Ok, so it's hardly the revelation of the century. And is a well used principle by many. But after mentioning free lays a few times, and discussing an example on the Betfair cricket forum the other day, I've had an email asking me to explain what I mean by a free lay, why they're valuable and how to identify them. So although I realise many are well aware of all this I thought I'd answer the email anyway.
Firstly, just to be clear, by free lay I do not mean free money in the way the Free Money and Bank of Federer etc merchants bang on about. I think I've made my views on the free money threads clear! However, as a trader, I guess identifying free lays is the next best thing!
What is a free lay?
Very simply it's an opportunity to make a good, sometimes huge profit, for no, or more usually a very limited, downside. So it's about identifying a situation where all the real value at the time of the trade is in laying a person / team rather than backing them - irrespective of who you think might eventually win the event.
Free Lay example
Perhaps its best to illustrate with an example so I'll use the one I mentioned on the Betfair cricket forum the other day. (I'm bf trader on the forum by the way - don't be shy to say hello!) The opportunity sprung up in the 2nd ODI between South Africa and India. I ended up laying South Africa, even though I believed they'd win, and this was my thought process.
South Africa had got off to an ok start and had lost their second wicket in the 10th over with 47 runs on the board. Their price spiked on the wicket before eventually dropping back to around 1.4ish when they were around 58 for 2.
This was the point where I layed South Africa for £500. My reasoning came from answering two questions.
1) What was their likely innings score?
2) What was their likely price if they reached that score?
The answer to 1) was I thought they'd do well to make 250. A view backed up by the spread firms whose total innings runs quotes are useful to keep an eye on. The answer to 2) is open to debate. I put it at around 1.35ish. Others who had a guess on the forum had it, from memory, between 1.32 and 1.4.
So effectively my downside was very limited. Even if the South Africans did as well as could be generally expected I was looking at a maximum loss of maybe 8 ticks. And a loss is unrealistic anyway, as give me a wicket in the next 10-15 overs, and I can trade out for a profit if I choose to.
My upside however was much larger. The South Africans could collapse. Or lose a few quick wickets. Or perhaps only make 210 etc. All these scenarios favour me hugely. And although getting involved in such situations doesn't always pay off, for such a limited risk, for such a potentially big win, I'm having some of it.
So what happened?
The free lay paid off. Gibbs was out in the 16th over, the South African's were 63/3 and their price went out to 1.59/1.6. That left me with an instant 19 tick profit on the trade if I closed out immediately. Which equates to £95 if i left it on South Africa, or £62 each if I spread it across both South Africa and India.
So I'm now in a position where I can take that green or let it run for a bit. The thinking behind the latter is if the price falls to say 1.54 I'll take my profit. But why not let the trade run for a little longer, see if the next batsmen gets out early before he's played himself in - and if he does we're not going to be too far from evens the pair and a 50/60 tick profit. Which wouldn't be bad at all for what was looking at most like a potential 8 tick loss and was never likely to result in a loss at all. Of course, every now and then the team you've layed will collapse. And if you don't close your whole trade out, you're left with a big profit - still all from that initial 8 tick risk. (Btw, the Saffers eventually made 248 and their price was low to mid 1.3x at the change of innings.)
Identifying free lay situations
I guess this is the hardest part. Though for anyone with a good knowledge of the sport they're trading - and they do, of course, crop up in all kinds of sports and markets - experience should be enough to spot them if you actively look for them. Obviously, not every lay is a free lay. It's all about reading the game, assessing likelihoods and predicting likely prices. If you can do that you can spot free lay situations.
Looking for such opportunities is something I, and no doubt thousands of other traders, do constantly when trading. As well as all the usual stuff I'm doing during a game I know finding a good situation can be very profitable. And can turn a small win into a much larger one. So the free lay principle is a useful technique in the armoury of the trader and it's well worth keeping your eyes open for favourable situations.
Happy hunting!
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2 comments:
Free lay my arse. All you're doing is backing something at long odds. A truly free lay is where you can get out at an identical price to what you got in and in efficient markets they dont crop up too often.
I agree a true free lay - with positively no downside - crops up rarely - though more often than you imply. And I accept the example given *from my perspective* is more a virtual free lay as there was the possible potential for a very limited downside in the example given. (Though with the prospect of a wicket it was next to impossible to see a way you couldn't profit from the trade). However, if you reread the post, you will see that some were of the opinion it would be possible to get out at the identical price anyway - qualifying it as a free lay by your own definition. (And although I layed at 1.4, others who hung on a little longer were able to lay as low as 1.37, again qualifying it as a free lay by your own definition.) Either way it was the principle I was more interested in discussing. And I've defined that as "no" risk ideally. But more often with a limited downside.
The real point is identify the situations correctly and overtime you will be more profitable. I'm sure we agree on that.
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