Schaeffer's Trading Floor Blog

TDs, Safeties, and Gisele: Breaking Down the Big-Game Prop Bets

What do Wall Street and Vegas have in common?

by 1/30/2015 8:19 AM
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Super Bowl Sunday is finally upon us! Which means, of course, wings, squares, and prop bets! I'm not really a big wings fan … but I love prop bets and I love square pools (though I've literally never won so much as a quarter in a square pool).

I can't offer much in the way of "edge," since they're generally all drawn randomly. But if you happen to stumble on a squares "auction" -- or someone interested in selling their draw -- NumberFire has a guide to the value of each square. This brings us to prop bets!

It's an interesting year in that the game itself is close to pick-'em as I type. The majority of bets and the majority of the total dollars bet apparently tilt toward the Patriots so far. But most of the money still remains on the table. The expectation is that the Pats will go out as small favorites, at most -2.5.

Why does that matter for many props? Well, it implies a host of them are even-money propositions, such as "team to score first," "first-quarter spread," et. al. This means they don't offer much value-add. If you like the Pats in any of those sort of props, just bet them straight up.

But there are plenty of interesting ones out there. And there's a common theme. The lion's share are priced with the "negative" money at about fair value, because the lion's share of the public wants to make "positive" money bets.

Let me explain. Let's say the probability of Super Bowl prop "X" happening is 33.3%. That implies the fair price of a Super Bowl prop is -200 "no" (bet $200 to win $100) and +200 "yes" (risk $100 to win $200). The majority of players will want the "yes" bet. So books will price Prop X at something like -200 for "no" and +170 "yes." "No" players will have about zero edge, whereas "yes" players have a sizable negative edge.

This reminds me of our out-of-the-money call pricing when I was a market maker and everything was singly listed. The entire world wanted to overwrite calls, so we posted offers at or below fair value, and posted bids as much below fair value as we could.

Long story short, if we want to find value, we're most likely to find it in "negative" plays. So here we go (all lines from 5dimes):

Super Bowl prop bet lines

In Super Bowl history, teams that scored first have won 32 times in 48 tries -- but that's not the best way to analyze this one. It's a small sample, and it's not necessarily comparable to this matchup of even teams.

But as luck would have it, it's close to the right number. There are a few variables to this. No. 1 is who actually scores first. If it's the favorite, the odds are much better. But there's no favorite here, so scratch that. Variable No. 2 is what type of score. According to another prop (more on that next), there's a 60% chance that first score is a touchdown. And finally, variable No. 3 is whether the team that scores first gets the ball to start the second half. That's less than 50%, but if it is in fact that team that didn't get the first-half kick, the odds get even better.

Anyways, I threw this all into the calculator at Advanced Football Analytics and I believe the "fair" price for this prop is about -195. So there's some edge at -165.

Super Bowl prop bet lines

Add it all up, and it's pretty consistent with the over/under of 47.5. But the breakdown is slightly off, in my humble opinion. I show them combining for 5.25 touchdowns, but taking under 5.5 at -115 equals roughly 5.35 touchdowns, so that's the tiniest of edges. But I show them combining for 4.2 field goals, so I do think there's edge in over 3.5 at +115. So yes, positive money plays! It's also offered at o3 -152, so it can go negative anyway.

There's a big caveat, though. That's based a lot on the Seahawks great defense and their propensity to force field goal attempts instead of allowing touchdowns. And that depends a lot on the Mike McCarthys of the world playing conservatively on fourth downs (I don't include the NFC championship game in the numbers, so that field goal number might skew even higher). Bill Belichick is not that sort of play caller, so there's certainly less edge than numbers suggest. I still like it, though.

Super Bowl prop bet lines

In 2014, there was an average of 0.41 non-offensive touchdowns scored per game. Neither the Seahawks nor Patriots is much different from the league average. It sounds like a Poisson problem. As an aside, starting a discussion of Poisson probabilities is a great way to clear everyone out of a Super Bowl party.

