How event contracts work

On this page · 6

1. What is the basic event contract mechanic?
2. How do you make money on event contracts?
3. What does a Lakers playoff trade look like?
4. Why are probability prices clearer than American odds?
5. How do bid-ask spreads and fees work?
6. What can go wrong?

If you can read a price tag, you can read a prediction market. That's the whole pitch: and once you understand the basic mechanic, it's hard to go back to American odds, decimal odds, or anything else the sportsbook industry has ever invented.

What is the basic event contract mechanic?

Event contracts function as binary options that payout exactly one dollar if a specific outcome occurs and zero dollars if it does not.

Every event contract resolves to one of two values: $1 if the event happens, or $0 if it doesn't. There's no in-between. The Lakers either win the championship or they don't. The Fed either cuts rates in March or it doesn't.

The price you pay for that contract is set by the market, in real time, somewhere between 0¢ and 100¢. That price is the market's collective estimate of the probability the event happens.

Price equals probability. A contract at 40¢ means the market thinks there's a 40% chance.

How do you make money on event contracts?

There are two ways:

1. Hold to resolution. You buy a contract at 40¢. If the event happens, you collect $1: a 60¢ profit on a 40¢ stake. If it doesn't, you lose your 40¢. Simple.

2. Sell before resolution. You buy at 40¢. The price rises to 65¢. You sell, locking in 25¢ of profit per contract. You don't have to wait for the event to play out. This is what most active traders do.

What does a Lakers playoff trade look like?

Say the Lakers are heading into the playoffs as a 5-seed. A contract titled "Lakers to make the Conference Finals" is trading at 28¢.

You buy 100 contracts. Total cost: $28.

Two weeks in, the Lakers win their first-round series in five games. The market re-prices.

• "Lakers to make the Conference Finals" now trades at 52¢.
• You can sell your 100 contracts for $52.
• Profit: $24, locked in. You don't care what happens next.

Or you can hold. If the Lakers do make the Conference Finals, your 100 contracts pay out $100: a $72 profit on the original $28 stake. If they lose in the next round, the contracts go to $0 and you lose the $28. For more NBA-specific platforms, see our Lakers fans guide.

Why are probability prices clearer than American odds?

Probability prices explicitly display the bookmaker's calculated likelihood of an outcome while removing the mathematical complexity and hidden margins inherent in American odds.

Traditional odds formats hide the probability behind a conversion step, and the price you see also carries the house margin, so you never learn exactly what the operator thinks. An event contract skips both problems: the price is the probability.

The right column tells you exactly what the market thinks. No translation. No hidden margin.

How do bid-ask spreads and fees work?

Bid-ask spreads represent the difference between the lowest price a seller accepts and the highest price a buyer offers, while transaction fees are additional costs paid per trade.

On a real exchange, there's a buy price (ask) and a sell price (bid). The gap is the spread. On liquid markets, major elections, big sports events, the spread is one or two cents. On thin markets, it can be wider. Always check before trading.

Most platforms charge a small per-contract fee, typically a fraction of a cent. For an itemized cost comparison between the two biggest US-regulated venues, see Kalshi vs Polymarket fees. And for traders chasing price gaps across them, our arbitrage guide walks through what's actually achievable.

What can go wrong?

Prediction market risks include unexpected market resolutions, sudden liquidity shortages, unfavorable trade timing, and complex legal or regulatory challenges.

Liquidity can dry up. Markets can resolve in unexpected ways. You can be right about an outcome and still lose money if you trade in and out at the wrong moments. None of that is unique to prediction markets, it's true of any market, but it's worth saying out loud. Make sure you understand the legal and regulatory backdrop before you fund an account.

Sources

• CFTC, event contracts overview (opens in a new tab)
• CFTC, Commodity Exchange Act, Regulation 40 (opens in a new tab)
• Reuters: prediction markets coverage (opens in a new tab)

Frequently asked questions

What is an event contract?

An event contract is a binary financial instrument that resolves to $1 if a specified event occurs and $0 if it doesn't. They are regulated by the CFTC as commodities derivatives.

How is price related to probability?

The price of a Yes contract, in cents, equals the market's implied probability of the event occurring as a percentage. A contract at 62¢ means the market thinks there's a 62% chance the event happens.

Can I sell my contract before the event resolves?

Yes. On all major prediction market platforms, you can sell at any time at the current market price, locking in profit or limiting loss without waiting for resolution.

What fees do prediction markets charge?

Most platforms charge a small per-contract fee, typically a fraction of a cent or 1-2% of the trade.

How is this different from sportsbook betting?

Sportsbooks set the price, build in margin, and pay only at resolution. Prediction markets are exchanges where prices are set by traders, fees are transparent, and you can exit any position at any time.

What happens if there's no liquidity in a market?

Bid-ask spreads widen and you may not be able to enter or exit at favorable prices. Always check spread depth before trading thinly traded markets.

Can I lose more than I invested?

No. Your maximum loss on a long event contract is the price you paid. A contract bought at 40¢ can fall at most to 0¢, capping your loss at 40¢ per contract.

What is the maximum trade size for an event contract?

Maximum trade sizes vary by platform and market liquidity. On Kalshi, limits are often determined by the specific CFTC-approved contract filing, sometimes capping positions at 250,000 dollars for certain events. Polymarket generally has no hard ceiling, but large orders will experience significant price slippage if the order book is thin.

How does contract settlement work if an event is canceled?

If an underlying event is canceled or does not occur by the expiration date, the platform rules usually dictate a refund of the initial investment or a settlement at 50 cents per share. Each platform maintains a rulebook that defines specific resolution triggers to ensure the settlement process is transparent and predictable.