Hedge Your Bets To Cover The Spread

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One of the most common terms in betting is to “hedge your bets” – a phrase that has been around for hundreds of years in the English language and is also used in everyday terms, not just in a gambling setting.
When we talk of “hedging our bets” in a gambling context however, what exactly do we mean?
Well in simple terms it means betting on more than one outcome in an event, thus giving you a better chance of winning and making a profit. 
It is employed by hedge funds in the stock market to great effect by managing the risk of certain positions by taking up other – often opposing – positions. So that could be managing risk by holding long term stocks whilst short-selling other stocks in similar sectors for example. The idea is to minimise risk whilst maximising gain.
But how can you apply such a strategy to the betting markets and does it actually provide you with any kind of edge?
We will have a look at these questions below, together with examples of how to hedge your bets and some advanced strategies for hedging like the pros.
In simple terms hedging means placing more than one bet on the same event to give you a greater chance of winning and making a profit. The downside of hedging is that will reduce the amount you could win compared to if you just backed one outcome.
Let’s say you were lining up some bets for the US Open tennis and you had a feeling the winner would come from one of the “big three” of Djokovic, Nadal and Federer, but you couldn’t decide which one was actually going to win from those three.
Here are the odds for the tournament on Oddschecker:
By hedging your bets, you could back all of them and cover the possibility of any of them winning.
Doing this would mean your potential winnings would be considerably less than by just backing one, but would significantly increase your chances of finding the winner.
In simple terms, if you wanted to back Djokovic, Nadal and Federer so that you would win the same amount if any of them won, at the odds displayed above (11/4, 4/1 and 11/2 respectively), for an outlay of £100 you would place the following bets:
If you placed your bets in this fashion, you would win £61.16 if any of those three players won the tournament.
So it is a little like backing those three against the field at odds of 8/13 (or 1.61 in decimal terms).
Of course, you might have a slight preference for one of the players, but still want to have the other two as back up.
In this case, if you wanted to stake £100 in total but win most if Djokovic won the event, you could for example place £50 on Djokovic and then £25 each on Nadal and Federer. 
Then if Djokovic won, you would end up with £137.50 profit, where as if Nadal won you would end up with £25 profit and if Federer won you would finish with £62.50 profit.
There are endless permutations you could choose in terms of your selections and staking, but these are two basic strategies for hedging that you could employ to try and spread your risk and give yourself a better chance of making some profit from an event.
There are some more advanced strategies you can use to maximise your profits from this kind of hedging, which we will discuss further below. 
Another approach to hedging is to use it as a tool to reduce risk during an event once your position has started to develop.
So let’s say you were betting on the Women’s US Open, with the odds at the start as follows:
Let’s say you chose to back Serena Williams at the start at 6/1 (7.0) and she progresses well through the tournament to reach the semi-finals, when her price is then just evens (2.0).
You may feel like although she has done well to reach that stage, she is not quite playing her best and is vulnerable to one of the up-and-coming players, so want to reduce your risk.
You could then hedge your bets by either laying Williams at the exchanges, or alternatively by backing one or more of the other players.
If you go for the more straightforward option of laying Williams, you might decide that you want to give yourself an equal profit whatever happens. 
In this instance, let’s say you had backed Williams for £100 at 7.0 at the start of the event, then want to lay her at 2.0 for equal profit. 
Here is an example of how you would do this on Betfair:
So having backed her at the start for £100 at 7.0, by then laying for £350 at odds of 2.0 later on, you would guarantee yourself a profit of £250 whatever happens and would have successfully hedged your bet.
Or you may wish to set things up so that you just leave yourself with a no-loss position, such that if Williams doesn’t win you break even and haven’t lost anything, but if she wins you pocket £500. And there are of course many other hedging positions you could take in between, but the principle is the same – to reduce risk and cover more outcomes in the event. 
This kind of strategy is often used by professional traders who aim to predict short-term movements in the odds they can take advantage of, rather than having to actually predict the outcome of an event.
There are some more advanced strategies that can be used with hedging, which we will take a brief look at here.
Strategy One – Offsetting Potential Profit
An approach used by some professional traders is to build up a position in a similar fashion to the original example in the Men’s US Open above where you have backed Nadal, Djokovic and Federer.
Let’s say they have all progressed very well and Djokovic is in the final, with Nadal and Federer due to play each other in the semi-final. If you felt confident of the result and saw that one player was off their game, you could use the potential profit of one to back the other two by that amount, or a portion of that amount.
So if you stood to win £50 on Federer if he won the tournament, you could “use” that to place additional £25 bets each on Nadal and Djokovic, thus upping your potential wins on them, whilst still ensuring you aren’t going to lose any money on the event.