Anyways, if I throw those numbers into an online Poisson Calculator, it suggests that the above prop is worth about 195. So there's modest value in the "offense scores all touchdowns" side at -185. The same exercise on safeties says that prop is worth 1170, so again, you're better off saying "no safety" at -950.

But let's face it, no one's doing that. The Super Bowl saw very few safeties until the Giants got one against the Patriots three years ago. And now we've had those three years in a row. Even minus that (utterly meaningless) trend, few are risking $950 to win $100, and few are bothering to risk $95 to win $10. Books know that, and that's why they price it as such.

And finally …

Super Bowl prop bet lines

It seems pretty bearish on Gisele sightings. And I think the national anthem is usually longer … maybe "sharps" have scouted Idina Menzel and found she buzzes through that "Frozen" song in concert.

In other words, I have no clue. What I do know is that books make enough on prop bets that even if the game "middles" on them, they still come out way ahead. Forty-cent spreads on "fun" props and markets tilted toward "order flow" on ones you can value, all multiplied by huge volume, makes it a great payday in Vegas. So most importantly, enjoy the game!

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Update: Hologic, Inc., Varian Medical Systems, Inc., and Pacira Pharmaceuticals, Inc.

Analysts adjusted their ratings on Hologic, Inc. (HOLX), Varian Medical Systems, Inc. (VAR), and Pacira Pharmaceuticals Inc (PCRX)

by 1/29/2015 1:51 PM
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Analysts are weighing in today on medical equipment specialists Hologic, Inc., (NASDAQ:HOLX) and Varian Medical Systems, Inc. (NYSE:VAR), as well as drugmaker Pacira Pharmaceuticals Inc (NASDAQ:PCRX). Here's a quick look at today's brokerage notes on HOLX, VAR, and PCRX.

  • HOLX is up 3.7% to trade at $30.70, and reached a six-year high of $30.74 earlier, following last night's upbeat earnings report. In response, the stock -- up 46.1% year-over-year -- saw its price target raised by no fewer than seven brokerage firms, but slashed by one. Leerink, for example, boosted its price target to $34 from $30 and reiterated its "outperform" rating, while SunTrust Robinson cut its target price by $6 to $18 and underscored a "reduce" rating. Meanwhile, bullish sentiment in Hologic, Inc.'s options pits is peaking, with the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 547.78 resting in the 100th percentile of its annual range. However, in spite of the stock's withstanding technical tenacity, HOLX's current price stands at a discount to its consensus 12-month price target of $28.56, and eight out of 15 covering analysts rate the stock a "hold" or worse, implying that an additional round of price-target hikes and/or upgrades could be on the horizon.

  • VAR is up 10.6% today to perch at $95.66, and notched an all-time high of $95.70 earlier, after the company unveiled a fiscal first-quarter earnings beat last night. As a result, Varian Medical Systems, Inc. received price-target hikes from Brean Capital, Baird, and Jefferies (to $96, $99, and $100, respectively), with all three firms reiterating either "buy" or "outperform" ratings. Surprisingly, puts have been a popular choice in the options pits, with the equity's Schaeffer's put/call open interest ratio (SOIR) of 2.99 arriving in the 96th percentile of its annual range. Simply stated, short-term traders are more put-heavy than usual at the moment. Traders are paying a premium for their front-month bets on the stock, per its Schaeffer's Volatility Index (SVI) of 30%, which is higher than 77% of all similar readings taken over the past year.

  • Shares of PCRX are up 7.8% this afternoon to linger near $109.48, after Goldman Sachs raised its price target by $16 to $126, while reiterating its "buy" rating. On the charts, Pacira Pharmaceuticals Inc has advanced a staggering 65.3% year-over-year, and has outperformed the S&P 500 Index (SPX) by over 16 percentage points during the last month. Surprisingly, bearish sentiment in the options pits is reaching fever pitch, with the security's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.55 sitting just 2 percentage points away from an annual pessimistic peak. The analyst community is still upbeat on PCRX, though, with five out of six covering analysts rating the stock a "strong buy," without a single "sell" rating to be found.

