Every trade in a prediction market hinges on a fundamental expected value calculation. Mastering this framework ensures you approach each position with clarity — you'll understand precisely what success rate you require, at what confidence level, and what threshold separates profit from loss.
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)
Consider a $100 position on YES trading at $0.40, where you assess the true probability at 55%:
- Win amount if YES: $150 (you get back $250 total, having staked $100)
- Loss if NO: -$100
- EV = (0.55 × $150) - (0.45 × $100) = $82.50 - $45 = +$37.50 expected value
How to Use This in Practice
- Before committing to any trade, establish your probability estimate FIRST
- Determine break-even probability (this equals the market price)
- If your estimate exceeds break-even by more than the spread: strong buy opportunity
- If your estimate falls below break-even: contemplate purchasing NO shares instead
- If your estimate aligns closely with break-even: pass — insufficient advantage
Position Size Calculator
Using 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 bankroll)
- Half Kelly: 21% of bankroll — nevertheless adhere to the 5% per position ceiling
FAQ
- Is there an automated calculator for prediction market trades?
- PolyGram displays projected entry price, quantity of shares to be received, and maximum profit potential directly within the trade confirmation screen before you finalise. Independently working through the EV calculation remains beneficial for thorough pre-trade due diligence.
- How do spreads affect the return calculation?
- Modify your actual entry price by incorporating half the spread width. Should YES display bid=0.38, ask=0.42, your realistic entry point approximates 0.42 rather than 0.40.