Last time, I discussed the mismatch between signals emerging from polls and betting markets towards November’s US Election and the perennial debate regarding which represents a better guide. Looking deeper into the plethora of side markets, the picture complicates further. In fact, it could ultimately offer some excellent, albeit sophisticated, trading angles to exploit.

First though, we must understand how a president is elected. Rather than the popular vote - which was actually won by Hillary Clinton in 2016 by a 2.9M margin - the winner is determined by an electoral college. Each of the fifty states awards a set number of electoral college votes to the winner of their statewide election. 

The total number is 538, making 270 the target for a majority and victory. As the detailed map below illustrates, Trump won 306 compared to Clinton’s 232 in 2016. Despite losing the nationwide tally, his voters were more efficiently spread throughout the key states.

Source: Business Insider

The prospect of a similar scenario goes a long way to explain the betting for next president. Biden is a mere 1.44 to win the popular vote, but 2.3 to be next president on Betfair. The theory goes that the Democrat challenger could rack up votes in populous blue bankers such as California and New York, but Trump retain the strategically important swing states.

How electoral college votes are balanced

To identify these decisive states, check out the map at 270towin.com. The colour scheme (Dark/Light, Blue/Red/Grey) indicates Strong/Lean Democrat/Republican, with grey representing a toss-up state. Six states are grey, collectively awarding 101 electoral college votes and therefore holding the balance of power.

Listed in order of votes, they are Florida (29), Pennsylvania (20), Michigan (16), North Carolina (15), Arizona (11) and Wisconsin (10). Trump won all six of those states in 2016 and will need to retain the bulk of them. For example, assuming none of the other 44 states switch and Biden wins Florida, Trump would need to win all the other five.

Six months out from polling day, the picture for the incumbent is not promising. According to these latest RealClearPolitics average, Trump trails clearly in five out of six and his lead in the other, North Carolina, is miniscule.

Latest poll averages for six toss-up states

Florida (29 Electoral College Votes): Biden + 3.2%

Pennsylvania (20): Biden +6.7%

Michigan (16): Biden +5.5%

North Carolina (15): Trump +0.3%

Arizona (11): Biden +4.4%

Wisconsin (10): Biden +2.7%

Other states could potentially be in play - Minnesota, Ohio, Iowa, Texas, Nevada - although were they to flip, it would likely reflect a landslide either way. Bookies are offering odds on these and indeed all fifty states. In the more one-sided races, Smarkets offer handicap betting on the margins. Again, the signal from Ladbrokes is grim for Trump.

Latest state by state betting from Ladbrokes produces the following electoral college map.
Not looking too good for Trump. pic.twitter.com/bbcW8fkXrk

— Ladbrokes Politics (@LadPolitics) April 23, 2020

The inescapable conclusion to draw from these state markets is that it, if you fancy Trump, it makes much better sense to back him for specific states rather than to win the main market.

Is there a mismatch between state betting and Trump’s outright odds?

For example, it is extremely hard to see how Trump can win without Florida and Wisconsin - I’d rate them at worst his second and third best targets among the aforementioned six. He would still almost certainly lose if winning both, plus North Carolina, but falling short in Pennsylvania, Michigan and Arizona (as the polls strongly imply).

Yet the odds for Trump’s best chances among them are similar to his outright odds - 1.83 for North Carolina (Skybet, Paddy Power, Betway);1.91 for Florida (Ladbrokes, Hills, Betfred); 2.25 (Skybet) for Wisconsin. In the state most likely to hold the balance of power, Pennsylvania, 2.5 (Ladbrokes) is bigger than Trump’s outright odds with any firm.

I strongly believe this offers a great trading angle to exploit - both now and moving forward as I expect these differentials to persist (they did during the 2016 cycle) - without taking any meaningful risk. Here’s the plan.

Try this hedging plan between the next president and state markets

First, back Biden at 2.3 on Betfair. If you want to eliminate the slight risk that he isn’t the candidate, lay Trump at 2.12. Let’s use a hypothetical 100 unit stake.

Next, spread the same 100 unit stake around bets on Trump to win North Carolina, Florida, Wisconsin and Pennsylvania. For example, respectively, 35 units at 1.83, 30 at 1.91, 20 at 2.25, 15 at 2.5.
If Biden wins outright, and all four states, we’ll make 30 units profit overall - 130-100.

If Trump wins all four states, we’ll either make 4 units profit if backing Biden, or lose 6 units if taking the ‘lay Trump’ option.

However these are the two extreme outcomes, where all the key states go one way. 

If Biden wins outright, but Trump wins North Carolina, we’ll make 94 units profit. Add Florida and the profit tally rises to 151 units. Add Wisconsin and we’re up to 197 units.

These extreme positive scenarios are not all that unlikely either. It may well prove that, as the results emerge on election night, the latter best case scenario can be covered by bets in states where the margin is close.

My advice is to have the Biden bet now at 2.3, then wait a few weeks before looking to cover on these state markets. Unless the trend changes soon - and there is little reason to think it will - Trump is going to drift across the board. This is the best way to take advantage.