In my arbitrage research, I came across with the sport betting – arbitrage strategy. Even when this blog is only about the financial markets, this topic of sport arbitrage is a very interesting to discuss.
What is Sports Arbitrage?
The Betting arbitrage technique usually happens when there is an inefficiency on the bookmaking (the predicted outcome of a sports event). This kind of arbitrage is possible because the metrics determining the winning odds of a specific match are very hard to predict. Also the inexistence of a single clearing house for sport bets makes possible the dislocations in betting prices.
Sports Arbitrage Betting Trading Risks
There are two big risks in the application of this strategy:
1. Execution Risk: trades need to happen simultaneously across two different exchanges or “betting houses” to make it profitable and hedge the risk; something very hard to do without the existence of a centralized market.
2. Cancellation Risk: there is a clause in sport betting that says that a bookmaker reserves the right of cancelling a bet if they discover an error on the odd making. In other words, did an arbitrage opportunity arise and they stand to lose money.
How to Sports Arbitrage
This kind of betting has many moving pieces but the best way to explain it would be with a practical exercise. First, the position will need to have four legs; 1 winning odd, 1 losing odd times 2 for bookies. Let’s take the Fight of the Century as example:
Muhammad Ali vs. Joe Frazier
|Bookie House||Bookie Home|
|Muhammad Ali Winning 6:1||Muhammad Ali Winning 3:1|
|Joe Frazier Winning 4:1||Joe Frazier Winning 7:1|
*Is very improbable that exchanges will make odds that look like this, but the math I am about to share with you is the same no matter what the odds are. I will present the probable results of this match in the case study of this post.
The Bottom Line
In order to participate in sports arbitrage, you need to be well informed about the odds in all running house before placing any kinds of bets.
Case Study Time
Develop an excel spreadsheet calculator that will track your bets and your profits through sports arbitrage trading. (click the image below for free download)