Hedging – Risk reduction strategy
1. What is hedging
“A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset.” – Investopedia
Simply put, hedging is a strategy to limit risk and guarantee the return of a bet.
It is used after we have made a certain bet by playing the opposite of this bet (we cover it) in certain situations.
It is very similar to arbitrage bets, except that bets are made at different times.
2. When we use it
We can use it before the match or live in two main cases.
The first case is when the odds are moving in our favor and for example, we have played a bet at higher odds and although they have moved in our favor, our bet is still not a favorite to win. Then we can take advantage of the advantage we have over the market and not wait for the bet, but hedge it by making a sure profit, playing the opposite bet with a certain amount that we can understand after using this calculator.
The second case is when the odds are moving in the opposite direction and we want to limit losses by covering the bet. So maybe we will be at a small loss again, but at least we will not lose everything.
European houses like Bet365 have a Cash-Out option that plays the same role, but there is a large commission to use and hedging is a good alternative, but Asian houses do not have such an option and it is imperative to know how to use it because situations arise that require it.
Example with active bets in Pinnacle
3. Example with a bet
I will give you an example with a bet we made on Odhod Madinah or a Draw of 2.00 odds, after which the odds moved in our favor to 1.53 and we had the opportunity to hedge it, ensuring a secure profit.
For this purpose, we could play with 42.74€ on the opposite bet, i.e. Al Jabalin to win, and as well as to end the event we will win 7.26€.
This bet was not the best example, because we believed in it and it was won, but a better example is with bets on higher odds, which despite their decline, are still underdogs and we choose a secure profit instead of we hope for a smaller chance to win.
If we play a tennis player at 4.00 odds to win and he falls to 1.85, then the other player will be at 1.85 (0.15 margin) and the chances are equal, but in case we had such a big advantage over the market instead of waiting, we can we guarantee a secure win by playing the other player to win a certain amount.
4. Summary (Pros and Cons)
In summary, I will share again that the main advantage of hedging is guaranteeing money and limiting larger losses.
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