A Super Bowl Hedge Bet

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The GameMaster's Secrets A Super Bowl Hedge Bet

No, I don't think the field where this season's Super Bowl will be played has hedges on it and even if it did, I wouldn't be recommending betting on them. What I want to talk about here is just one more idea for sports betting by using the very intriguing contracts that are available at TradeSports.com/. I've written about them twice before, so if you aren't familiar with what's offered there, please go through the previous articles (below on this page) and that'll get you up to speed.

The nice things about these sports bets is that they will "expire" at a price of either 0 (lose) or 100 (win), so it's very easy to figure your risk and/or potential profit in any trade you do. Being from St. Louis, I naturally hope the Rams will win the Super Bowl and I can make a bet on that right now. As this was being written, the price for that bet is 23 ($2.30 per "contract") and if I'm right, the contract will "settle" (close out) at 100, which is a profit of 77, or $7.70, minus $.08 in transaction fees (the "vig"). Because this is a future bet, my $$$ will be tied up until the game's over, so the cost of that has to be measured, too. Another consideration is that the Rams may not even make it into the Super Bowl, because they first must win their division title (NFC West) and then they have to win the Conference championship, which will get them to the big game.

This step-ladder qualification process raises some interesting betting scenarios that you might want to consider. Just as an example, let's look at the Rams and the Philadelphia Eagles. Because they're both in the same conference, only one of them can make it to the Super Bowl, yet at this time, you can place a bet on both. As I mentioned earlier, it costs 23 to buy a bet on the Rams winning the Super Bowl and a bet on the Eagles winning (not just getting there, but winning) is at 8. Naturally, if the Rams win the NFC, the bet on the Eagles will be worthless because they won't even get into the game and we'll know that long before Super Bowl Sunday. However, my faith in the Rams might be unwarranted and the Eagles could win the Conference, in which case the Rams bet will be worthless. One tactic to use in a situation like this is what we used to call, in the futures trading business anyway, a "hedge". This is a trade that has another "leg" to it that can offset some of the risk. Buying May corn futures and selling September corn futures is a type of hedge (often called a "spread"), as is owning actual "cash" corn and selling futures against the inventory, which is a true hedge. If one goes up in value, so will the other and vice-versa. There is very little risk in a true hedge, but there is also very little profit opportunity at the same time. In a cash/futures hedge, the producer or user of corn is just trying to lock in a price and that's the primary economic function of the commodity futures market. The big risk comes from what is known as a "basis" change, which is just a way of saying that the cash price may not mirror the futures price on a penny-by-penny basis, but the risk is still comparatively small.

My hedge is a little different and is really designed to take advantage of the fact that sports betting on a contract basis like this is fairly new, so the market is somewhat "inefficient". In other words, at this point in its development, these contracts don't necessarily reflect the actual conditions in the market place and sharp bettors might be able to take advantage of that situation. I want to state here and now that I'm not particularly recommending this trade, but I want to talk you through it so you can get an idea of how it works, but honestly, there's not a lot of profit in it. That's not to say, however, that there's not profits to be made from using this idea, but it'll take some homework on your part to seek out a suitable situation. Perhaps it's in baseball, or in the AFC or perhaps something entirely different, but the technique is pretty much the same, so stay with me.

Okay, I think the Rams will win the Super Bowl and the Eagles won't (they're my brother's favorite team and he's not going to be happy about this, but that's life in the NFL for you.) And yet, "da Birds" might pull it off, so let's hedge our bets by starting with the NFC Championship game. Who knows, the two may meet at that game, but only one will win it, that's for sure. As this was being written, a bet on the Rams to win the NFC Championship was trading at 33 and the same bet on the Eagles was at 15. So, let's buy the Rams and sell the Eagles for that game. Our net outlay would be 18 plus the transaction fees on two contracts, for a total cost of $18.16 per "unit". At the same time, let's do the opposite for the Super Bowl by selling the Rams at 23 and buying the Eagles at 8. Because we're sellin "short" on the higher-valued contract, we'll have a net income of 15 (minus the vig), which will offset a good portion of our outlay for the NFC Championship bet. We will still have a "margin" requirement for the bet, however, so at least some of our $$$ will be tied up for many months, but it won't be a huge amount.