This is a more risky strategy as if things go against you, then you could end up throwing away some potential profits, but for experienced traders this approach gives them the chance to see how the tournament progresses and who is playing well so they can then rebalance their positions to try and maximise profits.
Strategy Two – Correct Score Hedging
One of the most popular forms of hedging is with the correct score market in football matches. The attraction of this is that offers a way to back a variety of outcomes that can either just be left to run as bets or traded out as the game progresses. 
So for example you may think that a team is likely to win a game but that it will be a tight and cagey affair. So you may hedge on the 1-0 and 2-0 with a little bit of insurance on 0-0 in case it ends up in a deadlock. Hedging in this way on teams like Athletico Madrid would have done very well over the last few seasons as they are very adept at getting narrow, low-scoring wins. 
There are more advanced correct score strategies available in packages such as Goal Profits and Assured Soccer Profits that build on covering multiple outcomes in the correct score market and trading them in-play.
Strategy Three – Hedging Related Outcomes
Another approach to hedging is to back related outcomes in a game and to trade them as events unfold. 
So it could be for example that you back over 1.5 goals, under 2.5 goals and both teams to score, hedging your bets across these outcomes so that you are covering different eventualities. They are related to each other in the sense that a goal (or a lack of) will affect all of them in certain ways and none of them are independent of the others. 
Then you are hoping for a situation where the game goes 1-1 after an hour or so and your trades will be in a positive position, allowing you to trade out for a nice profit. 
Again there are more strategies like this that involve trading related outcomes as part of packages like Goal Profits. 
Hedging is a tool for spreading your risk and covering more than one outcome in an event. It can be used both pre-event and in-play and is a preferred strategy of many professionals, whether traditional “hedge funds” in the stock market or traders on Betfair. 
Hedging does not guarantee profit – there is no gambling strategy that does (other than matched betting through a tool such as Profit Maximiser) – but hedging can be helpful in certain circumstances.
It is perhaps best used in situations where you have an idea of certain outcomes that are likely to occur but can’t settle on just one, so want to cover these scenarios rather than placing all your eggs in one basket. This could be backing a few different players winning a tennis tournament or scores in a football match for example.
There are also advanced hedging strategies which again don’t guarantee profit but when used properly can significantly reduce risk and help guide the way to beating the market.
As always, if you are hedging or using other betting strategies then please gamble responsibly and only risk money you can afford to lose. 
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Another trading strategy is using spread betting as a hedging mechanism; indeed the recent volatility has made hedging more popular amongst investors and necessary. Financial spread betting involves betting on the direction of a financial market without buying or selling the underlying instrument. Hedging at its core is different from speculative trading in that traders actually have an asset to protect – they are not just taking a bet on prices and hoping to make a profit. Because of the relatively high level of gearing and the favourable tax treatment of profits, it can be a useful and effective method of hedging a portfolio or a currency exposure for the short to medium term.
Spreadbets are a useful instrument for hedging purposes. You can hedge because financial spread betting allows you the ability to bet on whether a financial instrument will move up or down in value; the fact that spread bets are leveraged means that investors can protect their shares portfolio with a financial outlay that is just a fraction of the value of their shareholding. But short selling isn’t only useful for speculation, though. Since spread betting allows the option to profit from falling market prices, it offers a perfect protection for anticipated losses portfolio values. Hedging essentially means protecting or trying to minimise any risk that may affect your existing investment portfolio. Hedging in this respect involves using spread betting as part of a short-term strategy as a means to protect your shares portfolio when faced with market turmoil.
Some speculators tend to hedge when important economic news is due like a company issuing a trading update or big economic news. In this respect, financial spread betting allows you to setup a quick and effective hedge to protect your investment portfolio without having to sell and exit your long term positions. Having said that using spread bets as a hedging mechanism is not ideal due to the tax regime. This is because profits from spread betting are a wager for tax purposes which effectively means that while gains are not taxable, losses are likewise not allowable and thus cannot be offset against profits elsewhere.
“One of the benefits of spreadbets is the ability to hedge a shares portfolio using either an index or stock trade. Hedging involves taking an opposite trade that will offset any losses in the actual investment. Normally hedging is used to limit or minimise the risk in an investment”
Spread betting provides traders and investors alike with an excellent trading tool capable of protecting investments against unfavorable movements in share prices. While some market participants are day traders in spread bets, others are investors who use them in conjunction with other investments as a way to mitigate risk or limit any possible harsh consequences of stock market volatility. Spread bets allows traders and investors to lock stock value at the present price by placing a down bet in the same stocks in their portfolios, which is especially useful if a market or share is about to fall in value. For example, such investors will go short in the market to benefit from falling markets to hedge against their existing shareholdings. Additionally, spreadbets being margined transactions means that you are able to leverage short positions. So for a fraction of the underlying market exposure, you can undertake a hedging strategy.
