Binary Market
Definition
A Binary Market has two possible outcomes (Yes/No). The Yes price is the implied probability of the event occurring.
Structure
Binary markets are the simplest form of prediction market:
- Two outcomes: Yes or No
- Complementary pricing: Yes + No ≈ $1.00
- Clear resolution: Event either happens or doesn't happen
Examples
Political
"Will the incumbent win the election?"
- Yes: $0.58 (58% probability)
- No: $0.42 (42% probability)
Economic
"Will CPI exceed 3% in June?"
- Yes: $0.35 (35% probability)
- No: $0.65 (65% probability)
Sports
"Will the home team win?"
- Yes: $0.72 (72% probability)
- No: $0.28 (28% probability)
How to Read Prices
The Yes price directly represents the market's probability:
- $0.20 = 20% chance event occurs
- $0.50 = 50% chance (toss-up)
- $0.80 = 80% chance event occurs
Trading Strategy
When to Buy Yes
Buy Yes shares when you believe:
Your estimated probability > Market price
Example: Market shows 30% ($0.30), you think 50% → Buy Yes
When to Buy No
Buy No shares when you believe:
Your estimated probability < Market price
Example: Market shows 70% ($0.70), you think 40% → Buy No
Payout Structure
At resolution:
- If Yes: Yes shares pay $1.00, No shares pay $0.00
- If No: No shares pay $1.00, Yes shares pay $0.00
Advantages
- Simple to understand: Two outcomes only
- Easy to price: Direct price-to-probability mapping
- Clear resolution: No ambiguity
- High liquidity: Most popular market type