Hedging a bet
To hedge a bet is to bet the other side of one you already hold, so that you win something whichever way it goes. You give up part of the big payout to remove the chance of getting nothing. It is insurance, and like all insurance it has a price.
A future that came good
The usual case looks like this. Say you bet $100 before the hockey season on a team at +2000 to win the championship, and it is now in the final. If it wins, you collect $2,000 in winnings. If it loses, you are out your $100. The other team is -150 to win the final, and your team is +130.
You have three choices, and I'd work out all three numbers before I picked one.
The first is to do nothing and let it ride. You win $2,000 or lose $100.
The second is to hedge for the same profit either way, by betting enough on the other team that both results pay the same. Here that is $1,260 at -150, which wins $840.
| Result | Futures ticket | Hedge bet | You finish |
|---|---|---|---|
| Your team wins | +$2,000 | -$1,260 | +$740 |
| The other team wins | -$100 | +$840 | +$740 |
You have turned a ticket that might pay $2,000 into $740 for certain.
The sum goes like this: take the total the original ticket would return, stake included ($2,100), and divide it by the decimal price of the hedge (-150 is 1.667 in decimal). 2,100 divided by 1.667 is $1,260. The hedge calculator does it for you.
The third choice is to hedge only your stake. You don't have to go all the way. Bet $150 on the other team at -150, which wins $100.
| Result | Futures ticket | Hedge bet | You finish |
|---|---|---|---|
| Your team wins | +$2,000 | -$150 | +$1,850 |
| The other team wins | -$100 | +$100 | $0 |
Now you can't lose, and you still have nearly all of the upside. Anything between $150 and $1,260 is a choice about how much of the swing you want to keep, and if I were going to hedge at all, I'd usually start looking at the small end.
The price of sleeping well
A hedge is a new bet, and you pay the vig on it like any other.
Take the book's cut out of -150 and +130 and the market gives your team a 42 percent chance of winning the final. On that basis, letting the ticket ride is worth about $782 on average: 42 percent of the time you win $2,000, and 58 percent of the time you lose $100. The full hedge pays $740. So the insurance cost you about $42, which is the book's margin on a $1,260 bet and the fee for certainty.
Whether $42 is worth paying has nothing to do with the arithmetic. It depends on what $2,000 means to you. If it is a month's rent, take the $740 and sleep. If it is a pleasant surprise either way, let it ride, because over a lifetime of bets the player who never pays for insurance ends up with more.
Sharp bettors mostly don't hedge. Their bets are small against their bankroll, so no single result hurts, and every hedge is another bet made at a price they wouldn't otherwise take. I'd hedge when a bet has grown bigger than your bankroll, or your nerves, can comfortably carry, and otherwise leave it alone.
Two practical things before you make that bet. Shop it, because you are about to make a large bet and the best price on the other side might not be at the book that holds your ticket. And check that the hedge fits under the book's limit before you count on it (a hedge the book won't write is just arithmetic on a napkin).
Other places it comes up
- The last leg of a parlay. Four legs are in and the fifth plays tonight. The ticket is now a single bet at a big price, and you hedge it the same way as the future above.
- During the game. A bet that is ahead can be hedged at the live price. The live price carries more juice, so the insurance costs more.
- A middle. You bet a favorite at -2.5, the line moves, and you take the underdog at +4.5. If the favorite wins by 3 or 4, both bets win. If not, one wins and one loses, and you are out the vig.
- Cash out. The button a book offers on an open bet is a hedge the book has priced for you, with its own cut inside. It is nearly always less than you would get by hedging yourself at another book. Compare the two before you press it.
I never liked the cash-out button, from either side of the counter. The book picks the price and the moment, and the player gets one tap to say yes.
Hedging is not the same thing as arbitrage. An arbitrage is set up to profit from two prices at the same moment. A hedge protects a bet you made earlier, after things have changed.
What a hedge can't do
Betting the other side of a bet you now regret, at the same price, doesn't rescue it. You pay the vig twice and lock in a small loss. A hedge only has something to protect when the first bet has gained value: the price has moved your way, or most of the ticket has already won. If neither has happened, there is nothing to insure, and I'd just take my medicine on the first bet.