Placing a bet of £1 per point is the equivalent of holding 100 shares, so with a holding of 10,000 shares, placing a down bet of £100 will lock the value of the holding until the hedge bet is closed. For instance, if you were worried that your existing shareholding worth £10,000 of Vodafone shares might be in for a rough ride in the short-term but you still believed your investment to be sound for the longer haul, you could short sell the equivalent of £10,000 Vodafone shares using a spreadbet. Because spreadbets are traded on margin, you only need a fraction of the total notional value of the trade in your trading account to open the trade. Should Vodafone’s stock price then fall by 10%, the loss in value of your shareholding would be offset by a gain in your short sell spread betting trade.
Equally, if you were of the opinion that the markets will keep recovering but you aren’t so confident to buy heavily in the real market, a spreadbet could be used to hedge against underlying shares that you own. Let’s say you owned 5,000 shares in Barclays and was worried about them in the short-term due to the ongoing Eurozone problems but still wanted to retain them as part of your longer term investment strategy. These Barclays shares could be part of your ISA or SIPP for instance. In this case you could take out a short position (this is selling a share with the expectation that its value will decline) if you are uncertain of how a stock will do in the future, but you want to keep hold of the underlying stock.
“Some investors even utilise spread betting for hedging purposes to neutralise market exposure. If they have, for example, a basket of FTSE 100 stocks or securities, financial spread betting can prove to be very cost-effective mechanism of hedging that portfolio because there are no commission charges and also very low setup fees.”
Let’s take an actual example. You bought 100,000 of ordinary stock in Company XYZ at £1 per share. Over a 6 month period they increase to £120p and are now worth £120,000. You think that they might fall back to about 110p per share but wish to avoid selling them now to avoid creating a capital gains tax liability so you decide to take out a spreadbet. This way, if your fears prove right, although you’ll still lose money on the shares, you’ll make money on your short spread betting position.
So you take out a short position at 120p with a spreadbet at £1,000 per point. This is the same as a stock exposure of £120,000 and with a 10% deposit margin, you would only need to put down £12,000 to open the position. As you feared, the stock price falls to 110p and now you close the spreadbet, buying at 110p and giving you a gain of £10,000. So in essence you have lost £10,000 on your shares holdings, but the loss has been offset by a tax-free £10,000 profit on your spread bet.
For instance, back in 2007-2008 when the credit crunch was heavy underway, anyone who owned shares in a bank institution or home building company could have sold the spread-betting quote. And while their underlying share value was going down, their spread betting would have offset the losses incurred on their shares positions.
Several times recently I’ve seen my holdings in ARM stock jump on some rumour and then fall back as the market overreaction settles back. The temptation is to sell after such a jump and then buy back, but one could use a an opposing spread bet to lock in the financial gain more cost-effectively. Though here you have to take into account the opportunity cost of the margin funds as you have to keep this at the spread betting company rather than investing it. This type of hedge is particularly effective if you have a shares portfolio which is overweight on a particular sector as shorting a key stock in that sector will help reduce the downside risk. Please note, however, that if you take a short equity position you will be liable for the disbursement of any dividends (when/if this comes due) so its a good idea to keep a calendar and make sure that a share is not about to go ex-dividend if you want to avoid this charge.
Spreadbets can also be used to hedge against rising household costs, such as fuel bills, food prices and rising mortgage repayments. Say, if you are worried about rising interest rates and do not have a fixed-rate mortgage, you can take out a ‘sell’ bet on short-dated UK treasury bonds (short sterling). That way, if interest rates rise more than expected, you will make money that you can use to offset higher mortgage repayments. Likewise, if you were thinking about buying a property in Spain later this year but were concerned the sterling/euro exchange rate might adversely affect your purchasing power – you could hedge your exposure with a spreadbet. If the exchange rate is, at say, 1.17, and you believe it might reach parity you stand to lose 17% of the value of your sterling. You can take a short trade for the equivalent value of your future property purchase to protect yourself against such a scenario.
Other forms of hedging could make use of options and warrants, but they don’t offer stop-loss orders to limit orders, In addition, spread bets generally can be rolled over overnight so have not strict time limits. The other day someone suggested to me that if you had high-yielding corporate bonds but were concerned about the company’s ability to continue paying, you could hedge part of the risk by taking a short position on the company’s stock using spread bets (but then maybe it might make better sense selling the bonds immediately?)
Note that hedging is designed to eliminate market exposure and is not a means to making an overall gain – it will simply ensure that you will always roughly breakeven. Hence, hedging your portfolio does somewhat reduce the prospect for making additional gains but in certain circumstances it makes practical sense to cover your posi
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