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issues and answers

Posted By: Dunbar
Date: 20 May 02, 8:35 am

In Response To: here we go again :) (ricky)

ricky, I followed this part fine:

Let's say a bet is offered that gives me a 49-1 shot (2%), but I think the true value is 24-1 (4%). For every dollar I bet, I make a dollar theoretically.

So, I make a $1000 wager today at 49-1....I think I've made $1000 right then and there, because they are paying me $49,000 4% of the time (49Kx.04=1,960 minues 1Kx.96 = -960, yielding a 1000 profit) when they should only be paying me $24,000 4% of the time.

Now let's assume for simplicity that if they get to the finals, they will be 40% to win that game (which is more realistic than 50%). At that price, my $1000 bet is now worth $19,000 (.4x49,000 = 19,600 minues .6x1000=600). The true odds on the money line should be the other team -150, but since I am betting into the line, I will have to pay -160...160 = 61.5%. If I make the perfect hedge, my value will get decreased down to $18,230, thus I lose $770 in my hedge.

For now, let's keep out the following issues : 1. I wouldn't be hedging the whole thing, since I'm comfortable with a $5000 risk, so I'm actually losing alot less than that. 2. If I think the fair line is -150, and I shop like I have done, I am very likely to find something alot better than -160 to bet into. If the last 3 years is an indication, I should do no worse than -155, and possibly even get -150 or better.

So, let's ignore all those issues and say they are a wash for now. So what I've done is that I've bet $1000, made a theoretical $1000, and if the bet comes into fruition, I will lose $770 back in hedging. So I'm making a $230 profit.

Here is where I begin to disagree:

Now, you can say that if I made a $230 bet, and make a $230 profit, isn't it easier?

It may be easier, but it is not accurate, as you yourself realize later in your post.

Yes it could be, but that's withholding the fact that I think I will be able to get better than -160 in my hedge when the time comes, and also that I won't need to hedge it all. So, the bet I can make is obviously a lot larger than $230.

If you want to get into a specific example, like you have, it would be better IMO to stick with a single scenario before switching gears. Decide on what you think you can get, and use that line. If you think you can get -155, then go ahead and use that in your example.

Take also in consideration the fact that I am theoretically winning $1000 when I make a $1000 wager, but I will only theoretically lose the $770 for hedging about 8% of the time. Because the other 92% of the time, that $1000 theoretical profit turns into a real $1000 loss. But the 8% of the time when I have to hedge, I've won $18000.

I'm going to stick with your original hedge bet at -160. Using your 8% estimate of the chance of making the finals, we can make the following statements:

1. 92% of the time you will not make it to the finals and you will lose $1000

2. 8% of the time you will make it to the finals and make your "perfect" hedge bet, which will be $30,769 on the other team.

3. Of the times you make it to the finals, your original team will win 40% of the time, leaving you with a profit of $49,000-$30,769 = $18,231.

4. Of the times you make it to the finals, your hedged bet will win 60% of the time, leaving you with a profit of 19,231 - 1000 = $18,231.

Therefore, the ev on your original bet is:

(92% * (-1000)) + (8% * 18231) = $538.

So, under the assumptions you laid out, you lose $462 of ev by making a $1000 bet with the plan to completely hedge it.

I realize you will not COMPLETELY hedge it, and that you can maybe do better than -160, but I'm just concentrating on correcting the math, because it leads to the error in your next paragraph.

The more I think and type this, the more I realize that when I make that $1000 futures wager that nets me $1000 theoretical, that I am in fact winning that $1000 theoretical, if I know with 100% certainty that I will hedge away all but $5000 of the risk, and I know that I can get out better than -160 vs -150, then its a no brainer to me.

I don't know how you came to this conclusion. You can whittle down that $462 loss of ev by (1) hedging less, and (2) doing better than -160, but you cannot get full value for your original bet. (Unless you can get -150 or better on your hedge, in which case the hedge becomes a good bet in its own right!)

All that being said, I think that there are times when it is clearly better to bet more with the firm idea that you will hedge. Consider this bet: You can get +110 on a team that you estimate has a 50% chance to win. You can get –101 on the other team. You have a $100,000 bankroll, and you can bet as much as you want on either team.

Getting +110 on a team that will win 50% of the time is 5% ev. Your optimal bet is roughly $5000, and your ev on that bet would be $250.

What about if you hedge? If you hedge, you cannot lose. Therefore, you can bet your entire bankroll. If you bet $48,657 on the +110 team, and the remaining $51,343 on the hedge at –101, your ev has been reduced to 2.2%, but you will now make $2179 regardless of who wins. So what’s better, 5% ev amounting to $250 or 2.2% ev amounting to $2179?

This is an extreme example, but I am just illustrating the point that a negative-ev hedge can make mathematical sense.

There will be times when it makes sense to hedge and times when it does not. The deciding variables will be your bankroll, the max allowed bet, your estimate of the fair odds, the actual odds, and your estimate of the cost and odds of the hedge bet.

--Dunbar

Messages In This Thread

Belmont questions -- ricky -- 19 May 02, 2:38 am

Answers to the easy ones.. -- Sluicebox -- 19 May 02, 8:10 am

a few more answers -- Dunbar -- 19 May 02, 8:32 am

Bid got hurt though... -- StevieY -- 19 May 02, 11:41 am

yep -- Dunbar -- 20 May 02, 3:14 am

added question -- ricky -- 19 May 02, 11:28 am

No -- Rusty Starfish -- 19 May 02, 11:36 am

thanks smartass. (nt) -- ricky -- 19 May 02, 12:26 pm

Not your most important question, but -- Gladstone -- 19 May 02, 1:26 pm

A week isn't enough for horses... -- Burnt Card -- 19 May 02, 1:56 pm

Ricky, the dark cloulds gather around, but we aren't dead yet. -- Fezzik -- 19 May 02, 12:42 pm

don't worry about me -- ricky -- 19 May 02, 1:13 pm

Hedging( War Emblem) futures -- D -- 19 May 02, 4:18 pm

2 & 3 -- ricky -- 19 May 02, 4:38 pm

Reponse -- D -- 19 May 02, 4:47 pm

here we go again :) -- ricky -- 19 May 02, 5:12 pm

Im not the one- -- D -- 19 May 02, 5:39 pm

if you disagree, please respond to this post -- ricky -- 19 May 02, 6:19 pm

Nothing to worry about yet -- patrick -- 20 May 02, 8:20 am

issues and answers -- Dunbar -- 20 May 02, 8:35 am

response -- ricky -- 20 May 02, 9:58 am

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