In light of the previous 2 articles which covers the most obvious risks of arbitrage and their solutions, most people wonder why arbing is always called ‘risk free’. The obvious answer is most likely accurate in most cases: the people who call arbitrage risk free are trying to sell you something and so it is in their best interest to overlook the actual risks.
Nonetheless, understanding how arbitrage works now, I have come to reconsider the meaning of ‘risk free’. First of all, nothing
in life is risk free: Another global economic crisis can start tomorrow and the most certain of certainties will be stopped from happening. So let us disregard the impractical meaning of ‘risk free’ and instead use it in a practical way: “Something is Risk free
in so far as safe accurate application, without external interferences, over the long term will almost certainly result in the desired result (ie: Profits).
Is arbitrage risk free under this definition? I think so. While any single arb may incur the risk of a loss, the repeated application of arbitrage brings greater returns than risk, and hence continual profit. This conclusion comes from practical experience, but I will attempt to explain why there is practically no risk in arbitrage when it is done in a professional manner over a long term.
First of all, with practice, most of the risks can be eliminated or reduced drastically. Accordingly, the consistent ‘guaranteed’ returns of arbitrage result in continual growth of the bankroll without the usual risks associated with gambling systems where many successive losses can wipe out your entire bankroll. Secondly, the odds that are being used in arbitrage are statistically in your favor. In order for an arbitrage to exist, the pair of odds must have a larger than 100% return, which basically means you have exchanged positions with the bookmaker: you now have the odds in your favor, not theirs. If you placed only one side of every arb, you should still come out ahead in the end. Of course trying this method does carry the risk of successive losses wiping out your bankroll which is why we do not recommend it. However it does give support to arbitrage over the long term where the occasional mistake may result in an uncovered bet. This is not what we want, but at least we have exceptionally high odds and a 50% chance of having accidentally bet on the winner.
Over the long run, the higher odds will result in larger returns than losses whenever these mistakes are made, and the continual profits made by arbing without error will grow the bank without losses.
So when Sports Betting Arbitrage is done in a professional manner over the long term, the profits to be made are practically ‘risk free’.
The final article in this series can be found here: To Arb Or Not To Arb?