, at the end of the day, I have to bear in my mind that I am effectively advocating backing 1.03 – 1.05 shots and so it definitely isn’t worth carrying red on these cars. However, I’m currently loathed to allocate any green to prices which appear ridiculous although given the price of these cars, I may look to equalise before the race to satisfy my risk averse nature.

As for qualifying itself, the liquidity that had been missing in Australia reappeared which was advantageous. On the downside, I yet again gave too much value away; the best example being levelling up my book before Q3, giving green away on Nico Rosberg and Mark Webber.

My general qualifying strategy is one of franticness, making several trades per minute with one eye on the live timing screens and one eye on the market with my ears trying to follow the TV.

I look to take value and then get rid of it as soon as possible. The downside to that is that I always end up kicking myself for giving away green. The upside is that I tend to have a level book which can produce a consistent profit.

Of course, this does work well at times. I didn’t get saddled with pointless green on the McLarens and Ferraris for instance, but maybe come Q3, I should embrace the value that I find, trade in a more calm and composed manner and only give it back at market value. However, given how I read the race markets, perhaps I should continue as I am!

However, to put this into context, 12 months ago I would never have thought it possible to make the profits I do now on Formula 1. I have identified and worked upon a successful strategy in a market where I do not have any form of natural edge although as with everything, there is always room for development.

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