General Forum

hedging futures bets

Posted By: rainmandon
Date: 21 Aug 01, 7:51 pm

In Response To: Example (StevieY)

Say you took the Lions to win the Super Bowl @ 40-1 for a dime and they have won their conference and are +150 to beat the Dolphins in the SB. At this point you could bet $25,815 to win $15,185 on the Dolphins @ -170 in the money line and add $15,185 to your bankroll no matter who won the game.

Let's assume that your current bankroll is $50,815. (You'll see why I picked this number later). We can theoretically make the hedge bet on the Dolphins and increase our bankroll to $66,000. With this theoretical bankroll, how much should we bet on Detroit? We'll assume that the Lions have a 50% chance of winning the game. Applying the Kelly criterion (we'll assume 100% Kelly) we should risk

.50 - .50/1.5 or 1/6th of our bankroll.

So, if we are playing 100% Kelly, we should make a second theoretical bet of $11,000 to win $16,500 on Detroit in the money line. If the Lions win, our theoretical bankroll would grow to $82,500 and if Miami wins our theoretical bankroll is down to $55,000.

Now let's look at what happens to our actual bankroll without hedging. If Detroit wins, our bankroll is now $91,185 and if they lose we stay at $50,185.

So, what I'll suggest is that we make a play on Miami @ -170 which will get us near our theoretical targets of $82,500 and $55,000. We could do this by betting about $8500 to win $5000 on the 'Phins. This would give us a bankroll of $82,685 if the Lions win and $55,185 if Miami wins. Both are above our theoretical targets because we eliminated some vig.

This is using 100% Kelly. If you were using 50% Kelly, you would have to hedge more.

If you felt that the Lions only had a 5% chance of winning the SB, meaning that Miami had a 95% chance of winning, you should bet even more on Miami. After all, you're saying the line should be -1900 so you're getting a major bargain on Miami at -170.

As far as your question regarding why you didn't just bet the Lions to win the conference instead of taking them to win the SB and hedging, the odds might have been better on them winning the SB. For instance, what if they were 9-1 to win the conference? If you could get them at 40-1 to win the SB, the equivalent line is the Lions being around 8 pt dogs in the SB, because then you could take the $10,000 from your winning conference championship ticket and put it on Detroit in the money line (at around +310) and end up with the same $41,000. If you thought they were going to be around 5 pt dogs, then you'd be better off taking the Lions to win the SB and hedge by taking Miami at -200. As long as you could hedge the AFC champ at anything less than -310, you should take the Lions to go all the way. If you thought they would be 14 pt dogs (or anything over 8 or so), you should have taken them to win the conference.

The real answer to the question of hedging is psychological more than mathematical. I don't know anyone who plays 100% Kelly, so your tolerance for risk will be determined by what Kelly fraction you use. And your own inputs, bankroll size, Kelly fraction, expectation of Detroit winning the game, etc. would determine whether you should hedge and if so, how much.

This is the way that I would approach the problem, but I know it's not the only way.

Messages In This Thread

How to handle the "huge exposure game" -- Fezzik -- 12 Aug 01, 11:53 pm

So, will you be hedging against the Mariners in October? -- James -- 13 Aug 01, 12:33 am

Difference between A's and Eagles -- StevieY -- 13 Aug 01, 11:35 am

that's not a hedge -- docriver -- 13 Aug 01, 12:10 pm

Yes and no -- StevieY -- 13 Aug 01, 12:33 pm

risk -- docriver -- 13 Aug 01, 1:04 pm

Hedging -- StevieY -- 13 Aug 01, 1:38 pm

Example please? -- docriver -- 13 Aug 01, 1:56 pm

Example -- StevieY -- 13 Aug 01, 5:36 pm

because you have 40x in equity now -- docriver -- 13 Aug 01, 6:01 pm

above title should read : 18x, not 40x (nt) -- docriver -- 13 Aug 01, 6:08 pm

You aren't wagering 18,000+ -- StevieY -- 13 Aug 01, 6:11 pm

Agree to disagree -- docriver -- 13 Aug 01, 6:20 pm

You are both right, even disagreeing -- Fezzik -- 15 Aug 01, 1:32 am

Size your bets according the payoff, not the bet size. -- Stanford Wong -- 13 Aug 01, 6:39 pm

he really has found some arbitrage -- Math Boy -- 13 Aug 01, 8:21 pm

You can always overbet if the marginal EV from betting more is less than th -- docriver -- 13 Aug 01, 8:41 pm

Practical issues -- James -- 14 Aug 01, 11:27 am

i'm the minority -- docriver -- 13 Aug 01, 8:38 pm

hedging futures bets -- rainmandon -- 21 Aug 01, 7:51 pm

I understand the bet... -- StevieY -- 21 Aug 01, 7:58 pm

hedging futures -- rainmandon -- 21 Aug 01, 9:22 pm

I understand the bet... -- StevieY -- 22 Aug 01, 6:40 pm

Sea hedge -- Fezzik -- 15 Aug 01, 1:34 am

Oops.......I showed my Sea Bias -- Fezzik -- 15 Aug 01, 1:36 am

I'm in the same boat. I won't hedge. -- Stanford Wong -- 13 Aug 01, 8:57 am

Risk-averse betting? -- John May -- 13 Aug 01, 9:14 am

Agree -- Don Schlesinger -- 14 Aug 01, 1:11 pm

1 investment question -- Fezzik -- 15 Aug 01, 2:29 am

Attempt at some answers -- Don Schlesinger -- 15 Aug 01, 8:13 am

how much does money mean to you? -- docriver -- 15 Aug 01, 8:39 am

In-the-money options -- Jaeger -- 23 Aug 01, 6:44 pm

No -- Don Schlesinger -- 23 Aug 01, 8:55 pm

Risk-averse betting? -- lepto -- 14 Aug 01, 1:33 pm

Your bet suffered turf toe -- McNabb#1 -- 14 Aug 01, 4:24 am

General Forum is maintained by Pi Yee Press