This is a question I am asked from time to time so thought I would write a short post on the subject.
Firstly, what do we mean by insurance?
So, when we lay the draw or do any other trade we have a liability. Our liability is our maximum potential loss.
So if we lay the draw for for £10 at 3.5 our liability would be £25. 10 x 3.5 – 10 = 25.
By using insurance, we are willing to risk a little more liability in order to minimise our overall risk and try to avoid a bigger loss than we may otherwise experience.