Is There an Edge in Trading Baseball Games?

trading baseball

trading baseballLong before I ever read Trading Bases, I wrote a post about the advantages that betting on baseball had over betting on football or basketball. That post was published on a site about online sports betting, but I was unable to locate it. Lucky for us, I had a rough draft saved deep in Evernote.

If we are going to attempt to replicate and eventually improve on Joe Peta’s stellar performance betting on baseball, the first thing we need to do is break down exactly where our edge is going to come from. Just like any stock trading strategy, we need to know where our advantages are, and where our disadvantages are. We need to understand what conditions will make us the most money, and what conditions we will struggle in.

From my research for the old post that I wrote, and from my general knowledge as a fantasy baseball nerd, I am aware that there are several advantages to betting on baseball that are not present in other sports or casino games. Let’s break down those advantages from a trading perspective and see if developing an edge is actually possible.

Greater Sample Size

One of the biggest things that differentiates baseball betting from football or basketball betting is the number of games played. Every major league baseball team plays 162 games in a season. Contrast that with only 16 games for each NFL team. That means there are a total of 2,430 regular season baseball games each year versus only 256 NFL games. If we expand our consideration to college football and college basketball we open up a great many more games to bet, but each of those teams still plays a very small number of total games compared to a major league baseball game.

Because major league baseball teams play so many more games than any other type of sports team, they have two advantages due to sample size. First, we are able to compile much more data about each team’s performance over the course of a season or multiple seasons. That makes the statistics we use to evaluate each team more significant. Second, because there are so many more games, each individual game becomes less significant. This allows us to implement the trading psychology where any single game bet will not make or break us.

 Moneyline Advantage

Because baseball is a low-scoring game, it is more common for sportsbooks to take bets based on a moneyline than a point-spread, as is more common in football and basketball. This is a very confusing prospect for many gamblers who are used to betting based on a spread, but it will be a huge advantage for us as we build our baseball trading strategy.

When gamblers place bets on football or basketball teams based on a point spread, their personal interests are not necessarily in-line with the interests of the team that they bet on. The simplest example of this occurs every time a big favorite finds itself winning a close game.

If you place a bet on a football team that was favored by 7 points and they are winning by a field goal and have the ball with 2 minutes left, your interests are completely different from the team you bet on. The team simply wants to hold onto its lead and run out the clock, but in order for you to win they need to score again. While the team wouldn’t mind scoring, they aren’t going to risk throwing an interception. They’ll probably just run up the middle a few times and end the game. They still win, but you don’t.

When you bet based on a moneyline, there is no point spread to be concerned with. You are simply picking which team you think will win and the favorite/underdog information is factored into the payout. This means that every player and coach on the team you pick has the exact same goal as you: win the game.

Limited House Advantage

Another advantage that is derived from moneyline betting on baseball games is a limited house advantage. Joe Peta does an excellent job of breaking down this topic in Trading Bases. He explains that the house advantage in roulette is over 5%.

That advantage drops to around 4% when the sportsbooks take point-spread bets on football or basketball games. When it comes to baseball games, the house advantage averages around 2% but can drop even lower than that in certain situations.

The fact that the house advantage can be extremely low in some situations makes baseball betting similar to blackjack. If we can consistently identify situations where the house advantage is low, we could theoretically take advantage of these opportunities, just like the MIT Blackjack Team did by counting cards.

Advanced Statistical Analysis

Because of the vast sample size that baseball give us, there is some very sophisticated statistical analysis that we can use to develop our edge. Unlike football and basketball, baseball player and team performances are relatively predictable from year-to-year because any outliers are able to correct themselves given the size of the sample. Put into trading terms, trading football games would be like picking a random five weeks of market action and trying to make money while trading baseball affords us the benefit of a whole year.

Because of the amount of data that baseball teams and players compile over the years, some really smart people have put together some great tools that we can use to our advantage.

Baseball stats legend Bill James applied a version of the Pythagorean Theorem to baseball teams. He explained that a teams winning percentage was directly related to the number of runs they scored and the number of runs they allowed. His formula does a remarkable job of predicting how many wins a team will record in a given season.

Another statistical tool we will use is PECOTA projections for individual players. PECOTA was invented by Nate Silver and is owned by Baseball Prospectus. The system provides projections for every single player in baseball based on computer models of how comparable players performed at similar ages throughout baseball history.

The end result of a LOT of advanced statistical computer work is that PECOTA tells us how many Wins Above Replacement (WAR) any single player will provide their team over the course of a season. This gives us a number that we can adjust a team’s winning percentage by when a player enters or leaves a lineup on a given day.

Combining the Pythagorean Theorem for how many wins we can expect a team to have, and adjusting for each individual player that is in a lineup on a given day will give us a statistically reliable strategy to determine the odds of any team winning on a given day.

The best part about all of this advances stats analysis is that we don’t have to actually do the hard work ourselves. For a simple $40 annual subscription to Baseball Prospectus (which I would buy for fantasy baseball anyways) we can have access to all of the Pythag and PECOTA data that we will need.

The Game of Individual Effort

Another advantage that we have in betting on baseball compared to football or basketball is that there are a limited number of players that impact each separate play. In basketball or football, there are many players who can touch the ball and produce a vast number of outcomes at any given time during gameplay.

In baseball, every play begins with a one-on-one matchup between the pitcher and the hitter. This means that the starting pitcher will have a much greater influence on the outcome of the game than any other player. It also means that a dominant hitter like Barry Bonds has the ability to beat the pitcher and score without anyone else on the opposing team able to do anything to prevent it.

The game of baseball is a compilation of hundreds of different individual plays, which over the course of a large sample size season, become extremely predictable. That is why we can find an edge.

The Vegas Concern

The last advantage that I want to address is the fact that, just like the major brokerage houses, the major sportsbooks have no interest in which team actually wins any game that they take bets on. They are simply market makers looking to make a living by providing a market for people who are passionate about their team. Therefore, they aren’t basing prices on who they expect to win.

They are basing prices based on the flow of money coming in. Just like any hot stock, if more people are betting on one side of a game, the price goes up. There are always going to be more people betting on the Yankees than on the Cleveland Indians. That means we could likely see a huge mispricing if Cleveland is starting their ace Justin Masterson while the Yankees are rolling out David Phelps while scrambling to replace Jeter, Ellsbury, and Brian Roberts who are all likely to spend time on the disabled list.

I believe that we can combine all of these advantages to isolate games like that, which are likely to be severely mispriced. That means that we might be able to make some money.