Evaluating the risk after a hedge

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

All sports bettors should know the basic principles of sports betting.

You should not be betting online or anywhere else without this fundamental knowledge.

Evaluate the risk after the hedge

If you hedge your initial bet perfectly, you will have zero risk remaining. An example was shown in a previous article. Other times you can hedge with a wager that is not exactly the same as the mirror image of the original wager, but is close. The combination of the initial bet and the hedge may have a smaller risk, but there will still be risk remaining. The risk remaining could result in a bigger potential loss in the worst case scenario than without the hedge. You should understand what the new risk will be before betting the hedge.

Here is an example of analyzing the risk remaining after a hedge.

Let’s say you bet Oklahoma -1.5 against Texas, risking $110 to win $100. You think the fair value should be Oklahoma -3 and you think you have positive EV in your initial bet.

On the day of the game, the line in the game moves to Oklahoma -3. Since you think the fair value should be Oklahoma -3, you decide there is no valid reason to hedge in taking Texas +3 -110. You are comfortable with the risk and see no need to make a negative-EV hedge. If the line had moved to Texas +3.5 -110, then you would find that to be slightly positive EV and you would be happy to bet that as a hedge.

As you search for prices in many Atlantic City sportsbooks, you find another bet that is closely related to your original bet. The bet has positive EV and is also a hedge to your initial wager, although not a perfect hedge. The bet is the money line on Texas at +160. Based on a fair line of Texas +3, you are confident that the money line on Texas at +160 is a fantastic bet. Not only is it a positive-EV bet, but it also hedges your original bet of Oklahoma -1.5. The risk remaining from these two bets combined is if Oklahoma wins by exactly 1 point, you will lose both bets. These two bets combined is a positive-EV reverse-middle.

Given the positive EV, the Texas money line is a good bet and also hedges your risk in the Oklahoma -1.5 initial bet. The risk remaining (if Oklahoma wins by exactly 1) is a scenario that is a bigger loss than the worst case scenario before the hedge. But you are comfortable with the fact you may lose both bets in that scenario, given the positive EV of both bets.

This example is just one possible risk profile of two combined bets. Upcoming articles will contain descriptions of some other general risk profiles that can occur with a combination of wagers.

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.