Understanding the Difference between Hedging and Arbitrage in Exchange Betting
A common misunderstanding among bettors is confusing hedging with arbitrage. This is because both strategies have to do with placing multiple bets in order to make a sure profit. In reality, these are two different strategies and it is important to know their similarities and differences.
What is Hedging?
Hedging is when bettors place a bet and then they place a second one in order to reduce potential losses from the first bet. In doing so, they make sure they do not lose too much money, no matter what the outcome of the bets.
In exchange betting, bettors use hedging strategy to minimize potential losses. In order to do so, they place additional bets.
Initial Bet
A bettors starts with a first bet on a specific outcome. In the example of a soccer match they place 100€ on Team A to win at odds of 3.00. The bettor could get back from this back bet 300€.
Changing Odds
As the event is in progress, anything could happen to cause a change in the odds for various outcomes. In the example of this soccer match, the odds for Team A to win might drop to 1.5.
Hedge Bet
The bettor then worries about potential losses and decides to place a new bet on the same event. This bet could be placed on a different outcome or the same outcome as the first bet but at different odds. This hedge bet will balance the bettor’s position. In the soccer match example, the odds for Team A to win drop to 1.5 and the bettor decides to bet on Team A not to win. With this lay bet the bettor has covered the potential loss from the initial bet and has locked in some profit.
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What is Arbitrage?
Arbitrage is finding different odds across various bookmakers for the same event and placing bets in a way that guarantees a profit. Bettors search for differences in odds offered by various bookmakers or exchanges and they exploit them in order to ensure a profit regardless of the outcome. So this strategy is not about placing additional bets, but finding and acting on odd differences before they are corrected by the market.
In exchange betting this become way easier, as it does not involve looking across various platforms.
In the example of the soccer match, a bettor decides to use arbitrage strategy.
Find Odds
they look for the odds offered and they can even offer their own and wait for other bettors to match them. The bettor finds back odds for Team A to win at 2.1 and lay odds for Team A to not win at 2.00.
Place Bets
The bettor places 100€ on Team A to win at 2.1 and then they lay Team A with 105€ at odds of 2.00.
Possible Outcomes
By placing a back bet and a lay bet using the differences in odds, the bettor has secured a profit no matter the outcome of the match.
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Pros and Cons of Hedging and Arbitrage
What are the Advantages of Hedging?
With hedging, bettors can cover multiple outcomes for an event and this way they minimize risk. With minimum risk, they can minimize losses and they can make sure they get back a profit.
Hedging is a very useful strategy in exchange betting, because in betting exchanges the odds change very quickly and the betting markets are more volatile.
What are the Disadvantages of Hedging?
With hedging, bettors usually receive a reduced profit compared to what they would have gotten back with taking the risk. Bettors also need to afford extra money because they need to place multiple bets.
This strategy requires time, effort, and skill, as bettors need to monitor the markets in order to find the best timing and the most favorable odds to place their hedge bets.
What are the Advantages of Arbitrage?
With arbitrage, bettors can ensure a profit regardless of the outcome. They can also exploit all the odd differences in the betting market, even create a few of their own in order to make arbitrage opportunities. By arbing, bettors do not have to be skilled in predicting the outcome of an event correctly.
What are the Disadvantages of Arbitrage?
In order to be able to make significant profit, bettors need to afford big capital. It is difficult to find arbitrage opportunities and bettors need to be very quick in their reflexes, because the odds change rapidly. Arbitrage activity is regarded by most platforms as suspicious and arbers are usually limited. This strategy also requires complex calculations in order to ensure a profit.
Key Differences between Hedging and Arbitrage
These strategies although they appear similar, they have a different goal. Hedging aims to reduce losses from a specific bet, while arbitrage aims to exploit odd differences to guarantee a profit.
Hedging reduces the risk but does not guarantee a profit. Arbitrage seeks a risk-free profit.
Arbitrage is more complex than hedging. It requires finding odd differences and acting on them quickly. Hedging requires only adjusting the bets when the conditions in an event change.
In Conclusion
Hedging and arbitrage are very common advanced strategies used by bettors in exchange betting. Although they seam similar to bettors and they often confuse them, they are very different, because they serve different purposes and they require different approaches. Understanding both strategies can help bettors make more informed decisions and get more skilled in their betting practices.