Binary & Multi-Choice Pricing
The core innovation of prediction markets is their ability to reduce complex, real-world events into numerical probabilities. To trade effectively, you must understand exactly how a price on your screen translates into the current consensus of the crowd.
At their foundation, all prediction market contracts are structured so that a correct prediction yields exactly $1.00, and an incorrect prediction yields $0.00.
1. The Core Mechanic: Implied Probability
Because the maximum payout is always $1.00, the current trading price of a contract represents the market's collective estimation of the event's probability.
[!NOTE] The Rule of 100 To convert a share price to a percentage probability, multiply it by 100.
- A share priced at $0.60 implies a 60% probability of the event occurring.
- A share priced at $0.15 implies a 15% probability.
Pricing the "Yes" and "No" Sides
In a standard binary market (an event that can only resolve as True or False), the implied probability of "Yes" and the implied probability of "No" must always equal exactly 100% (or $1.00).
If you believe an event will happen, you buy "Yes". If you believe it will not happen, you buy "No".
- If "Yes" is trading at $0.60 (60%).
- "No" must trade at $0.40 (40%).
- $0.60 + $0.40 = $1.00 (100%).
If you notice a market where "Yes" + "No" equals more or less than $1.00 on an Automated Market Maker, this usually represents a structural fee applied by the protocol or temporary slippage.
Calculating Expected Value (EV)
When you buy a share, you are calculating that the actual probability of the event occurring is higher than the implied probability reflected by the price.
Example: The Presidential Election
- Candidate A "Yes" is trading at $0.45 (45% Implied Probability).
- Your proprietary model suggests Candidate A actually has a 65% chance of winning.
- Because your calculation (65%) is higher than the market price (45%), buying "Yes" at $0.45 has a positive Expected Value (+EV) for your portfolio.
If Candidate A wins, your $0.45 share resolves at $1.00, netting a pure profit of $0.55 per share (a 122% Return on Investment).
2. Multi-Choice Markets (Mutually Exclusive)
Not all markets are simple Yes/No binary outcomes. Many markets feature multiple potential choices, but only one of those choices can ultimately be correct. These are called Mutually Exclusive markets.
Example: Who will win the NBA Finals?
- Team A: $0.35
- Team B: $0.25
- Team C: $0.20
- Team D: $0.10
- The Field (All other teams): $0.10
The Constraints of Multi-Choice Pricing
In a properly functioning mutually exclusive market, the sum of all "Yes" shares across all available choices must equal exactly $1.00 (100%).
$$ 0.35 + 0.25 + 0.20 + 0.10 + 0.10 = 1.00 $$
Because only one team can win the championship, only one of these contracts will resolve to $1.00. The rest will resolve to $0.00.
Trading Mechanics in Multi-Choice
When trading mutually exclusive markets, buying "Yes" on one outcome is mathematically equivalent to buying "No" on every other outcome simultaneously.
If you buy "Yes" on Team A at $0.35, you are betting that Team B, Team C, Team D, and The Field will all resolve to $0.00.
[!TIP] Shorting in Multi-Choice Often, liquidity is too fragmented to directly buy "No" on a frontrunner in a multi-choice market. Advanced traders "short" the frontrunner by buying a basket of "Yes" shares on all other viable competitors.
3. Slippage and Spread
The implied probability ($0.60) is the mid-market theoretical price. In reality, you must navigate the bid-ask spread.
- Bid Price: The highest price a buyer is willing to pay.
- Ask Price: The lowest price a seller is willing to accept.
If the market is quoting a Bid of $0.59 and an Ask of $0.61, the implied probability is roughly 60%. However, if you want to buy instantly (using a Market Order), you must pay the Ask ($0.61).
Slippage occurs when your order is so large that it exhausts all the shares available at the best Ask price ($0.61). To fill the remainder of your order, the exchange moves to the next best price (e.g., $0.62, then $0.63). Heavy slippage severely degrades the Expected Value of your trade by forcing you to pay higher prices for the exact same implied probability.
Summary
- Share prices equal implied probabilities ($0.50 = 50%).
- In Binary Markets, Yes + No = $1.00.
- In Multi-Choice Markets, the sum of all "Yes" options = $1.00.
- Profitable trading requires identifying situations where your calculated probability is higher than the market's implied probability.
Next Step
Continue to understand how these prices are actually set under the hood by exploring the next module.