Hedging<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com
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By Daniel Song<o></o>
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The end of the football season is near. Of the 28 bowl games, only one is left – the Orange Bowl, the mythical national championship game. The NFL has wrapped up its final week of play, and playoffs are about to start. And if you were one of the fortunate souls to place a large futures wager on the Atlanta Falcons or Pittsburgh Steelers, you should be in a great position to make a tidy profit. But your job is not done yet: by placing a few additional wagers, you can guarantee yourself a profit and reduce your potential risk.<o></o>
></o><o
></o>Distinguish between “live” and “dead” positions.<o
></o><o
></o>During the course of the season, I made three major recommendations in NFL futures to VSA subscribers. Here is a list of my selections:<o
></o><o
></o>Atlanta to WIN NFC at +1200 (1.5*)<o
></o>Atlanta to WIN NFC at +800 (1.5*)<o
></o>Pittsburgh to WIN AFC at +6000 (1.5*)<o
></o>Denver to WIN AFC at +600 (1*)<o
></o>Denver to WIN AFC at +1200 (1.5*)<o
></o><o
></o>Atlanta clinched the NFC South with three weeks to spare, and the #2 seed and a first-round bye with two weeks remaining. Pittsburgh went on a 13-0 run with Roethlisberger as the starter (25 straight wins for the QB, including his last 12 in college!), and clinched a #1 seed and home-field advantage throughout a playoffs. Denver, on the other hand… barely managed to sneak into the playoffs, thanks to a less-than-inspired effort by the Indianapolis Colts.<o
></o><o
></o>Since the Wild-Card format was introduced in 1978, only ONE team (the 1985 New England Patriots) has won three ROAD games to reach the Super Bowl. On the flip side, 16 out of the last 20 Super Bowl participants were either the #1 or the #2 seed in their conference – hence the recipients of a first-round bye. Though anything can happen in the topsy-turvy NFL, it’s safe to say that Atlanta and Pittsburgh are strong contenders in their respective conferences, while Denver is a longshot at best. Thus you will likely have ample hedging opportunities with the first two teams, while you are reduced to hoping for a pair of upsets with the Broncos.<o
></o><o
></o>In general, the #1 and #2 seeds are “live”, while the #5 and #6 seeds are “dead”. The #3 and #4 seeds lie somewhere in between, so use your own discretion with these squads.<o
></o><o
></o>Determine the “value” of your position.<o
></o><o
></o>Once again, Tradesports can be an invaluable resource in determining the market value for various teams, as the prices on the board are generally “fair” – unlike the infamous futures board in Las Vegas, which have built-in juice in excess of 30%. But proceed with caution: their odds reflect the opinion of the betting public; your assessment of teams may be very different. For example, if you feel that Pittsburgh is likely to make an early exit, you might want to “tweak” Tradesports’ numbers to reflect your own opinion. Make sure to handicap each team, using market odds as a starting point, and write down your results in a chart like this:<o
></o><o
></o>(Disclaimer: these odds are purely hypothetical. Do NOT use these numbers for handicapping purposes!)<o
></o><o
></o>Team % Win Conference Team % Win Conference<o
></o>Pittsburgh 32 Philadelphia 53<o
></o>New England 35 Atlanta 21<o
></o>Indianapolis 18 Green Bay 12<o
></o>San Diego 10 Seattle 7<o
></o>NY Jets 3 St. Louis 4<o
></o>Denver 2 Minnesota 3<o
></o><o
></o>Determine the proper size of your wagers.<o
></o><o
></o>The size of your wager depends on three factors:<o
></o><o
></o>1. The potential value of your hedge wagers.<o
></o>2. The value of your original wagers, if your hedge wager wins.<o
></o>3. The value of your original wagers, if your hedge wager loses.<o
></o><o
></o>Here is a hypothetical example of how you can put these principles into practice:<o
></o><o
></o>Example 1. During the Wild Card Round, Indianapolis defeated Denver, while the NY Jets upset the San Diego Chargers. Indianapolis next plays at New England, while the NY Jets play at Pittsburgh.<o
></o><o
