November 19, 2003

Spread betting

Gambling is part of the life blood of Hong Kong and I've spoken about horse racing here before. Now Scott over at my regular read for sporting news and analysis is again warning on the dangers of spread betting. To some extent he's right. Spread betting is dangerous if you have no idea what it is. Also many object to betting full stop. If you understand what you are doing though, it can make sports that much more interesting.

The idea is simple. The traditional fixed odds bet says that if X wins, for every $1 you have wagered you will receive that $1 back plus $A. So when someone says this horse is at 4:1 (said as 4 to 1), that means for every $1 you wage, you get $5 back ($1 for the original wager and $4 for winning). For the mathematically inclined, odds of 4:1 say there is a 1/5th or 20% chance of that event happening. Fixed odds tend to work well when there is a single event with multiple contenstants, like horse racing.

But what if you are betting on a football game? Yes there are fixed odds depending on the relative abilities of the competitors. But most people can't be bothered with odds. They are tricky and are too much like 5th grade maths. Most people just want to bet $10 and either win it or lose it. A handicapping system of some kind needed to make such an even money bet. In a football game the easiest way to do this is to give the underdog team a head-start. These bonus points are called the line. For example, in this weekend's Rugby final, England are considered the favourites, so you can back Australia with a head start of 6 points. Again like all things there are some who will (mis-guidely) want to back the Poms instead. So a bookmaker steps in and makes a "market" on the line. The market might be England over Australia with +5 to +8. This means you can back England to win giving Australia 8 points head start or you can back Australia to win with 5 points head start. The difference is the spread, the bookmarkers profit margin. If lots of people start backing England to win at +8, the market will move, perhaps to +7/+10 and so on, until a market clearing equilibrium is reached.

These markets are always moving and trading. There are even some websites where people can trade spreads without the intervention of a middleman bookmaker. In other words it is exactly like trading shares. These prices move even during the games as they happen. Furthermore the bets can become more and more exotic, so for example you can bet on the total points in a game. Many betting houses have what they call "close-out" rules to prevent things getting too out of hand. If you are losing or winning to much, the betting shop will close out (settle) your bet at the market prevailing price at that time. These are called "stop loss" and "stop profit" levels.

So the end result is the downside and upside in spread betting is greater. However it is also much more flexible, offering a wide variety of things to bet on, and not just the result. Spread betting requires thorough analysis of potential profit and loss and it is always important to measure the maximum downside as well as upside.

The beauty of spread betting though is you can take bets off, at a profit or loss, before the event is decided. If you have a bet, once it's on, that's it. If you spread bet and the spread moves in your favour, then you can take off that bet and take your profit. Likewise if you change your mind and want to get out of a losing bet then you can do that too.

Spread betting is like playing in any market. It moves up and down and the possible gains or losses are not fixed. If you want certainty, you can bet fixed odds. You can only lose what you wager. If you want greater upside, then you risk for greater downside.

The most important rule of all though is to only bet what you can afford. Each bet should be considered as a likely loss and a win as a bonus. The trick is to try and find "value", where for whatever reason you think a particular bet is cheap or expensive. Again just like shares.

Betting adds new dimensions to sports, both good and bad. Money has always influenced sport and betting is a key part of that. However sports always remain different to normal commercial endevours for one simple reason: sports are about who wins the game, not who makes the most money. At least that's the idealistic view.

Here endeth the lesson.

Posted by Simon at November 19, 2003 02:49 PM | TrackBack

All in all, I'd still rather go long on the Dow then spread bet.

The basic problem with betting on sports is that you need to know more about the sport then the bookie- even if he's more a numbers monkey then he's bound to have a real expert on the payroll.

It was the great English keeper Godfrey Evans who rated England at 500 to 1 that fateful Headingley day in 1981, for example.

I could probably break even betting on cricket- no more then that though.

Posted by: Scott Wickstein at November 19, 2003 09:17 PM

I'm not a betting man, mainly because I don't believe that I can outwit the bookies and the professional gamblers. Where I have some knowledge I am probably biased, and where I more objective I am also less well-informed.

However, spread betting does interest me more than traditional fixed odds (or the 'tote' type market offered by the HKJC). I don't think it's for the casual punter, but if you put in the time and watch the spread as it changes you can spot good opportunities. If you get it right you can 'lock in' a profit regardless of the result, and if you get it seriously wrong you can close out and take your loss.

Posted by: Chris at November 22, 2003 04:14 PM
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