Master the art of hedging on betting exchanges to protect profits, minimize losses, and manage risk in your trading portfolio.
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Hedging is a fundamental risk management technique for professional exchange traders. Effective hedging allows traders to:
Important: While hedging can protect profits and limit losses, it also reduces potential gains. The key is finding the right balance between risk management and profit maximization for your trading style.
Hedging involves taking offsetting positions to reduce or eliminate the risk of an existing position. In exchange trading, this typically means:
A trader backs a football team at 2.0 for €1,000. As the match progresses, the team takes a 2-0 lead, and the odds drop to 1.2. To lock in profits, the trader lays the same team at 1.2 for €1,667 (calculated to secure a profit regardless of the outcome). This creates a guaranteed profit of €333 (€1,667 - €1,000 - €167 commission) regardless of whether the team wins or loses.
While both strategies involve taking multiple positions, they serve different purposes:
A trader notices that a tennis player is available to back at 2.0 on Betfair and lay at 2.05 on Betdaq. This represents an arbitrage opportunity where they can lock in a 2.5% profit by taking both positions simultaneously. In contrast, if they had already backed the player at 2.0 on Betfair before noticing the lay price of 2.05 on Betdaq, taking the lay position would be a hedge to protect their existing position, not an arbitrage to create new profit.
Understanding the costs involved in hedging:
A trader backs a horse at 5.0 for €1,000. To hedge this position, they need to lay at 4.8. The spread cost is 0.2 points (5.0 - 4.8), which represents 4% of the potential profit. Additionally, they will pay commission on both the original back bet (2%) and the hedging lay bet (2%), totaling 4% of the stake. If the horse wins, the trader's profit is reduced by 8% compared to not hedging. However, if the horse loses, the trader still makes a small profit instead of losing the entire stake.
Calculating the optimal size for hedging positions:
A trader backs a football team at 2.0 for €1,000. When the team takes a 1-0 lead, the odds drop to 1.5. To secure a profit of €200 regardless of the outcome, they calculate they need to lay €1,333 at 1.5. However, they decide to partially hedge by laying only €1,000 at 1.5, which secures a profit of €150 if the team wins but still allows for additional profit if the team wins by more than one goal. This partial hedge balances risk management with profit potential.
Specific hedging techniques for football markets:
A trader backs a football team at 2.0 for €1,000. When the team takes a 2-0 lead, they notice that the correct score market for 2-0 is trading at 3.0. Instead of laying the team directly, they back the correct score at 3.0 for €333. This creates a hedge that pays out if the score remains 2-0, while still allowing for profit if the team scores more goals. This approach can be more profitable than a direct lay hedge when the correct score market offers better value.
Hedging strategies for tennis markets:
A trader backs a tennis player at 1.8 for €1,000. When the player wins the first set 6-3, the odds drop to 1.3. Instead of laying the player directly, the trader notices that the "Player to win 2-0" market is trading at 1.5. They back this market for €867, creating a hedge that pays out if the player wins in straight sets, while still allowing for profit if the player wins in three sets. This approach can be more profitable than a direct lay hedge when the set betting market offers better value.
Hedging techniques for horse racing markets:
A trader backs a horse at 5.0 for €1,000. As the race approaches, the horse's odds shorten to 3.0, but the place odds remain at 1.5. Instead of laying the horse directly, the trader backs the horse to place at 1.5 for €2,000. This creates a hedge that pays out if the horse finishes in the places, while still allowing for profit if the horse wins. This approach can be more profitable than a direct lay hedge when the place market offers better value, especially in races with a high number of runners.
Hedging strategies for cricket markets:
A trader backs a cricket team at 2.0 for €1,000. When the team reaches 150/2 after 20 overs in a T20 match, the odds drop to 1.5. Instead of laying the team directly, the trader notices that the "Over 180.5 Runs" market is trading at 1.8. They back this market for €833, creating a hedge that pays out if the team scores more than 180.5 runs, while still allowing for profit if the team scores between 150 and 180 runs. This approach can be more profitable than a direct lay hedge when the run market offers better value.
Gradually hedging a position as the market moves:
A trader backs a football team at 2.0 for €1,000. They set up a ladder hedging strategy with the following points: lay 25% at 1.8, lay 25% at 1.6, lay 25% at 1.4, and lay 25% at 1.2. As the team scores goals and the odds drop, they execute each hedge point in sequence. This approach allows them to capture more profit if the team wins easily while still protecting against a comeback. The ladder approach is particularly effective in volatile markets where prices can move quickly.
