What is hedging a bet? How does hedging a bet reduce risks?
"Hedging a bet" is a strategy used in gambling and investing to reduce risk or guarantee a profit regardless of the outcome of an event. The concept involves placing a bet on a different team or outcome than the original bet, in order to create a situation where there is a guaranteed return or at least a reduction in potential losses.
How to hedge a bet?
Place an Initial Bet: This is the bet you are looking to hedge. For example, you might bet that Team A will win the championship for that current season.
Identify Hedging Opportunities: As the season goes on and the playoffs approach, the odds may change, or you may want to ensure some level of profit from your bet.
Calculate the Hedge: Determine how much you need to wager on the other teams to ensure a profit or minimize a loss. This often involves some math to figure out the right amount to hedge.
Place the Hedge Bet: This second bet is on the outcome opposite of your initial bet or on various other outcomes that would cover the possibilities that your original bet does not cover. Using the previous example, this would mean betting on Team A not winning (which could be betting on Team B or Team Cwinning, depending on the sport and the betting options available).
Analyze the Results: Once the season has concluded, one of your bets will win. If you have hedged correctly, you will have ensured a profit or reduced your potential loss.
Example of Hedging a Future's Bet:
Let's say you bet $100 on Team A to win the championship at odds of +500 (5/1). If Team A wins, you would get a return of $600 ($500 profit plus your $100 stake).
Now imagine that as the season goes own, Team B and Team C have started to really play well and look like they could beat Team A in the playoffs. You could then hedge your bet by placing a hedge bet on Team B or Team C or both.
To fully hedge, you might want to increase your chances of a profit with bets on multiple teams. Picture this, your original bet is on Team A to win at +500 so $100 to profit $500 ($600 return). If Team B and Team C have greater odds than +300, you can guarantee that you profit or don't lose money. Let's say Team B and Team C have odds of +700 and +800 as the playoffs near for this example. So you make two additional bets, $100 on Team B to win at +700 odds ($800 return) and $100 on Team C to win at +800 odds ($900 return).
By placing these two additional bets, you have increased your chances at winning:
Now, you have four outcomes:
If Team A wins, you win $500 on your original bet and lose your $200 hedge bets, leaving you with a profit of $300.
If Team B wins, you lose your original $100 bet and the $100 you bet on Team C but win $700 from your hedge bet on Team B, resulting in a profit of $500 after subtracting the hedge bets.
If Team C wins, you lose your original $100 bet and the $100 you bet on Team B but win $800 from your hedge bet on Team C, resulting in a profit of $600 after subtracting the hedge bets.
However, if none of these teams win the championship, then you will lose all $300 that you bet on them.
This is a simplified example. The real-world application involves more variables, such as commission fees, taxes, or changes in odds. You can always reach out to me on twitter or instagram @kofsports for an example for the current season for whatever sport you are betting on. I'm always here to help!
Example of how to hedge a parlay bet
Original Parlay Bet:
A $100 parlay on four football teams: Team A, Team B, Team C, and Team D all to win at combined odds of +1000. If all four win, the payout is $1,100 ($1,000 profit plus the $100 stake).
The first three teams (A, B, C) have won their games. Team D plays tomorrow.
The payout for the parlay if Team D wins is $1,100.
The current odds for Team D’s opponent (let's call them Team E) are +150.
To hedge, you might want to bet on Team E such that you win a good amount if Team D loses.
You decide to guarantee yourself a $500 profit regardless of the outcome.
Hedge Bet Amount:
To win $500 on Team E at odds of +150, you would need to place a bet of approximately $333.33.
If Team E wins, you get $500 from the hedge bet, minus the $333.33 stake, minus the original $100 parlay stake, leaving you with a profit of $66.67.
If Team D wins, you get $1,100 from the parlay, minus the $333.33 hedge bet, for a profit of $666.67.
No matter who wins the last game, you walk away with a profit.
Considerations for Hedging a Parlay bet:
Timing: Hedging before the last game of a parlay is common, but you could also hedge earlier if circumstances change (like player injuries or weather conditions).
Partial Hedge: You don’t have to fully hedge. You can decide to hedge just a part of your potential winnings to keep some skin in the game.
Profit Margin: How much profit you are willing to guarantee versus the potential maximum profit.
Cost of Hedge: Remember, hedging is not free. It reduces the potential maximum profit of your original bet.
Odds Movement: Keep an eye on the odds. Sometimes, waiting a bit can give you a better hedging opportunity if the odds move in your favor.
The strategy for hedging a parlay is quite personal and can vary greatly depending on individual risk tolerance, the specific odds involved, and the bettor's confidence in the outcome of the final events in the parlay.
Why Hedge a Bet?
Guaranteed Profit: In some cases, if the odds are favorable, you can guarantee yourself a profit regardless of the outcome by hedging.
Risk Aversion: If you’re no longer confident in your original bet or if something changes (like an injury to a key player), hedging can minimize your potential losses.
Changing Sentiments: Your opinion about the bet's likely outcome might change, and hedging can reflect your new thinking with an adjusted risk.
Important Considerations when hedging a bet
Costs: Hedging isn't free; it can eat into your potential profits since you're placing another bet.
Timing: The timing of your hedge can dramatically affect the odds and the profitability of your hedge.
Partial Hedging: You don't have to fully hedge; you can place a hedge bet that only covers part of your potential losses.
Final Thoughts on hedging a bet
Hedging can be a useful strategy in sports betting if you understand the odds and can calculate the right amounts to bet. It requires a bit of math and a strategic approach to betting. Always remember that hedging reduces risk, which is particularly useful if the circumstances around the event have changed since you placed your original bet, or if you are nearing the end of a parlay and want to ensure some kind of return from your bets.