Phron Weekly #6: Hedging and Betting on the US Election

Hi Everyone!

Welcome to the sixth edition of Phron Weekly! This week's review explores self-imposed limits, hedging strategies, and election betting.

Reflections and Growth

Bruce Lee was an iconic martial artist, actor, and philosopher. His approach to martial arts was unconventional; he believed traditional systems were too rigid and limiting. He saw martial arts as a metaphor for life. According to Lee, any style should not confine us, and we should not be confined by self-imposed limitations.

Limitations are often created in our minds. Lee argues that once we accept a limit in one area, that limitation will bleed into other areas of life. Furthermore, he argues that there are no limits but only 'plateaus' - temporary stops along the journey of growth. After prolonged struggle without progress, we can start to believe that we have reached the end. However, obstacles or slowdowns are not limits but opportunities for reassessment to grow further.

Your Next Move

This week, consider what limitations you place on yourself. How does this limitation function in your life?

Business Insights

Hedging against the US Election

Kalshi, an events contract platform, allows people to bet who will win the 2024 US Presidential Election. Events contract platforms are marketplaces where individuals or institutions can bet on event outcomes, ranging from political outcomes to Oscar winners.

The ability of Kalshi and other institutions to offer contracts on the outcome stems from an appeals court ruling last week that lifted an emergency stay requested by the Commodity Futures Trading Commission (CFTC). The ruling read that “the CFTC has given this court no concrete basis to conclude that event contracts would likely be a vehicle for such harms [violating the integrity and distorting the electoral process].”

After exploring Kalshi's website, I learned that most of Kalshi's participants fall into two categories:

• Directional traders - People who believe the pricing of a contract is attractive relative to the probability of the event occurring. They are betting that the value of the contract will move in their favor.
• Hedgers - Individuals or institutions buying contracts against their core investment strategy to mitigate short-term losses.

I became curious about hedging and its role in investments. Hedging typically involves taking a position in a derivative, a security whose value is derived from an underlying asset that moves inversely to the core strategy. Hedging helps mitigate the short-term risks associated with an investment.

For example, a person holding a position in XYZ stock may place a 'put' on XYZ ahead of an earnings announcement. A 'put' is a bet for a stock's price decline, which allows the investor to profit even if the earnings announcement is negative and the price declines.

Hedging allows investors to control risks while maintaining exposure to potential upside. People who may hedge using the US election include those with core investments in industries that will be affected by the winner of the US Presidential election.

While these strategies can perform well, they take skill to master. I caution against participating in derivatives as competition is fierce with expertise, and for uninformed retail investors, it is comparable to gambling.

Some action steps for you:

• In your investments, consider short-term hedging to reduce your exposure to risks
• Avoid participating in derivative trading unless you are well-informed

Some links for you:

• Reuters on Kalshi Election Betting Clearance
• CNBC on Election Betting
• Kalshi on their Consumers

Fun Fact: Did you know that when a portable charger powers your device, some energy is lost as heat? This loss occurs as energy transfer is inefficient, and around 10-20% of energy is lost to heat and resistance.

Disclaimer: The content of this newsletter is for informational purposes only and does not constitute professional advice.