Hedging using related markets on the same event:
A trader backs a football team at 2.0 for €1,000. When the team takes a 1-0 lead, the match odds drop to 1.5, but the "Over 2.5 Goals" market rises to 2.0. Instead of laying the team directly, the trader backs "Over 2.5 Goals" at 2.0 for €750. This creates a hedge that pays out if more goals are scored, while still allowing for profit if the team wins 1-0. This cross-market approach can be more profitable than a direct lay hedge when the alternative market offers better value.
Hedging across multiple positions in a portfolio:
A trader has multiple positions across different football matches, with a net exposure of €5,000 on home teams. To hedge this portfolio, they take positions on away teams in different matches, creating a balanced portfolio that is less sensitive to whether home teams generally perform well. They also notice that their portfolio has a bias toward high-scoring matches, so they take positions in low-scoring matches to create a more balanced exposure to different match types.
Adjusting hedges based on changing market conditions:
A trader backs a tennis player at 2.0 for €1,000. When the player wins the first set 6-3, they lay 50% of their position at 1.5. When the player goes 3-0 up in the second set, they lay another 25% at 1.2. When the player faces break points at 3-1, they lay another 15% at 1.5. Finally, when the player serves for the match at 5-3, they lay the remaining 10% at 1.1. This dynamic approach allows them to capture more profit as the player's chances improve while still protecting against a comeback.
Built-in tools provided by betting exchanges:
A trader uses Betfair's position calculator to determine the optimal lay stake for hedging a €1,000 back bet at 2.0. They enter their original stake, original odds, and current lay odds of 1.5. The calculator shows they need to lay €1,333 at 1.5 to secure a profit of €167 regardless of the outcome. They also use the profit calculator to see how their profit would change if they laid different amounts, helping them decide on a partial hedge instead.
External tools for enhanced hedging capabilities:
A trader uses a third-party portfolio analyzer to evaluate their exposure across 20 different football matches. The tool shows they have a net exposure of €3,000 on home teams and €2,000 on over 2.5 goals markets. It also calculates the correlation between different markets and suggests optimal hedging positions to balance their portfolio. The trader uses this information to take offsetting positions that reduce their overall risk while maintaining their desired exposure to specific market factors.
Building your own tools for hedging:
A trader develops a custom Excel spreadsheet that calculates optimal hedge sizes based on their original position, current odds, desired profit, and risk tolerance. The spreadsheet also includes a Monte Carlo simulation that shows the probability distribution of outcomes with different hedging strategies. Using this tool, they can quickly evaluate multiple hedging options and choose the one that best balances profit potential with risk management.
Online calculators for common hedging scenarios:
A trader has placed an each-way bet on a horse at 20.0 for €100 (€50 win, €50 place). When the horse's odds shorten to 10.0, they use an each-way hedging calculator to determine how to hedge their position. The calculator shows they need to lay €25 at 10.0 to secure a profit of €225 if the horse wins, while still allowing for a profit of €75 if the horse places. This approach is more sophisticated than a simple back/lay hedge and takes into account the unique structure of each-way bets.
Optimal timing for implementing hedges:
A trader backs a football team at 2.0 for €1,000. They set a rule to hedge 50% of their position if the team takes a 2-goal lead, and the remaining 50% if the team takes a 3-goal lead. When the team scores twice in the first 20 minutes, they immediately hedge 50% of their position at 1.3, locking in a profit of €350. When the team scores a third goal in the 35th minute, they hedge the remaining 50% at 1.1, securing an additional profit of €450. This systematic approach ensures they don't miss hedging opportunities during fast-moving matches.
Situations where hedging may not be optimal:
A trader backs a tennis player at 2.0 for €1,000. When the player wins the first set 6-3, the odds drop to 1.5, but the trader notices that the player has won 95% of matches after winning the first set. They also observe that the player's opponent is showing signs of fatigue and has a poor record in deciding sets. Despite the odds movement, the trader decides not to hedge because their confidence in the original position has increased, and the cost of hedging (spread + commission) would significantly reduce their potential profit.
Common pitfalls in hedging strategies:
A trader backs a football team at 2.0 for €1,000. When the team scores in the first minute, the odds immediately drop to 1.5, but the trader decides to wait for the market to settle. However, the team scores again in the 5th minute, and the odds drop to 1.2 before the trader can hedge. This delayed hedging results in a much smaller profit than if they had hedged immediately after the first goal. The trader learns to act quickly when significant events occur, as markets can move rapidly in response to goals.
Mental aspects of effective hedging:
A trader backs a horse at 10.0 for €1,000. When the horse's odds shorten to 5.0, they hedge 50% of their position, securing a profit of €2,500 if the horse wins. The horse goes on to win at odds of 3.0, meaning the trader could have made €7,000 if they hadn't hedged. Despite this "missed profit," the trader remains satisfied with their decision because they followed their risk management plan and secured a guaranteed profit. They understand that consistently applying their hedging strategy is more important than maximizing profit on individual trades.
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