Definition
Hedging places a bet on the opposite side of an existing position to reduce risk or lock in profit. Used most often on futures as the original bet moves into a winning position. Partial hedge reduces variance while retaining upside. Full hedge locks a positive payout regardless of outcome. Hedging sacrifices expected value for certainty - the opposite side carries its own vig, so hedging always costs something. Only rational when variance reduction is worth more than the EV sacrifice.
Worked Example
Bet Eagles to win Super Bowl at +800 ($100 stake, win $800). Eagles reach Super Bowl. Opponent offered at +150. Bet $400 on opponent: if opponent wins, collect $600 (opponent bet) — lose $100 (original) = +$500 net. If Eagles win, collect $800 (original) — lose $400 (hedge) = +$400 net. Full hedge locked $400–$500 guaranteed vs original 0-or-$800. Vig paid on hedge: approximately $20–30.
Why It Matters
Hedging futures at profitable odds can be rational - locking real dollars may matter more than riding the full outcome. The EV cost is worth paying when the locked payout exceeds your Kelly-optimal remaining position.