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How To Use Hedging Strategies To Reduce Your Risk

Reducing risk using hedging strategies

How To Use Hedging Strategies To Reduce Your RiskHow To Use Hedging Strategies To Reduce Your Risk

Hedging is a widely used concept but less understood and even lesser-used in practice. Hedging has its origins in the world of finance, where farmers would hedge against the adverse price movements in the price of grain. This would secure the price paid for the grain at the current market price. Should the price of grain drop in the future, then the farmer will still get the full price he expected to get. However, should the price of grain go up because of higher demand, a shortage, etc., then the farmer can’t sell his grain for a higher price, but for the price fixed on the hedge contract.

Hedging is currently used in commodity trading, grain contracts, sports, and betting. Think of hedging as an insurance policy. Hedging helps secure a punter from downside risk, at the cost of the hedge and at the expense of limiting a punter’s upside. But most importantly, a hedge does what it’s intended to do – provide the buyer of the hedge protection against losses.

How to use hedging strategies to reduce risk?

Punters across the globe have access to several hedging strategies that they can use depending on the situation’s circumstances and the type of wager made. Let’s take a look at how punters can adopt hedging strategies to reduce risk.

1.To Cancel A Wager

A hedge bet is placing an opposite bet of the initial bet you made. In effect, this cancels the wager made. A punter may feel he/she rushed into a bet too quickly, or throughout a game, the odds swing in the opposite direction, and he/she wants to change his/her bet. Let’s consider you bet on Chelsea to beat Ajax in a Champions League game. However, during the game, Ajax scores a couple of goals and is poised to win the game. This time, you bet on Ajax to win because you feel you’re going to lose your original bet. Effectively, you cancel out the original bet. A punter may win or lose a relatively small amount depending on which way the bet goes (also known as the juice).

2. Betting On Tournaments Or Series

A punter can use a hedge when betting on tournaments or series. In some cases, a punter can ensure making a profit irrespective of the result. Hedging your bets when betting on multiple games or a series can be very profitable if done correctly. Consider a series of 7 games between the Lakers and the Celtics. The Lakers are the favorite to win 2:1. You place a wager of $100 on the underdogs because they have a good team and better payout odds. If the Lakers lose the first game, you win $200. For the next game, the odds change in favor of Boston as they lead the series. The odds for the Lakers to win this game shift to 1:1.5. So if you bet $100 on the lakers to win, effectively, if Boston wins, you win $100. However, if the Lakers win, you make $50.

3. Making Bets During The Game

A punter can use a hedge when making bets during a game or in-play bets. In the same way, a punter would hedge a bet when betting on a series or tournament. Punters can also hedge bets made during a game. They have the advantage of seeing how the game is progressing and the odds that are on offer. Under the right conditions, a punter can effectively win irrespective of the result by betting on both outcomes, or he may lose a small amount.

4. Hedging Strategies Are Not Always Profitable

As mentioned, hedging secures a punter against severe losses should things not go as expected with a particular result. However, hedging isn’t always profitable and, in some cases, can be more damaging to a punter’s bankroll if his exposure isn’t limited. Moreover, opportunities to profit off a hedge rarely occur, and when it does, the odds of the bet move fast, changing the bet constantly. A punter must be accurate and quick at making calculations to profit off a hedge. In this respect, experienced punters have a slight edge when it comes to making a hedged bet.