All prediction market trades boil down to a fundamental expected value computation. Mastering this calculation ensures you approach each position with clarity — you'll understand precisely what success rate you require, at what odds, and what threshold determines profitability.
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 represents your break-even threshold)
Worked examples:
- YES at $0.20: gain = +400%, break-even = 20%
- YES at $0.50: gain = +100%, break-even = 50%
- YES at $0.75: gain = +33%, break-even = 75%
- YES at $0.90: gain = +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 you assess the true probability at 55%:
- Payout if YES: $150 (you collect $250 total, having invested $100)
- Payout if NO: -$100
- EV = (0.55 × $150) - (0.45 × $100) = $82.50 - $45 = +$37.50 expected value
How to Use This in Practice
- Establish your probability assessment BEFORE examining the market price
- Determine the break-even probability (which equals the market price)
- When your assessment exceeds break-even beyond the bid-ask spread: compelling entry opportunity
- When your assessment falls short of break-even: examine NO shares as an alternative
- When your assessment aligns with break-even: pass — insufficient advantage exists
Position Size Calculator
Applying half-Kelly: f = 0.5 × (bp - q) / b
- For a scenario where your p = 0.65, market = 0.40: b = 1.5, q = 0.35
- Full Kelly: (1.5 × 0.65 - 0.35) / 1.5 = 0.42 (42% of total capital)
- Half Kelly: 21% of total capital — nevertheless respect the 5% per-position ceiling
FAQ
- Is there an automated calculator for prediction market trades?
- PolyGram displays projected execution price, quantity of shares allocated, and maximum profit in its pre-confirmation trade summary. Performing your own EV analysis beforehand remains a prudent practice.
- How do spreads affect the return calculation?
- Modify your entry price upward by incorporating half the spread width. If YES shows bid=0.38, ask=0.42, your realistic entry approximates 0.42 rather than 0.40.