Derivatives

Earlier I discussed what makes two betting markets related, and I went through an example of how to price one market versus the other.

The same logic from that chapter can be used to price any point spread versus any other spread (or a moneyline, which is the same as a point spread bet with a line of zero). Pricing -1 versus the moneyline is simple, because you only care about how often the game will tie or land on 1. But you could use the same process to derive the price relationship between the moneyline and a line of -2.5 or -7.5 or even -28.

If you wanted to do -28, for example, you’d try to estimate five percentages. The chance the dog wins the game, the chance the game ends in a tie, the chance the favorite wins by less than 28, the chance the favorite wins by exactly 28, and the chance the favorite wins by more than 28. If you can come up with good estimates for those five percentage chances, you can estimate how those two bets should be priced relative to one another.

Nowadays, books want to offer more than just three markets on each game. They want you to be able to bet on just the first half. Or just the second half. Or just the first quarter. Or just the first inning.

Or they want you to be able to bet on alternative spreads and totals. Say you want to bet a favorite, but you don’t want to lay a big minus on the moneyline, and you also don’t want to

bet -7.5 -110. You want to lay even more points than that— say -13.5—but get a plus money payoff on your bet. That’s an alternative spread.

The same logic applies to totals.

It should be obvious that all of these are related markets. If a team is a favorite for the game, they’ll usually also be a favorite in the first half, first quarter, or the first inning as well. If you wanted to bet which team will score first, the game favorite will usually be a favorite there as well.

If -7.5 is the current market spread on a game set by a market maker, then the price for -10.5 can reasonably be estimated using the method I described previously.

And so on. All these markets that sportsbooks offer that are clearly related to the big three markets are called derivatives. The idea being that the pricing for these markets can be derived from the pricing for the main markets.

The key words in that last paragraph are “can be.” How books price these derivatives varies, but you can be fairly certain that nobody at your favorite retail sportsbook is making the numbers for every game, every day with a database and a push rate chart.

In fairness, pricing these derivative markets is a very difficult job even for the market maker books. The market makers work by taking bets and moving lines. But what happens if they take a bet on one market, but they don’t take an equivalent bet on a clearly related market?

Say they have an NFL spread at -5.5 and a moneyline at 68.5% (-217 in American odds). Then they take a few limit bets on the favorite at -5.5, but no bets on the moneyline. What should they do?

Well obviously they should move the line on the favorite to make it more expensive, either by increasing the break-even

percentage by moving to say -5.5 -120 or by moving the spread to -6. But what about the moneyline?

Should they leave it where it is because it took no action?

Should they move it an equivalent amount as the spread even though it took no action?

Should they move it some in-between amount?

It’s a tricky question to answer. On one hand, the relationship between the two markets is obvious. On the other hand, there may be a good reason the sharp bettors took the point spread bets but not the moneyline bets.

Remember, our method for determining the relationship between these two bets. It was very simple. I just looked at games over the last ten years and figured out how many landed on the key numbers.

But what if that method isn’t good enough? What if there was a recent rule change that made the chance of landing between 0 and 5.5 smaller? Or what if there was some other reason specific to this game (as opposed to just looking at an average of all NFL games) for the difference?

There’s no clear correct answer here—and this is one of many, many reasons that it’s actually very hard to be a good sportsbook.

Derivatives like first inning bets, first period bets, first quarter bets, and the like are often weak because their prices are not tied tightly to the major markets.

The openers are often not particularly strong, made using years-old charts or rules of thumb. Sports change year-over-year, sometimes by a lot, and often these changes affect what percentage of the entire game’s scoring happens in any particular

quarter or period. But these changes aren’t reflected in how the derivative’s opening lines are set.

Maybe you know a basketball team intentionally loses the opening tipoff every game for some strategic reason. (The Minnesota Lynx in the WNBA have used this strategy.)

Some NBA teams win tipoffs more often than others—some much more often. Winning the tipoff makes a team a bigger favorite to win a first quarter bet, and who wins that first tipoff also determines the team that starts with the ball in each subsequent quarter.

Or in a football game, you know one team is likely to elect to receive the kickoff if they win the coinflip, but the other is likely to defer (thus ensuring that one team is almost certain to start with the ball).

If you want to attack derivatives, it pays to build a simple model to price them. If you want to bet NFL first quarters, for instance, you should look at games with a similar game point spread and total and then look at the first quarter results for those games when evaluating bets. Keeping in mind, of course, that the game changes over time, and that, for example, a total of 48 points today might mean relatively more second and fourth quarter scoring and less first quarter scoring than a total of 48 points from ten years ago.

Be aware some derivatives—particularly first half markets in major sports like NFL and NBA—are priced almost as sharply as the major markets. Market makers take action and move the line, and retail books follow. If a first half line looks “off” to you, it’s entirely possible there’s a good reason for it that you just don’t know. Tread carefully.

Similarly, be much more willing to bet any derivative that seems “off” at a soft book than at a sharper retail book. If a book

normally prices their derivatives well, but you find one that seems out of line, it might be there for a good reason.