I resurrected the Monday Mailbag in yesterday’s blurb, asking readers for questions on the things that they are curious about. Ashunn sent over a great question that definitely deserves more of an explanation.
Can you explain hedging futures when you don’t expect them to win it all?
This question likely stems from my recent article about Super Bowl LVII futures and my suggestions about the Minnesota Vikings and Atlanta Falcons. Crazier things have happened than the Vikings winning it all, but the Falcons are not winning the Big Game. Before I explain the hedging possibilities, allow me to explain the thought process behind betting a team that won’t win the Super Bowl.
If you take a favorite like the Bills or the Chiefs at 750, your ability to lock up profit can be limited. You more or less need that team to get to the Super Bowl or the Conference Championship Game. Obviously, it is pretty likely, but let’s say you’re sitting on $100 to win $750. As you start hedging, you start losing value on your initial position, which means you also have to wait longer to hedge. Just think about how those two teams had to face each other in the Divisional Round this past postseason. That was a tough spot for anybody with futures on those teams. (You also have a good chance at getting better odds during the season)
If you bet a favorite, you could end up with limited profit potential outside of picking the champion or a Super Bowl participant, unless you’re willing to take a larger initial position that may create more opportunities.
If you take a long shot like the Falcons, you’re holding a 50/1 ticket that you can basically hedge immediately because you have so much equity in that price. Even if you were to bet $500 against the Falcons in the first round, your ticket goes from $100 investment to win $5000 to essentially a $600 investment to win $5000, which still leaves a lot of hedging margin. If the Falcons win and your ticket lives on, it still has some major profit potential.
The idea for me is that you can bet a long shot and that is the kind of thing that adds equity as time moves forward. If the Falcons start playing well and the rest of the division stinks, that 50/1 price will go away. It might be 40/1 or 30/1. Your position gains strength in that situation. You could take a future on another team in that division at a bigger price as an in-season hedge. You could hold that position and hope that the team keeps improving or the team’s playoff chances get better.
A team like the Falcons won’t be a Wild Card. If they get in, they’ll win the division and get a home playoff game. Not only would they have a chance in that game, but it would also keep the line a little lower, depending on the Wild-Card team they would face. I’d just bet the moneyline on their opponent or look for other futures as a hedge.
Also, if the Falcons are bad, it was a low-risk, high-reward investment that just didn’t pan out. The shorter the price, the more you typically need to bet on it to make it worthwhile. The longer the price, the more you can speculate with smaller wagers in hopes that you get a team that goes on a big run, a la this past season’s Cincinnati Bengals. I’m not trying to pick the winner. I’m trying to guarantee profit.
A great example from the MLB season is the Milwaukee Brewers. I found the Brewers at 55/1 before the season and I felt like the NL Central was wide open, much like the NFC South in the Falcons example. I didn’t think the Brewers could win it all, but they did end up far better than I expected and were very live going into the playoffs. They lost to the Braves, but my position had a lot of equity with hedges on the Atlanta series price and a small Braves World Series future. Those are the opportunities I try to find.
Hopefully this is a good explanation. Keep the questions coming!