At its core, every prediction market trade hinges on a straightforward expected value calculation. Mastering this mathematics ensures you approach each position with clarity — you'll understand precisely what win rate you require, at what odds, and which threshold separates profit from breakeven.
Basic Return Calculation
When you acquire a YES share at price P:
- Win return: (1 - P) / P × 100% = your percentage gain should YES resolve affirmatively
- Loss: 100% of your initial capital if NO resolves instead
- Break-even probability: P (the quoted market price doubles as your break-even threshold)
Worked examples:
- YES at $0.20: win = +400%, break-even = 20%
- YES at $0.50: win = +100%, break-even = 50%
- YES at $0.75: win = +33%, break-even = 75%
- YES at $0.90: win = +11%, break-even = 90%
Expected Value Formula
EV = (Your probability × Win amount) - ((1 - Your probability) × Stake)
Suppose you commit $100 to YES priced at $0.40, and your own assessment places the true probability at 55%:
- Payout upon YES resolution: $150 (you collect $250 total, having wagered $100)
- Payout upon NO resolution: -$100
- EV = (0.55 × $150) - (0.45 × $100) = $82.50 - $45 = +$37.50 expected value
How to Use This in Practice
- Commit your probability assessment to paper BEFORE executing any trade
- Determine break-even probability (which equals the market price)
- Should your estimate exceed break-even by a margin wider than the bid-ask spread: this signals a compelling opportunity
- Should your estimate fall short of break-even: explore shorting via NO shares instead
- Should your estimate align closely with break-even: pass — the edge is too thin
Position Size Calculator
Applying the half-Kelly criterion: f = 0.5 × (bp - q) / b
- Consider a scenario where your p = 0.65, market = 0.40: b = 1.5, q = 0.35
- Full Kelly allocation: (1.5 × 0.65 - 0.35) / 1.5 = 0.42 (42% of total capital)
- Half Kelly allocation: 21% of total capital — though the standard 5% per-trade ceiling should apply regardless
FAQ
- Is there an automated calculator for prediction market trades?
- PolyGram displays projected entry price, quantity of shares allocated, and terminal payout directly within the trading interface prior to order submission. Independent EV computation remains invaluable for due diligence before committing capital.
- How do spreads affect the return calculation?
- Modify your effective purchase price upward by incorporating half the spread width. When YES carries a bid of 0.38 and ask of 0.42, your realistic entry point sits nearer 0.42 rather than 0.40.