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EV of a Hedge vs. Risk Profile

Ev of a hedge vs risk profile

King Yao is the author of Weighing the Odds in Hold‘em Poker, and Weighing the Odds in Sports Betting. He uses his experience from making millions in financial derivative markets and translates it into gambling. Since he left his trading position in 2000, he has been betting on sports. He travels to Las Vegas frequently, especially during football season.

Prospective sports bettors should know the basic principles of sports betting. All other types of casino advantage players, including blackjack players of all skill sets, which includes card counters, should have good working knowledge of Expected Value (“EV”)as well.

Compare the EV to the risk profile

Compare the EV of a hedge to the remaining risk of the combined bets and use that information to help evaluate if there is a valid reason to hedge. As mentioned in earlier articles, most of the time the negative EV in the hedge is not worth the risk reduction of the initial bet. It is up to you to evaluate your own risk preferences and to make sure you have a valid reason to hedge. The remaining risk can be larger than the initial risk if the hedge has a low correlation with the mirror image of the initial bet. If the EV of the hedge is positive, then this may be acceptable to you.

But if the EV of the hedge is zero or negative, then it is not acceptable and you should pass on the hedge.

When the hedge has positive EV, it is usually a no-brainer to make the bet. The only time it is unclear is if it increases the risk profile, in which case it is not truly a hedge.

When the hedge has zero or neutral EV, it is a no-brainer to hedge if it reduces risk. But if the risk is either unchanged or increased with a zero EV hedge, then it is better to pass on it.

When the hedge has negative EV, the only time you should even think about betting the hedge is if it reduces the risk of existing bets. Then you should make sure there is a valid reason to hedge.

Sportsbooks Hedge Too

When lines move at a sportsbook, it can be due to new information such as injuries and weather or copying line moves at other sportsbooks. But line moves are often based on action, meaning that the sportsbook has had enough bets on one side and no longer want any more exposure on that same side. To encourage other bettors to bet the other side so the sportsbook can balance their risk better, the sportsbook moves the line. The line move could be a change in the point spread or a move in the money line of the point spread. A sportsbook moving a line based on action is a form of hedging. The book moves a line to encourage bettors to bet the other side and thus hedge the book’s risk. Here are two examples of line moves:

Original Line:

One way to move the line if customers are betting heavily on Dallas -5:

  • Dallas -5.5 -110
  • Atlanta +5.5 -110

A second way to move the line:

  • Dallas -5 -120
  • Atlanta +5 +100

A sportsbook that moves the line to Dallas -5.5 is taking the risk of being middled. A worst-case scenario for the sportsbook is if Dallas wins by exactly 5, because the book is putting itself at risk to lose to customers who bet Atlanta +5.5, and push against the customers who bet Dallas -5. If the sportsbook manages its lines well, then it is likely being paid enough vig on both sides to warrant this risk.

When a sportsbook moves the money line on the point spread and keeps the point spread the same, as in the second example, it does not put itself at the risk of being middled. Square customers are used to betting lines at -110. When they encounter a line of -120, they may think the sportsbook is trying to take advantage of them. This is an erroneous thought because customers can take Atlanta +5 +100 if they wanted to, but some square customers do think this way. It is possible moving the money line on the point spread will scare off this type of customer, and it is this type of customer the sportsbook wants to keep most. So moving the point spread rather than the money line may make the most business sense depending on the sportsbook’s customer base.

Conclusion

Hedging is overrated and overused. Sports bettors as a group hedge too often. Even professional financial traders on Wall Street hedge too often. There is a natural human tendency to lock in a profit and reduce risk; unfortunately it is often at the expense of EV. As the saying goes, a bird in the hand is better than two in the bush. But two in the bush is better than a bird in the hand if there is a greater than 50% chance you can catch each bird in the bush. This is the way a sharp sports bettor should think.

This is part of an occasional series of articles.

Excerpted with permission from the e-book version of Weighing the Odds in Sports Betting by King Yao, edited for this format.


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