Trade Idea #1: Lay Liverpool for Top 4 at 3.1 or better

Position

Lay Liverpool for Top 4 at 3.1 or better (= 32% chance of finishing 4th or better).

Thesis

Our analysts’ forecast was that Liverpool’s price to finish in the Top 4 was too short. The rationale was their poor performance in 2014/15, a complete change in coaching staff over the summer, a questionable transfer policy that did not seem to address their primary needs in the squad, an incredibly difficult run of early fixtures in the first part of the league calendar and taxing involvement in the Europa League to contend with throughout the year. With all of these question marks around the club and with manager Brendan Rodgers under pressure from the outset, a decision was made to lay Liverpool when the price was at its shortest at the earliest possible time.

Plan

We set an entry around 2.8-3, with a stop loss at 2 and an upside of around 10, making the trade a more than 11/1 risk reward (lose 1 unit of risk or make 11 units if you get out at that point).

Timing

An opportunity was identified after unconvincing 1-0 wins in the opening two games and a spirited 0-0 draw at Arsenal, which led the market to overrate Liverpool much more than it had before the season began. The price was ~2.5 here, while it was ~4.5 before the opening weekend.

Quantitative Analysis / Keys to Performance

We compared Liverpool this year to:

  • Teams that finished in the top 4 in the last few seasons
  • Teams from this season that show comparative performance but variant price difference
  • Liverpool’s performance to last year, where it finished 6th.

Comparison of Liverpool’s output compared to the last two 4th placed teams:

Comparison of 2014/15 Liverpool to 2015/16 Crystal Palace, Swansea and Tottenham:

Our view is that Liverpool is mispriced and should be trading closer to 10 given their recent performance, Tottenham can be taken at 13 currently.

The data from the first 4 rounds shows that Liverpool are underperforming in attack and having to work very hard defensively to keep clean sheets, which is not typically the nature of a successful team. Our proprietary analyst data ranks them 18/20 for Attacking Efficiency and 8/20 for Defensive Efficiency, while our Fair Score Model believes their current position of 7th is inflated. Based on their creation and concession of Great and Good Chances, in addition to some other key factors, 11th is actually their “fair” ranking at present.

This season’s distribution of goals. Liverpool stand 4th from left with an average of just 0.5 goals.

Comparison of Goals

  • Liverpool scored on average 0.5 goals in their fixtures this year.
  • The average 4th team for 2014/2015 (Man Utd) scored 1.6, and for 2013/2014 (Arsenal) was 1.9.
  • Liverpool would need to score 1.79 goals (or higher) on average for the remainder of the season match what the 4th teams scored on average in the last 2 seasons.
  • They would need to score on average more than Arsenal, or Man City or Man Utd did in the last season. We think that is unlikely because they have not shown any significant improvement in the attacking unit.

We compare Liverpool to Man Utd, Arsenal, Man City of 2014/2015 and versus Swansea and Arsenal this year…

Analysis to past years

On a 10 year basis, the average number of points to finish 4th is 68.8 and the PPG is 1.8, with the spread to first being 0.5 and 0.2 to in PPGs and 0.13 to 5th.

Liverpool currently have 7 points, which means to reach the average it needs approximately 62 points, implying a 1.83 PPG. Roughly, it would translate to a record of 17 wins, 10 draws and only 7 losses in the next 34 games as the break even rate (17*3 +10*1 + 0 + the existing 7 ~68). We think that is a very tall order for any team, particularly one that has not played the stronger, higher scoring teams so far this year.

Risk Factors (Potential for the trade to go against us)

  1. Liverpool score more than 2 goals on average over the next 7-8 fixtures
  2. For this to happen there would need to be a meaningful increase in the following stats:
  • Goals Scored
  • Chances Created
  • Attacking Efficiency

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