Learning objectives
- Understand the mechanics and assumptions of this technique.
- Reproduce a worked calculation or decision worksheet.
- Identify cases when the evidence supports passing rather than trading.
Instructor-led lesson
A prediction market trades claims about a specifically defined future event. In a conventional binary $1-settlement contract, a YES share costs a price now and settles at $1 when the stated resolution is YES, otherwise $0. The headline is not the complete legal or economic contract. Read the resolution source, timezone, deadline, cancellation provisions, dispute procedures, and exact event wording.
Suppose a hypothetical YES contract is offered at $0.63. Ten shares cost $6.30; if YES resolves, $10 is paid and net profit is $3.70 before fees; if NO resolves, the $6.30 stake is lost. Its break-even probability, under those simplified assumptions and a hold-to-resolution strategy, is 63%. This is NOT a claim that the event has a 63% probability. A quoted price contains information about willingness to trade at a particular moment, plus microstructure and liquidity effects.
A NO contract can represent the other side of an event but venue-specific rules differ. Do not automatically assume a YES ask plus a NO ask equals $1, or that buying YES on one platform and NO on another creates an executable riskless trade. Differences in resolution language can destroy equivalence.
Technique: Read the contract title, then its full resolution criteria. Write a one-sentence definition of what must occur. Identify the official settlement authority and timestamp. Verify the $1 settlement convention and transaction terms, then calculate stake, payout, profit, and total loss for both outcomes. Mark anything ambiguous as unresolved rather than inventing an interpretation.
Worked drill: A fictional contract settles $1 for YES; 20 units are purchased at $0.42 each. Cost is $8.40. A YES result returns $20, giving $11.60 gross net profit before costs; a NO result loses $8.40. At 42% estimated chance of YES, gross EV per contract is.42−.42=$0. The result changes if purchase fees apply.
Common mistakes: treating contract probability as certainty; using headlines instead of settlement rules; confusing last traded price with available ask; failing to note share size; assuming disputed events resolve immediately.
Exercise: Ten contracts at $0.78: what is maximum gross loss and profit on YES resolution? Answer: $7.80 maximum cost/loss and $2.20 net profit, before fees. Explain why the market's headline alone cannot prove the settlement outcome.
Next steps
Review the example with a spreadsheet. The independent ARBAI assistant can answer follow-up questions, while Academy remains the canonical structured course.
Review checklist
- Check numeric examples and fee definitions against venue terms.
- Verify referenced settlement language and regional eligibility before publication.
- Record editor, review date, source snapshots and change history.
Try it in Sharp App: Prediction markets
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