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How to calculate betting margins

Learning how to calculate betting margins is a vital tool in any bettor's armoury. Once you have mastered this simple calculation, you can easily identify who offers the best odds.

Betting margins are the difference between the odds (an implied probability) the customer is offered to bet at, and the true probability of the outcome.

What are bookmakers' margins?

Bookmakers make money by accepting bets on a market and pricing it in a way that does not represent the true probability of the outcomes. This margin, or overround, gives them an edge over bettors.

When pricing an event, bookmakers aim to set odds that will attract betting on both sides of the market, therefore balancing their liability on all possible outcomes.

However, if the bookmaker’s liability is fully balanced, they wouldn't make any money. Therefore they build a margin into their markets, resulting in a profit if their liability is balanced.

A fair market

The simplest way to explain bookmaker margins is with a coin toss. The probability of landing on either side of a coin toss is 50% meaning the odds should be priced at 2.0/2.0 on both sides. You bet £100 to win £100, making it a 100% market.

If a bookmaker offered odds on a coin toss

It is not in the interests of the bookmaker to offer the true probability of an event, so instead they price markets to go above 100% and create an edge in their favour. The deviation of the odds offered from the ‘true price’ is the bookmaker's margin.

For the coin toss, bookmakers would offer heads or tails at odds below 2.0, meaning you would have to bet more to win £100. If the odds were offered at 1.91 - a margin of 4.7% - on average bettors would lose 5p for every pound spent over time.

It’s vital for bettors to recognise the variations in margins across bookmakers and exchanges, as this dictates the value of their odds and the potential profit for a bettor. Unlike exchanges, bookmakers don’t showcase their margin, so you could be setting yourself up to lose over the long run.

Calculating margins on a two-way market

To calculate margins on a two-way market you need to use the following equation:

(1/Decimal Odds option A) * 100 + (1/Decimal Odds option B) * 100 = Margin

As an example let's use Smarkets decimal odds for the 2016 Australian Open final between Novak Djokovic (1.20) and Andy Murray (5.50).

The calculation for the margin above would be:

(1/1.20) * 100 + (1/5.50) * 100 = 101.51%

The margin for this market is therefore 1.51%.

Calculating margins on a 1X2 market

To calculate betting margins on the popular 1X2 market, use the following equation:

(1/Home Odds) *100 + (1/Away Odds) *100 + (1/Draw Odds) *100 = Margin

For our example we will use Smarkets odds for the 2016 League Cup final between Man City (2.56) and Liverpool (3.20) - the draw was available at 3.30.

The calculation for the margin above would be:

(1/2.56) *100 + (1/3.20) *100 + (1/ 3.30) * 100 = 100.61%

How to factor in commission on an exchange

The above examples show how to work out betting margins. However, the calculation does not include an exchange's commission, which can be as high as 5%, unlike Smarkets's industry-low 2%.

To work this out you must first incorporate the commission into the odds. To do this, use this simple calculation:

1 + ((1 – (Commission / 100)) * (Odds – 1)) = Exchange odds with commission factored in

The calculations for the odds including commission on the 2016 Australian Open final between Novak Djokovic (1.20) and Andy Murray (5.50) are:

Djokovic

1 + ((1 – (2 / 100)) * (1.20 – 1)) = 1.19

Murray

1 + ((1 – (2 / 100)) * (5.50 – 1)) = 5.41

So to work out the true exchange betting margin, you use the calculation:

(1/1.19) * 100 + (1/5.41) * 100 = 102.51

The margin for this market including commission is therefore 2.51%. In comparison, one UK high street bookmaker offered a margin of 7.88%.

Remember, unlike some other exchanges, commission is only paid on Smarkets if you win.

Apply this to betting

Now that you can calculate betting margins on bookmakers and betting exchanges (including commission), you’re capable of identifying the odds with the most betting value.

Betting margins vary immensely across bookmakers so calculating them correctly will ensure you’re best prepared to make a profit over time - as you now have the tools to identify and bet with the best odds.

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