Vigorish, Commission, and Taxes
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Anytime you are thinking of getting into business it is important to understand the cost of getting into said business. Say you want to start your own coffee shop. It would be important to understand the cost of coffee from wholesalers, the monthly rent of the space for your shop, the wages for your employees, etc. The same goes for both stock trading and sports betting.
For sports betting, it is a little different than your typical business transaction. We envision a typical business transaction as one where we go to a shop to buy a product and then the cost of engaging in that business transaction are the taxes associated with it. For example, the sales tax when you want to buy a coffee. In the sports betting world, it isn’t as cut and dry. We aren’t hit with an explicit tax seen on a receipt as we may see when we go to a coffee shop. Rather we must pay the Vig.
What is the vig you may ask? The vig, maybe more commonly known as the juice, is the cost of doing business with the sportsbook. In most cases when we place a bet each side is -110, depending on the liquidity of the market, and we must pay $110 to win $100 as the sportsbook must create an edge to help ensure they can create a profit. This is best just thought of as a sales tax. It is the cost of doing business with the sportsbook. They don’t want to deal +100 on each side as no inherent edge would exist for them. That is why a vig must be put in place.
The beauty of sports betting, sports in general as well, is it is a perfect way to help draw great analogies to explain the options trading world. Similar to the vig, the cost of doing business in the options world is called commission. Commission is an additional charge incurred when putting on an options trade. Say we put on an options trade that costs us, or requires us to put up, $500, well the cost of putting that trade on could be $2.50 and so we must put up $502.50, the $500 required for the trade plus the $2.50 commission. As vig is to sports betting, sales tax is to a coffee, commission is to options trading. You might notice a $2.50 commission is a lot less than paying an extra $50 to win $500 when placing a sports bet, assuming -110 sides, but that is an article for another day.
Commission is a fairly elementary concept to understand and all over the stock market world we see brokers marketing on how low their commissions are. Robinhood is famous for having $0 commissions, although it is not as good as it seems. Understanding commissions is a very important concept to understand as $2.50 can add up over time. Just as in sports betting, we must understand the vig or juice on a bet to see the “tax” on the bet as the more vig we have the more we must pay.