Lesson # 1

ARBITRAGING - 5 Part Tutorial

Who is this tutorial aimed at?

This tutorial is aimed at those who wish to gain a basic understanding of, and understand the methods involved in, arbitraging.

Win or lose - you win!

Do you like the idea of a free bet?  Do you like the idea of profiting from a horse regardless of whether it wins or loses?  Then ARBITRAGING is definitely for you and you are invited to read on.

What is Arbitraging?

The word Arbitrage is derived from the French word arbitrer which means to ‘give judgement’.

One dictionary defines Arbitrage as ‘the simultaneous buying and selling of assets in different markets or in derivative forms, taking advantage of the differing prices.’  A second defines it as the trading of one currency for another in the hope of taking advantage of small differences in the currency conversion rates in order to achieve a profit.  For example, if $1.00 buys £0.7, £1 buys 9.5 Euros and 1 Euro buys $0.16, then an arbitrage trader who starts with $1.00 earns: 1 x 0.7 x 9.5 x 0.16 = $1.064.  This produces a profit of 6.4 cents or 6.4 percent.  6.4 cents doesn’t seem much but if, instead of trading $1, we trade $1,000,000, the profit would be $64,000!

From the above, it can be seen that Arbitraging isn’t about buying or selling anything.  It’s about deciding whether the price of an item will increase or decrease in value and taking advantage of the price movement.  A currency trader doesn’t buy or sell a currency with the intention of keeping it.  The trader only buys a currency to sell it at a profit.

So, what has all this got to do with horse racing and betting in general?

The best way to describe arbitraging is by way of the following examples:

Let us assume that a horse called ‘Arbit’ is running in the 3:30 race at Sandown.  The odds to lay Arbit to lose on one of the betting exchanges is 5.0. (The odds on betting exchanges are expressed in decimal form, by the way).  If you feel that that the odds on Arbit will increase before the start of the race, you should place a bet on Arbit to lose.  Then, when the odds have increased, you should place a bet on Arbit to win.

Let’s work through this example:

If you were to place a £10 bet on Arbit to lose, your liability on this bet, should Arbit win, would be £40 ((£10 x (5.0 - 1.0)) = £10 x 4.0 = £40.  In other words, if Arbit wins, you would lose £40.  If Arbit loses, you would win £10.

If the odds on Arbit then increase, for example to 10.0, you could placed a bet on Arbit but this time to win.  If you place a £5 bet on Arbit to win at 10.0 and Arbit won, you would win £45 ((£5x(10.0 - 1.0) = £5 x 9.0 = £45).  If Arbit lost, you would lose your stake i.e. £5.

Now let us look at all of the the possible outcomes of the race from Arbit’s point of view:  There are only two:  Arbit wins or Arbit loses the race.

Now let’s look at the net effect of the two bets based upon the race outcome:

Notice that, irrespective of whether Arbit wins or loses,  the profit is the same; £5.

What has actually been achieved by placing the two bets?  A bet was ‘purchased’ on Arbit at a particular price and re-sold at a higher price, thus making a profit in the process.  What actually happened was that a bet was sold on Arbit to lose for £10 (the lay bet) and a bet was purchased on Arbit to win for £5 (the back bet).  The result was a £5 profit.  The result of the race was immaterial.

We have now dealt with the case where we think that a horse’s odds will increase.  Now let’s deal with the case where we think that a horse’s odds will decrease.

Let us again suppose that ‘Arbit’ is running in the 3:30 race at Sandown and that the odds on Arbit are 5.0.  If, this time, we think the odds on Arbit will decrease, we could place a bet on Arbit to win, wait for the price to fall and then place a bet on Arbit to lose.

Now let’s work through the following example:.

Let’s place £5 on Arbit to win at odds of 5.0.  The potential profit on this bet is £20 (£5 x (5.0 - 1.0)) = £5 x 4.0 = £20).  In other words, if Arbit wins the race, we win £20.  If Arbit loses, we lose our stake of £5.

If the odds on Arbit decrease, for example to 2.5, a second bet could then be placed on Arbit, but this time to lose.  Suppose that a £10 bet is placed on Arbit to lose at 2.5.  If Arbit loses, the liability will be £10 x (2.5 - 1.0) = £10 x 1.5 = £15.  If Arbit loses, we win £10.