Understanding Odds & Pricing

# Understanding Odds & Pricing Every price on Kalshi is a probability in disguise. Mastering the relationship between price, probability, and expected value is the single most important skill for prediction market traders. ## Cents to Percentages Kalshi prices contracts in cents, from $0.01 to $0.99. The conversion to implied probability is straightforward: **Price in cents = Implied probability in percent** A Yes contract at $0.73 implies a 73% probability. A No contract at $0.27 implies a 27% probability. Together they sum to 100% (in a perfectly efficient market). This is cleaner than traditional sports betting odds. No need to convert between American odds (-150, +200), decimal odds (1.67, 3.00), or fractional odds (2/3, 2/1). The Kalshi price IS the probability. ## Expected Value: The Core Concept Expected value (EV) is the mathematical foundation of profitable trading. For any position: **EV = (Your estimated probability x Profit if right) - ((1 - Your estimated probability) x Loss if wrong)** Example: A market prices Yes at $0.40. You believe the true probability is 55%. - Profit if right: $1.00 - $0.40 = $0.60 - Loss if wrong: $0.40 - EV = (0.55 x $0.60) - (0.45 x $0.40) = $0.33 - $0.18 = **+$0.15 per contract** A positive EV means the trade is profitable over many repetitions. The larger the positive EV, the more attractive the trade. ## Reading the Bid/Ask Spread Every market has two prices: - **Bid**: The highest price a buyer is willing to pay (what you get if you sell) - **Ask**: The lowest price a seller will accept (what you pay if you buy) The difference is the **spread**. A market showing 62 bid / 64 ask has a 2-cent spread. This tells you several things: 1. **Liquidity**: Tight spreads (1-2 cents) mean lots of active traders. Wide spreads (5+ cents) mean thin liquidity. 2. **Transaction cost**: If you buy at the ask and immediately sell at the bid, you lose the spread. It is your implicit trading cost. 3. **True price**: The midpoint of the spread (63 cents in this example) is the best estimate of the "true" market price. ## The Overround In a perfect market, Yes + No = $1.00. In practice, the sum might be $1.01 or $1.02. This excess is called the **overround** and represents the market maker's edge. - Yes ask: $0.65 - No ask: $0.37 - Sum: $1.02 - Overround: 2% A 2% overround is tight and trader-friendly. If you see overrounds of 5% or more, the market is expensive to trade. Factor this into your EV calculations. ## Spot Value: When Markets Are Wrong Markets misprice events all the time. Common situations: ### Anchoring Bias Markets anchor to round numbers or initial prices. A contract that opens at $0.50 tends to stay near $0.50 longer than warranted, even as evidence accumulates. ### Recency Bias A single dramatic news event can push prices too far. Markets overreact to breaking news and then gradually revert as cooler heads prevail. ### Thin Market Inefficiency Low-volume markets often have stale prices. If a market has not traded in hours or days, the displayed price may not reflect current information. ### Correlated Markets Sometimes two related markets are inconsistent. If "Will the Fed cut in March?" is at 80% and "Will the Fed cut by June?" is at 75%, that is a logical contradiction -- the June market should be at least as high as the March market. These discrepancies are arbitrage opportunities. ## Practical Pricing Tips 1. **Always check the spread before trading.** If the spread is wider than your edge, the trade is not worth it. 2. **Use limit orders in thin markets.** Never pay a wide ask when you can place a limit bid near the midpoint. 3. **Compare across platforms.** Kalshi prices sometimes diverge from Polymarket or PredictIt on similar questions. Cross-platform comparison can reveal mispricings. 4. **Track price over time.** A market that has been steadily moving from $0.30 to $0.50 over two weeks tells a different story than one that jumped from $0.30 to $0.50 overnight. 5. **Size your bets to your edge.** The Kelly Criterion suggests betting a fraction of your bankroll proportional to your edge divided by the odds. This maximizes long-term growth while controlling drawdowns.