Risk v Reward – A Case Study- British GP July 14

I originally wrote this a blog post, but thought it would be lost among the other posts over time. So I decided to copy it as a page too.

It’s the British Grand Prix on Sunday, where I am sitting on a tidy Green Book already. You may know I trade F1 regularly, but I cannot take too much of the credit for this trade. One of the chaps that I am Mentoring – Jay  ( give him a follow on Twitter @lewisjay2014 ) popped up in my Skype room late morning to say that Lewis Hamilton’s car had been playing up in morning practice. There was some money to lay at 1.7. He rightly identified it as a potential trade and asked my opinion. This price was to win the race. He hadn’t even been through Qualifying yet! We quickly discussed the scenarios. The conversation was brief as I reckon Jay didn’t want me to nick the liquidity lol. What a ridiculous price! I managed to get a few quid in unto 1.8. This was the point where the risk was becoming less attractive comported to the reward. There were bound to be many chances to lock in a profit here. I have been spending lots of time recently showing how to put together a trade that offers a good chance of success with little Risk and high Reward. We call it a RvR trade. This looked to have all the features we are looking for.

1) Limited Downside

2) A good chance of success.

It’s hard to put a number on this. Let me try to give some context. There is a horse race where the favourite who started the race at 1.3. It’s a 3 runner race and he is over a furlong clear coming to the last fence. He is trading at 1.01. Would want to Lay him at this price?  The price is effectively to jump the fence. But he is under no pressure, he’s had an easy race and hardly had to break sweat. Well, yes. I might well have a crack at this. The risk is low and the reward is 100%. But realistically the chances of success very low. Lets look at a slightly different scenario …..

The horse stared at 1.3. It’s a 9 runner race on heavy ground over 3 miles. It’s a novice chase. Meaning the horses are inexperienced, in fact this is the first time this horse has attempted fences. During the race he has clouted a couple of the fences. His big lead has slowly diminished, although he is still 4 lengths clear coming to the last 2fences. The body language of the jockey is interesting. he is constantly looking behind him. It’s clear he is nursing the horse home and doesn’t have a lot of fuel left in the tank. There are 2 fences to jump and his price is 1.03. I am all over this. There is a much bigger chance of him failing to win this race. Poor jumping. Heavy ground, jockey knowing he is running on empty, pressure from other runners catching him. So lots of reasons that he may not win the race. Although the price is slightly bigger, the chances of failure are much higher. Staking also has to be right. Piling into Laying 1.01-1.1 shots means lots of bets failing. But in context a 1.03 Lay bet need to successful (i.e. lose so i win) 1in 33 to break even

3) A much bigger Upside.

So laying at 1.7 and backing a 1.9 is great. But the Downside is nearly as much. So if we structure a bet like this 10 times and if was landed 5 times we would pretty much break even. But I prefer the odds to be more in my favour. At 1.7 the implied chance of success is 59%. So even blindly Laying this we have a theoretical 41% chance of success. That doesn’t factor in the odds being bigger at some point. That’s total failure. I am not looking for total failure.If Hamilton did get pole, my best guess of him being 1.5 would give an implied percentage chance of him winning the race of 66% (100/1.5). So an extra 7%. So we are basically saying he will be7% more likely to win the race if he is fastest in Qualifying than he was before it had even began. Seems like a raw deal there. If he drifted out to my best guess of at least 3.5 if he didn’t get pole. That gives him an implied percentage of 28.5% (100/3.5). A reduction in chances of success in the race of 31%  (59% – 28% = 31% ) So in summary – If fastest in qualifying a increase of his implied chance of winning of 7% – if not a minimum gain of 31%. Risk v Reward (RvR).

This calculation is looking at the book and what the implied chances of winning the race are based on the pre qualifying prices. Do I sit there and do calculations like this? No…..well sometimes. But I am at the stage where I can weigh it up in my head almost instantly. Occasionally I will ask someone who I have respect for who knows about a specific sport to get another opinion. I don’t know everything. In fact not even close. So if you know someone who knows more that you, why not ask them? The more opinion you get, the more accurate your assessment will be. (Wisdom of crowds and all that???)

Lets look at each part in isolation.

Firstly the Downside. Lets put some context to this. You rarely see a driver less than 1.5 at the start of a Grand Prix. But this wasn’t the start of the race, it was pre qualifying. There was every chance that Hamilton would get pole. But it was no gimme. I estimated the max downside to be 1.5 with the upside potentially double figures, but realistically 3.0 -4.0  if not on pole, and depending how far back he was. If his car did break down and he didn’t get enough time on track during the qualifying period, he could potentially start in the pit lane, which would pretty much rule him out. There was enough doubt to have a crack at this.

So what chance of Hamilton not getting pole? Considering the lack of track time with his car, and the poor weather (raining in morning), Better than 50% surely? (Don’t call me Shirley!!) – LINK to Joke. – It’s bad when you have to explain your jokes isn’t it????

And finally, what is the upside. Is there enough potential profit to offset the loss if the trade fails? In this case? What do I mean by this? Well like the way I structured this trade I assessed the potential risk against the potential  reward. Not all of these type of trades are successful. In fact many are not. So I need to make sure that the rewards that I make cover the failure strike rate. This will depend on your own strike rate. But to point you in the right direction and using this trade as a rough guide. The ratio is risk 20 ticks (1.7 to 1.5) versus reward 100+ ticks (1.7 – 3.5) outweighs the chances of failure. If I placed a £100 Lay (this is a ball park figure- I have no intention of showing you what I made on this trade, It is completely irrelevant) @ 1.7 and traded out at 1.5 for a loss. The downside would have been £13.40 and if I traded out at 3.5 (my estimated worse case position iff he failed to get Pole the upside £50.70. 4 times more Reward versus Risk.

It’s important not to get to hung up on the stats and percentages. I am trying to show the reasoning behind the trade. The math is a way to show this. But like i said, it’s not something i do to work out the trade. It’s much more instinctive to me. That’s not to say when you are starting to look at this sort of trade who shouldn’t sit down with a blank sheet of paper and write it out.I will be following this piece up with another post about how to work out your positions and show you some of the ways you can work out staking/profit and loss before you put on your trades. One of the “Rules” of my trading is to know how much i am potentially going to lose – worst case- before I place a trade. If you don’t know why would you place it? It’s like leaving your wallet on the bar in a pub and nipping outside for a cigarette.

It doesn’t really matter what happened in Qualifying that led to Lewis Hamilton to cock it up. The point is that he did. I traded out at 3.5 (lucky guess?). My entry wasn’t as good as it could have been, there was not a massive amount of liquidity and Jay gobbled that up. It was only fair. It was his spot!

This page is dedicated to Jay & all the guys in my group who work very hard everyday to find opportunities for all of us to profit from. Winning is so much better when you are sharing it with your mates. If getting involved with the Mentorship program interests you have a look at my Mentoring Program HERE and the incredible feedback from the guys on the Program HERE. I have added 2 new dates for the back end of the year due to demand.

As always I welcome your comments and questions- Cheers Steve

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