King Yao Article: 5th Reason to Hedge
Another common reason to hedge is if you have made a wager on a betting exchange that takes commission on net market winnings (such as Betfair or Matchbook). It increases your EV to make a zero or slightly negative hedge bet in the same market.
For example, suppose you short the Grizzlies +2.5 tonight at 1.9 for $100 (risking $90) at Betfair because you believe that they only have a 50% chance (fair value is 2.0) of covering that spread. Let's assume your commission rate is 4%.
If the Grizzlies don't cover, you will win $96 ($100-$4 commission).
If the Grizzlies cover, you will lose $90.
Your EV without hedging is .5*96 - .5*90= $3
But suppose you can buy back the Grizzlies at 1.99 for $95.48 (to win $94.52). You will win $4.52*.96 = $4.34 regardless of the result.
By making a slightly negative EV wager as a hedge, you have increased your EV from $3 to $4.34 while removing your variance.
|