Lesson # 2

Now let us look at all 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:

Result	Arbit Wins	Arbit Loses
Win Bet	+£20	-£5
Lay Bet	-£15	+£10
Net Effect	+£5	+£5

Notice that, irrespective of whether Arbit wins or loses the race,  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.

This is what Arbitraging is all about.  It isn’t about betting on the outcome of a race.  It’s about profiting from a movement of the odds on a horse in a race, rather than on a horse’s performance.  That is why the outcome of a race is unimportant in arbitraging. What is important in arbitraging is that the odds on a horse move in the predicted direction.  The more that the odds move in the predicted direction and the greater the size of the bet, the greater is the profit.

So why not Arbitrage all of your bets?

If arbitraging a bet always leads to a profit, regardless of the outcome of a race, why wouldn’t we arbitrage all of our bets?

Firstly, the odds on a horse may remain fairly constant.  As a result, arbitraging a bet may not be possible and we will have to honour the initial bet.

Secondly, the odds on the horse may move in the opposite direction to the one anticipated.  As a result, arbitraging our bet isn’t possible and we will have to honour the initial bet.

Thirdly, if we arbitrage our bet, there is a penalty which we must pay because you can’t have something for nothing - not in this world and certainly not in horse racing!  The penalty is that most of the profit potential on a horse must be sacrificed in order to secure a smaller arbitrage gain.  Again, this is best explained by way of an example.

Let us suppose that our old friend ‘Arbit’ is running in the 3:30 race at Sandown.  Let us further suppose that the odds on Arbit on one of the betting exchanges is 5.0 and we place a £5 bet on Arbit to win.  The odds on Arbit then fall to 2.5 and we place a second (£10) bet on Arbit, this time to lose.  The situation is that, irrespective of Arbit’s performance, we make a £5 profit.

Now let’s change the situation slightly.  Let us suppose that we place a £5 bet on Arbit to win at odds of 5.0 but we don’t place the second bet (to lose).  In other words, we do not arbitrage our bet.

If Arbit loses the race, we lose £5.  If, however, Arbit wins, we win £20 .

If the bet had been arbitraged, a potential £20 win or £5 loss would have been replaced by a certain £5 win.  This is a case of ‘is a bird in the hand worth two in a bush?’.  Is a certain £5 win better than a potential win of £20?.  If you feel that it is, arbitrage is for you.

A Free Bet!

I asked you earlier if you liked the concept of a free bet. Let’s face it, who wouldn’t?

So, how do we achieve it?

Well there are two ways. Here’s the first:

From the above examples, you can see that we made a £5 profit on Arbit, regardless of whether or not it wins. Simply place a £5 win bet on another horse of your choice, either in the same race or in a different race. OK - if your horse loses, you lose £5, but, you won it from arbitraging Arbit anyway, so you won’t have lost anything. In any case, if your selected horse wins, you can look forward to adding to the £5 that you won on Arbit.

The second way is a little bit more complex:

To explain this method, we need to go back to the 3:30 race at Sandown and our old friend Arbit.

Let us suppose that the odds on Arbit is 5.0 and we place a £5 bet on Arbit to lose.  Our liability on the bet, should Arbit lose, is £20 (£5 x 4).  If Arbit wins, we win £5.  The odds on Arbit then begin to increase until they reach 11.0.  At this point, we could place a £2 bet on Arbit to win.  If Arbit wins, we would win £20 (£2 x 10.0).  If Arbit loses, we would lose £2.

Now let us look at all 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:

Result	Arbit Wins	Arbit Loses
Win Bet	+£20	-£2
Lay Bet	-£20	+£5
Net Effect	+£0	+£3

What have we achieved in placing the two bets?

The second bet nullified the liability of the first bet at a cost of £3 less than that of the initial bet.  As a result, if Arbit wins, we break even.  If Arbit loses, we win £3.  What we have actually achieved is to totally nullify the initial lay bet and leave ourselves a profit of £3 that will be won if Arbit loses.  In other words, we have created a free lay bet on Arbit.