Although sport and financial markets are seemingly two different worlds, arbitrage trading and sports betting have a lot in common. Trading strategies and risk-management techniques used in financial markets can be applied to sports betting and vice versa. As in financial markets, pricing inefficiencies do exist in the sport bookmaking markets which result in opportunities for arbitrageurs.
Sports arbitrage can be loosely categorized into two main types:
- Inter-bookmaker arbitrage which exploits bookmakers’ different opinions on sport events’ outcomes or plain pricing errors.
- Intra-bookmaker arbitrage which exploits the relative mispricing, based on the actual and implied odds, of a sport event.
Of the two types of sports arbitrage, the latter is being used by us. It is in a sense very similar to the options volatility trading strategy where one seeks an edge by taking advantage of the discrepancy between historical and implied volatilities of an underlying asset. To see how sports arbitrage work, let’s go through a real-life example.
Soccer is unarguably one of the most popular sports in the world. At the club level, UEFA Champions League is the most prestigious competition for a European soccer club. The final this year will be held on May 25 at the Wembley stadium. As of this writing there are four clubs remain in the competition, two from Germany and two from Spain. The draw for the semi-finals was held last Friday and the following match up will occur:
Bayern Munich – Barcelona
Borussia Dortmund – Real Madrid
The first leg of the Bayern Munich- Barcelona match will be played on April 23 in Bayern’s homeland. As of this writing, the implied probability of a Bayern Munich win is 40%. It is calculated from the posted odds of 2.5 on Ladbrokes, a well-known bookmaker.
Note, however, that this price is not static; it can vary from now until the end of the match, thus creating short-term trading opportunities. The actual probability of winning for Bayern Munich, calculated based on its past and recent performance, is 45.9% (2.18 in decimal form). Consequently, there is an opportunity for arbitrage. If we place a bet on Ladbrokes now, we’ll have an edge of 5.9 %.
As can be seen from the example above, the goal of sports arbitrage is to find as many as possible this kind of mispricing opportunity and repeat the betting process over and over again. This way we play a positive expectation game and will make money in the long run.