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Yum! Brands, Inc.'s (YUM) Taco Bell Breakfast: Good in Theory, Bad in Reality

Yum! Brands, Inc. (YUM) would have been better off letting Pizza Hut do breakfast

by 1/29/2015 10:13 AM
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Breakfast from Yum! Brands, Inc.'s (NYSE:YUM) Taco Bell sounded like a great idea when it was first announced. The fast-food chain -- creator of fun, popular items such as the Doritos Locos Taco -- seemed like one that could really shake up the breakfast landscape.

Taco Bell has a cult following, and people needed more options for early food outside of McDonald's Corporation (NYSE:MCD) and Tim Hortons Inc. (NYSE:THI). We'll exclude Starbucks Corporation (NASDAQ:SBUX) or Dunkin Brands Group Inc (NASDAQ:DNKN) from this subject, since coffee is their No. 1 focus. Fast-food breakfast seemed like an area with room for another major player. Luckily for all those too lazy to make their own breakfast in the morning (me), Taco Bell made the jump in early 2014.

But, has the Taco Bell breakfast been a success? The initial numbers said "yes," with YUM's CEO praising the company's ability to launch a successful breakfast campaign, which is apparently hard to do. But could this "success" just be from initial curiosity, a premature excitement over new food that will soon fade? My answer is "yes."

Why do I say this? What do I see holding back Taco Bell's breakfast success? Well, the biggest issue Taco Bell may face is that none of the items on its breakfast menu are very good -- at least, not at the locations I've patronized. From my experience, the breakfast burritos taste like plastic, and the Waffle Taco -- while in theory a great idea -- is nowhere close to what it's cracked up to be. I'm no restaurant expert, but I think food joints need good food to keep making money.

As I said, the idea of Taco Bell breakfast is great, but the reality isn't pretty. Over time, I think people will begin to realize the fast-food chain's morning menu isn't what they hoped for.

From where I'm standing, YUM missed an opportunity here. The company is trying to reach millennials, Taco Bell's main demographic. It's trying to appeal to college kids, and other youngsters, who for whatever reason are out late at night, or are up extra early, or maybe simply still awake at 7 a.m., and need something tasty -- and filling, to fight off that hangover. Instead of coming up with all these wild ideas for a breakfast menu at Taco Bell, YUM should have just introduced breakfast through its other popular restaurant brand: Pizza Hut.

As a recent college grad, I can tell you that the one thing I probably had for breakfast more than anything else was cold, stale pizza. Mmm, now that's real breakfast. It would have been so easy, too! Pizza Hut could have just used its leftover pizza, threw it out on a table, and tacked up a sign: "Pizza, $2 a slice." Put out some already-opened packages of ranch dressing and other random condiments left behind on tables by yesterday's patrons, and now you have the attention of millennials everywhere.

But seriously, as much as it disappoints me to say it, Taco Bell's breakfast was a flop for my taste buds. We'll hear more about the numbers next week when Yum! Brands, Inc. (NYSE:YUM) reports its fourth-quarter figures. Maybe it'll give even more positive highlights from its breakfast foray. However, I'm still short Taco Bell breakfast in the long term.

Daily chart of YUM since July 2014

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Analyst Upgrades: Facebook, Inc., Tractor Supply Company, and Salix Pharmaceuticals, Ltd.

Analysts upwardly revised their ratings on Facebook Inc (FB), Tractor Supply Company (TSCO), and Salix Pharmaceuticals, Ltd. (SLXP)

by 1/29/2015 9:46 AM
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Analysts are weighing in today on social media giant Facebook Inc (NASDAQ:FB), farm equipment retailer Tractor Supply Company (NASDAQ:TSCO), and drugmaker Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP). Here's a quick roundup of today's bullish brokerage notes on FB, TSCO, and SLXP.

  • Despite an initial negative earnings reaction, FB received a round of price-target hikes, after the company's fourth-quarter earnings report handily topped analysts' estimates -- thanks to a surge in mobile ad revenue. Weighing in on the stock was Cantor, which raised its price target by $10 to $90, and Stifel, which upped its target price to $97 from $94. Both brokerage firms underscored their "buy" ratings. Technically speaking, FB is up 0.4% this morning, and has been a standout on the charts, boasting a more than 42% year-over-year gain to trade at $76.55. Not surprisingly, options traders have been optimistic, as evidenced by Facebook Inc's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.60, which ranks in the 83rd annual percentile. Simply stated, calls have been bought to open over puts at a quicker-than-usual clip in recent months.

