In 2014, Auburn fan Mark Skiba was holding a $100 bet placed at 500 to 1 odds on Auburn to win the College Football National Championship. Unexpectedly, Auburn had some big SEC wins and Ohio State lost to Michigan State in the Big Ten Championship. Auburn ended up playing Florida State in the National Championship. Florida State was favored by about 8.5 points; I don’t know what the final odds were on Auburn but it was probably less than 5 to 1. Many people were advising this guy to hedge. Just put a large bet on Florida State so that you lock in some winnings, maybe $20,000 instead of the $50,000 that he would have won had Auburn won. Mark Skiba did not hedge; instead, he let it ride and when Auburn lost, his ticket suddenly became worthless.
This scenario is a dramatic one, but it plays out on a lesser scale all day long in Vegas. A team’s odds to win the World Series may drop from 200 to 1 down to to 50 to 1 over the course of 2 weeks. A team that is favored by 3 points may suddenly lose their quarterback and be a 4 point underdog. In the first example, you may be 3 months away from finding out whether your ticket pays off, and even then it is still a pretty big long shot. Still, someone else looking to bet on your team would much rather have 200 to 1 odds than 50 to 1. In the second example, there is no doubt that if you owned a ticket where you were getting 3 points and suddenly the other team’s quarterback went down and you are a 4 point favorite, you have a valuable ticket. If you had $1000 bet this way, and ultimately won the bet, you would walk away with $2000 ($1000 original bet plus $1000 profit). Now the the fact that you are getting 3 points when you should be giving up 4 points does not make your ticket worth $2000, but it does certainly make it worth something above $1000. You are way more likely to win than someone who walks up to the Sports Book and places a bet at the current line.
Your Active Bet Might Still Lose, Lock in Guaranteed Profit
For sellers, selling an active bet allows you to lock in some profit today rather than gamble for bigger profits in the future. Also, it prevents you from having to come up with a large amount of money yourself ($20,000 in the Auburn – Florida State example). Finally, while hedging on the Auburn – Florida State example is pretty simple, hedging the Atlanta Braves to win the World Series at 50 to 1 by placing bets on all other remaining teams is way more complicated and involves a large number of hedges. Selling the ticket to someone who simply wants to step into your betting position is way less complicated. For buyers, buying an active bet is a way to get slightly better odds than buying a new ticket from the sports book. No buyer is going to pay the same price to a seller as the price they could get from buying at the sports book. They are going to want some type of discount.
People buying active bets from others person-to-person has gone on for years in Vegas. Recently an online marketplace called PropSwap launched to allow buying and selling of active bets; a 10% commission goes to PropSwap on all completed sales. They say that they have spoken with the Nevada Gaming Control Board and were told they were outside of the Board’s jurisdiction; obviously this is a new area so that is always subject to change in the event that regulators decide to get involved. Right now, PropSwap allows you to sell active bets from out-of-state but must be in Nevada to buy them. There will likely be other websites springing up in the future and a lot of active bets trading will still happen offline. I have no doubt that this market will attract a lot of quantitative people getting involved in the event that they find a mathematical edge when it comes to pricing.