📐 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.