Ignoring commissions for the moment (which really isn't fair, because they can eat up a major portion of any profits) will at least make the calculations easier, so our net cost for each hedge would be 18 minus 15 = 3. Now we have to analyze our risk, so we need to consider all possible outcomes. If neither team makes it to the NFC Championship game, then all contracts will go to zero. That's good in the cases where we sold the contract, because it's now worthless. So, we sold the Eagles at 15 and sold the Rams at 23, which gives us 38 (again, ignoring transaction fees), but we also bought two contracts and they'll be worthless as well. We bought the Rams at 33 and bought the Eagles at 8, so we'd lose 41 on those, in total. Thus, our risk is 41-38 = 3 per "unit", plus transaction fees of $.32 for a grand total of $3.32.

But the Rams are going to win the Super Bowl, dammit! If that happens, they have to first win the NFC and the Eagles will not. We bought the Rams at 33, so we'll make 67 on that and we sold the Eagles at 15, but that will be worthless, so we'll net 67 + 15 = 82, minus fees. However, we sold the Rams at 23 for the Super Bowl and that will certainly go up in value, but remember that it's a bet that the Rams will WIN the Super Bowl, so it won't go to 100. But, just to be conservative, let's say it goes to 70, so we'd lose 47 on that, plus the buy we made on the Eagles at 8 will be at 0, so we'd lose 8 on that, also. Thus, we'd lose about 55 on this "leg" of the trade,which will net out to 82 (our profit on the NFC game) minus 55 (our loss on the Super Bowl bets) = 27, minus transaction fees of $.32, which gives us a profit of $2.38. Not very impressive, until you consider that the investment is $3.32. On a percentage basis, that's not bad at all.

However, the Rams might not win (on any given Sunday, etc.) and the Eagles could go "All…The….Way" (a little Chris Berman there). Well, we'll lose 33 on the Rams in the NFC, plus we'll lose 85 on the Eagles (we sold them at 15, remember? Ouch!), for a total loss of 118 The hedge will kick in here, though, and we'll make 23 on our sale of the Rams for Super Bowl, plus we now own the Eagles to win it and we paid only 8 for that bet. If the Eagles meet and beat the Rams in the NFC Championship game, I just have to believe that the bet will go to 60 or more, but maybe I'm wrong, so you might want to do some research on it. But if it does go to 60, we'll make 52 plus 23 = 75 on this "leg", maybe a little more. But we lost 118 on the NFC bet, so our net loss will be about 45 or $4.50 plus fees of $.32. This is the real risk for this scenario, but a "gambler" might hold on to the Eagles bet and, if they win, come out of it even.

The real "nightmare" scenario would be that the Rams don't make it to the NFC Conference game, but the Eagles do and they lose the game. That leaves us losing 33 on the Rams plus 85 on the Eagles for the same 118 loss, but then we'd also lose 8 on the Eagles bet for the Super Bowl, although we'd make 23 on the Rams bet for that game, so we'd end up a loser of -126 + 23 = 103, plus transaction fees. This is probably the maximum risk for this trade, but it's considerable when you consider the investment, so it's probably not wise to do hundreds of these contracts.

Like I said earlier, all I wanted to do with this was to show you some ways that bets like this can be used together. I believe that there are a lot of opportunities for those who think creatively in this game and the fact that you're here reading this tells me you're smarter than the "average bear". Some research will, sooner or later, turn up a bet like this where a profit can be locked in. A small profit, to be sure, but a profit nonetheless. Such "arbitrage" bets actually help improve the market's efficiency and that's always a good thing, so don't be shy about seeking them out.

I'll see you here next time.