  • No fewer than five brokerage firms raised their price targets on TSCO, following the firm's fourth-quarter profit beat. Included in the bunch were Nomura and Barclays, which each upped their price targets to $92, while reiterating their respective "buy" and "overweight" ratings. Since hitting an annual low of $55.95 in mid-October, TSCO has been on fire -- rallying nearly 46% to trade at $81.54. In fact, the equity touched a record high of $84.82 out of the gate. Should the shares extend this momentum, short sellers could start hitting the exits. Short interest rose 8.7% in the latest reporting period, to 5.6 million shorted shares. What's more, it would take more than a week to cover these bearish bets, at Tractor Supply Company's average daily pace of trading.

  • SLXP received upwardly revised price targets from Jefferies (to $149) and Cantor (to $151), after the company said it will restate its financial statements for the past seven quarters. The stock has had a strong start to the year, up 16%, and this morning has added 3.7% to trade at $132.98. However, six out of 14 analysts covering the shares maintain a tepid "hold" recommendation, and the average 12-month price target of $130.69 stands at a discount to the equity's current perch. If Salix Pharmaceuticals, Ltd. continues to outperform, a fresh wave of upgrades and/or price-target hikes could help fuel its fire.

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Analyst Downgrades: Qualcomm, Cliffs Natural Resources Inc., and Silver Wheaton Corp.

Analysts downwardly revised their ratings on QUALCOMM, Inc. (QCOM), Cliffs Natural Resources Inc (CLF), and Silver Wheaton Corp. (USA) (SLW)

by 1/29/2015 9:22 AM
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Analysts are weighing in today on telecom giant QUALCOMM, Inc. (NASDAQ:QCOM), commodity concern Cliffs Natural Resources Inc (NYSE:CLF), and precious metals producer Silver Wheaton Corp. (USA) (NYSE:SLW). Here's a quick roundup of today's bearish brokerage notes on QCOM, CLF, and SLW.

  • QCOM reported an earnings beat last night, but a reduced full-year profit and sales forecast has the brokerage bunch turning bearish. Specifically, at least a dozen analysts reduced their price targets on the stock, while Macquarie downgraded it to "neutral" from "outperform." As a result, QUALCOMM, Inc. is sitting nearly 7% lower ahead of the bell. As it is, the shares have had a pretty rough go of it -- shedding 13.4% of their value since hitting a late-July 14-year high of $81.97 -- to close Wednesday at $70.99. Additional downgrades could be in the cards, too. Currently, 17 out of 23 covering analysts rate QCOM a "buy" or better. In other news, the company's health care subsidiary has entered into a strategic collaboration with Roche on a system to remotely monitor and manage patients with chronic illnesses.

  • CLF saw its price target cut by $1 to $8 at RBC, which also reiterated its "sector perform" assessment. This bearish note isn't surprising, considering the stock's 67% year-over-year deficit to trade at $6.62. Elsewhere, short sellers have taken a shine to Cliffs Natural Resources Inc. Over half of the equity's float is sold short, which would take more than week to cover, at CLF's average daily trading volume. Ahead of the bell, the stock is pointed slightly lower. Looking forward, the company will report fourth-quarter earnings Monday night.

  • Finally, Raymond James weighed in on a number of precious metals producers, including SLW, which it downgraded to "outperform" from "strong buy." This is somewhat surprising, considering the shares have rallied an impressive 12.6% year-to-date to rest at $22.90, and are sitting atop potential support at their 160-day moving average. Traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) are also skeptical. Silver Wheaton Corp.'s 10-day put/call volume ratio of 0.61 ranks in the 83rd percentile of its annual range, hinting at a stronger-than-usual appetite for bearish bets over bullish. This morning, the stock is sitting 3.1% south of the flatline.

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