></o>Currently you have a 1-unit wager on the Steelers to win the AFC at 20-1, and a 1.5-unit wager on the Jets to win the AFC at 15-1. You have handicapped the remaining teams, and have come up with the following probabilities for winning the conference:<o
></o><o
></o>Team % Win Conference<o
></o>Pittsburgh 36<o
></o>New England 34<o
></o>Indianapolis 22<o
></o>NY Jets 8<o
></o><o
></o>New England is a 3.5-point favorite over Indianapolis (-170/+150) while Pittsburgh is a 7-point favorite over the NY Jets (-370/+270). How should you proceed from here in order to secure a profit?<o
></o><o
></o>Step 1: Determine the total value of your original wagers.<o
></o><o
></o>A 1-unit wager on Pittsburgh will return 21 units if Pittsburgh wins the conference (your original wager + 20 units of profit). Therefore, the value of this wager is 36%*21 = 7.56 units. A 1.5-unit wager on NY Jets is worth 8%*(1.5+1.5*15) = 1.92 units.<o
></o>Total: 7.56 + 1.92 = 9.48 units.<o
></o><o
></o>Step 2: Determine the value of your potential hedge wagers.<o
></o><o
></o>The prognosis on Ben Roethlisberger is not good, as he suffered a setback during practice and is listed as questionable in the injury reports. It’s quite likely that Maddox will be forced into action in this game. In addition, Bettis’s recovery has been slower than expected, and he is a game-time decision. Thus, you give Pittsburgh only a 72% chance of winning the game.
<o
></o> Then the expected return on a wager on Pittsburgh is (370+100)/(370)*72% = 91.5%, while the expected return on a wager on the Jets is (270+100)/(100)*28% = 103.6%.
<o
></o> When hedging, it’s usually good practice to absorb a small loss in order to secure a profit. But in this case, a hedge wager on Pittsburgh is clearly a lousy bet; thus you should probably bet on the Jets, or pass.<o
></o><o
></o>Step 3: Determine the value of your original wagers, if your hedge wager wins.<o
></o><o
></o>The best way to do this is to pretend that the Jets won, ignore the result of the other game, and make a new table of probabilities for winning the conference:<o
></o><o
></o>Team % Win Conference<o
></o>New England 44<o
></o>NY Jets 29<o
></o>Indianapolis 27<o
></o><o
></o>Your wager on Pittsburgh is now worthless, and your wager on the Jets is now worth 29%*(1.5+1.5*15) = 6.96 units.<o
></o><o
></o>Step 4: Determine the value of your original wagers, if your hedge wager loses.<o
></o><o
></o>Consider the case where Pittsburgh has won:<o
></o><o
></o>Team % Win Conference<o
></o>Pittsburgh 50<o
></o>New England 30<o
></o>Indianapolis 20<o
></o><o
></o>Your wager on the NY Jets is now worthless, and your wager on Pittsburgh is now worth 50%*(1+1*20) = 10.5 units.<o
></o><o
></o>Step 5: Determine the size of your hedge wager.<o
></o><o
></o>If the Jets win, your original wagers will be worth 6.96 units; if they lose, your original wagers will be worth 10.5 units. In addition, you’ve determined that a wager on the Jets is a potentially profitable one, while a wager on Pittsburgh is so brutal that it does not even merit consideration.
<o
></o> Clearly, you should proceed by wagering on the Jets on the money line at +270 – this will make up for your potential losses in the case of a Jets victory. The size of the wager should be such that your TOTAL value (value of your original wagers + value of your hedge wager) is the same no matter which team wins. Thus:<o
></o><o
></o>Pittsburgh wins:<o
></o>Value of original wagers: 10.5 units<o
></o>Value of hedge wager: 0 units<o
></o>Total: 10.5 units<o
></o><o
></o>NY Jets wins:<o
></o>Value of original wagers: 6.96 units<o
></o>Value of hedge wager: 10.5 – 6.96 = 3.54 units<o
></o>Total: 10.5 units<o
></o>Size of hedge wager: 3.54/((270+100)/(100)) = 0.96 units<o
></o><o
></o>If you like, you can take this analysis a step further – clearly, the result of the New England/Indianapolis contest will affect on the chances of NY Jets and Pittsburgh winning the conference. I’ll leave the calculations up to you for the time being… but feel free to e-mail me with your questions over the course of the playoffs, should you find yourself in a similar situation.<o
></o><o
></o>http://forum.therx.com/showthread.php?p=1701009#post1701009
