One other interesting avenue you could have discussed is how the Polymarket community which is primarily crypto bulls and avid users (since you have to deposit in crypto you must know the ropes somewhat) so the Yes prices are usually inflated quite a bit over fair value making the No side +EV (although high variance as anything high vol/crypto). This positive skew is quite interesting when we typically would see some negative skew in most US equities where people pay up for insurance on the puts side. This is probably the fundamental reason this arbitrage exists.
The other thing is that if the "over" is overpriced then the "under" must be underpriced because of how binary contracts on Polymarket function. It is impossible for them to both be overpriced.
One interesting result was that the "yes" contracts tend to also be overpriced on the downside (the contract for dipping to $80k as a representative example). So Polymarket overprices "over" for strikes > the current price and "under" for strikes < the current price, which adds skew to both sides of the distribution.
That being said, I align with your prior on the high-strike calls. I haven't spent enough time with Polymarket's API to check whether the positive skew is more overpriced than the negative skew, but it'd be an interesting future direction.
Also, did you multiply by 2 after getting your implied probabilities from the options? If you did you’re fine, but if not that also explains why you think Polymarket is overpriced. You’d have to convert from binary to 1-touch binary by multiplying the implied probabilities by 2 (for the specific market you sent, there are markets on Polymarket where it is about closing above/below a certain price in which case if you had the same expiry in your options you could directly translate the prices to probability without any transformation or multiplication)
Thanks for sharing, this is interesting. Unfortunately I do not think this works.
If the 110k price barrier is hit soon, the value of your spread is not going to compensate the lost polymarket bet as the spread value is lower than it would be at expiry. You cannot exercise the short leg of your American option, so you can only sell the spread at market value.
What's interesting is that the IBIT options are cheaper than the deribit/binance options, despite being American ones. Price diff is usually a full percentage point, so it may be tradable.
Great point—thanks for sharing. That being said, Poly does have a few markets on European-style binaries that demonstrate the same inefficiency. Those would sidestep the American problem in exchange for some pin risk.
Interesting note on the cross-exchange arb. I'll look into it!
One other interesting avenue you could have discussed is how the Polymarket community which is primarily crypto bulls and avid users (since you have to deposit in crypto you must know the ropes somewhat) so the Yes prices are usually inflated quite a bit over fair value making the No side +EV (although high variance as anything high vol/crypto). This positive skew is quite interesting when we typically would see some negative skew in most US equities where people pay up for insurance on the puts side. This is probably the fundamental reason this arbitrage exists.
The other thing is that if the "over" is overpriced then the "under" must be underpriced because of how binary contracts on Polymarket function. It is impossible for them to both be overpriced.
One interesting result was that the "yes" contracts tend to also be overpriced on the downside (the contract for dipping to $80k as a representative example). So Polymarket overprices "over" for strikes > the current price and "under" for strikes < the current price, which adds skew to both sides of the distribution.
That being said, I align with your prior on the high-strike calls. I haven't spent enough time with Polymarket's API to check whether the positive skew is more overpriced than the negative skew, but it'd be an interesting future direction.
Also, did you multiply by 2 after getting your implied probabilities from the options? If you did you’re fine, but if not that also explains why you think Polymarket is overpriced. You’d have to convert from binary to 1-touch binary by multiplying the implied probabilities by 2 (for the specific market you sent, there are markets on Polymarket where it is about closing above/below a certain price in which case if you had the same expiry in your options you could directly translate the prices to probability without any transformation or multiplication)
https://quant.stackexchange.com/questions/40771/relation-between-one-touch-and-binary-option
The screenshot you posted would yield a 13c profit and not 23c btw.
Great catch! Updated.
Thanks for sharing, this is interesting. Unfortunately I do not think this works.
If the 110k price barrier is hit soon, the value of your spread is not going to compensate the lost polymarket bet as the spread value is lower than it would be at expiry. You cannot exercise the short leg of your American option, so you can only sell the spread at market value.
What's interesting is that the IBIT options are cheaper than the deribit/binance options, despite being American ones. Price diff is usually a full percentage point, so it may be tradable.
Great point—thanks for sharing. That being said, Poly does have a few markets on European-style binaries that demonstrate the same inefficiency. Those would sidestep the American problem in exchange for some pin risk.
Interesting note on the cross-exchange arb. I'll look into it!