Prediction Markets: Yes/No Contract Explanations
If you’re new to prediction markets, you’re probably looking at a market and seeing a bunch of numbers, prices, and dates that you’re not sure how to read. Well, this article will help you understand how yes/no contracts work, which will help you evaluate markets and potential trades.
Prediction markets allow for the creation of markets framed around yes-or-no questions. For example, let’s say the San Francisco Giants and Cleveland Guardians are playing each other in Major League Baseball, and you wanted to pick the Guardians to win that night’s game. You would answer the question with a “Yes” or a “No”.
“Yes, the Guardians will win against the Giants tonight.”
“No, the Guardians won’t win against the Giants tonight.”
Let’s say Cleveland’s price for Yes is 66 cents and for No is 34 cents. This means the market thinks the Guardians have a 66% chance of winning tonight’s game.
The price for “Yes” on 1 event contract is 66 cents. Say you buy 10 event contracts on the outcome, investing $6.60 in this market. If the Guardians win, each event contract gets paid out at $1. After your original investment, you’ll net $3.40 in profit, excluding platform fees and commissions.
On the other hand, if you think the Giants will win, an investment of 10 event contracts in “Yes, the Giants will win against the Guardians tonight” at 33 cents per contract would net a profit of $6.70 before fees and commissions.
When evaluating potential market opportunities, the cost per contract is the first criterion to understand. With this information in hand, you can begin to define the value of the opportunity in front of you.
Using the Guardians-Giants example above, the maximum you could lose from investing in the Guardians YES is $6.60. For the Giants, it would be $3.30. To calculate your maximum win, subtract the contract price (66 cents for Guardians YES) from the $1 payout.
It’s also imperative to understand the resolution criteria before investing in outcome-based event contracts. Within each market page, there will be a section that defines the settlement criteria for the investment. This includes items such as when the market opens and closes, when traders would receive a payout based on their investment, and the source that will serve as official verification of the result.
Sports contracts tend to have easy-to-understand settlement criteria. The only thing that would change the Giants-Guardians settlement criteria would be something like a rainout. Settlement criteria for outcomes in political markets can be more complex.
For example, in the market for “Who will be Trump’s next Press Secretary?” the settlement criteria include appointments for acting or interim candidates, not just a permanent replacement. Specifying this in the settlement criteria ensures that this market doesn’t stay open for an extended period.
Reading event contracts and understanding yes/no contracts is a skill that takes time to develop. It’s easy to think that the price you pay for an event contract is the likelihood of the event occurring, but it is essential to understand that the price is affected by the release of new information or changes in investor sentiment. Understanding the full picture of an event contract before investing is essential to a successful initial experience in prediction markets.