Product
Hedging
Definition
Placing a bet that offsets an existing position so as to lock in a profit or cap a loss whatever the result, done by bettors on exchanges or across bookmakers and by operators laying off liabilities they do not want to hold.
Key takeaways
- Hedging offsets an existing position with an opposite bet, locking in a profit or capping a loss regardless of result.
- For bettors it trades expected value for certainty; cash out is the operator’s packaged version at a margin.
- For operators, laying off liability with other bookmakers or exchanges is the core of risk management.
- Middling is a hedge with an upside: both sides taken at different lines so a result between them wins twice.
Why it matters
Hedging is the same idea on both sides of the counter. A bettor who backed a team to win a tournament at 20.0 before it started, and now sees it in the final at 1.8, can back the opponent at 2.2 for an amount that guarantees a profit whichever side wins; or, on an exchange, lay the original selection at the shorter price for the same effect. A bookmaker whose customers have loaded one side of a market can lay off part of the liability with another bookmaker or on an exchange, accepting a smaller expected profit for a smaller range of outcomes.
For bettors, hedging is a risk decision, not a value one. Every hedge gives up expected value (the hedging bet is placed at the market's margin) in exchange for certainty, and a bettor with an edge should, in theory, never hedge. In practice bankroll, tax and temperament all argue for it, and cash out, the operator's one-click hedge offered at a margin in the operator's favour, has made the concept mainstream. For operators, hedging is what the risk function does: the trading team decides how much of each liability to hold and lays off the rest, and the skill lies in holding the positions the operator prices well and laying off the ones it does not.
The term also describes arbitrage's cautious cousin: middling, where a bettor takes both sides of a market at different lines so that a result between them wins twice, is a hedge with an upside.
Frequently asked questions
How do I calculate a hedge that guarantees a profit?
Divide the potential return on the original bet by the decimal odds now available on the opposite outcome; that stake on the opposite side equalises the return. Any smaller hedge keeps some of the upside.
Is cash out the same as hedging?
It is a hedge the operator does for you, priced from the current market with a margin in the operator’s favour. Hedging yourself on an exchange usually returns more but takes effort and liquidity.
Why do bookmakers hedge?
To reduce liabilities on outcomes where customers have bet heavily, so that a single result cannot produce a loss the operator does not want to carry. The trading team decides what to hold and what to lay off.