#Definition
A short position is a trading stance that profits when a predicted event does NOT happen. In prediction markets, going short means you believe an outcome is less likely than the market implies and want to profit from its non-occurrence.
While traditional financial markets implement shorting through borrowing and selling assets, prediction markets make shorting simpler: you can buy No shares directly, which pay $1 if the event doesn't occur. Alternatively, some platforms allow selling Yes shares you don't own, with settlement handled automatically.
#Why It Matters in Prediction Markets
Short positions are essential for healthy prediction markets:
Two-sided markets
Without shorts, markets would only reflect bullish views. Short sellers provide the counterbalance that makes prices accurate. If everyone can only buy, prices would be systematically inflated.
Correcting overpriced outcomes
When the market overestimates a probability, short sellers profit by betting against it. This selling pressure pushes prices down toward fair value.
Expressing negative information
People with negative information (a product is failing, a candidate is losing support) need a way to profit from their knowledge. Short positions enable this, ensuring negative information gets incorporated into prices.
Traders can short to hedge existing positions or offset real-world exposures they want to protect against.
#How It Works
#Methods of Going Short
Buy No shares
The simplest method in most prediction markets:
Yes: $0.70 → implies 70% chance
No: $0.30 → implies 30% chance
Short strategy: Buy No at $0.30
If event doesn't happen: No pays $1, profit $0.70
If event happens: No pays $0, loss $0.30
Sell Yes shares
Some platforms allow selling shares you don't own:
Sell Yes at $0.70
If event doesn't happen: Buy back at $0 (or settles at $0), keep $0.70
If event happens: Must deliver $1, lose $0.30
Complete set mechanics
On platforms using complete sets:
1. Mint complete set (1 Yes + 1 No) for $1
2. Sell Yes for $0.70
3. Net position: Long 1 No at effective cost $0.30
4. If No wins: Collect $1, profit $0.70
#Short Payoff Diagram
#Numerical Example
A market asks "Will the company hit its revenue target?"
- Yes: $0.75 (75% implied probability)
- No: $0.25
Your analysis: Management guidance is overly optimistic. True probability is ~55%.
Short position: Buy 400 No shares at 100 invested
Outcome A: Target missed (No wins)
Payout: 400 × $1 = $400
Profit: $400 - $100 = $300
Return: 300%
Outcome B: Target hit (Yes wins)
Payout: 400 × $0 = $0
Loss: $100
Return: -100%
Expected value (if your 55% probability estimate is correct):
P(No wins) = 45%
EV = (0.45 × $300) - (0.55 × $100) = $135 - $55 = $80 expected profit
Even though you estimate No is more likely to lose than win, the mispricing creates positive expected value.
#Examples
#Example 1: Overvalued Favorite
A market prices "Incumbent wins re-election" at $0.85 (85%). Your analysis of polls, approval ratings, and historical patterns suggests true probability is 70%.
Short strategy: Buy No at $0.15
- If incumbent loses: 0.85 profit per share (567% return)
- If incumbent wins: 0.15 loss per share
The asymmetric payoff compensates for the lower probability.
#Example 2: Insider Knowledge
An employee knows their company's product launch is delayed, contrary to optimistic public statements. Market prices "Product launches Q2" at $0.65.
Short strategy: Buy No at $0.35
- Employee's knowledge suggests ~20% chance of Q2 launch
- Expected value strongly positive
#Example 3: Hedging Real-World Exposure
A contractor benefits financially if a construction project proceeds. A prediction market offers "Project approved" at $0.60.
Hedge via short: Buy No at $0.40
- If project approved: Real business gains, No loses
- If project rejected: Real business suffers, No wins and partially offsets loss
#Example 4: Correcting Momentum
A candidate's market price has risen from 0.70 on enthusiasm rather than fundamentals. Polls don't support the surge.
Short strategy: Buy No at $0.30, expecting reversion
- If momentum was irrational, price falls, No becomes more valuable
- If momentum was warranted, the short loses
#Risks and Common Mistakes
Unlimited loss potential (in some structures)
In traditional shorting, losses are theoretically unlimited: a 1,000. In prediction markets with No shares, maximum loss is what you paid. But selling Yes you don't own can create large obligations.
Being early
Overpriced markets can stay overpriced. Even if you're right that 0.60, the price might go to $0.90 before correcting. Timing matters.
Squeeze risk
If you've sold Yes shares, a sharp price rise might force covering at unfavorable prices before resolution.
Psychological difficulty
Shorting feels unnatural to many traders. Betting against outcomes (especially optimistic ones) can be psychologically uncomfortable, leading to premature exits.
Borrowing costs (where applicable)
Some platforms charge for short positions. These costs reduce profitability, especially for long-duration shorts.
#Practical Tips
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Size shorts conservatively: The asymmetric payoff structure means shorts can lose 100% but profits are capped. Adjust position sizing accordingly
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Know your platform's mechanics: Understand whether you're buying No shares, selling Yes, or using complete sets. Each has different implications
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Set clear exit criteria: Define in advance what would change your mind. Don't let a losing short position drift hoping for reversal
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Consider time decay: If a short is based on timing (event won't happen "by X date"), watch the calendar. As time passes without the event, No prices rise
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Use shorts for hedging: Even if you don't want to speculate bearishly, shorts can protect other positions or real-world exposures
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Don't short just because prices are high: High prices can be justified. Ensure you have genuine edge, not just contrarian instincts
#Warning: Short Squeeze
In thin markets, if many traders are short (betting NO) and the price starts to rise, they may panic-buy YES to close their positions. This buying pressure drives the price up further, forcing more shorts to cover.
While less common in binary prediction markets (where price is capped at $1.00), "squeezes" can still cause rapid losses if you are shorting a momentum-driven outcome.
#Related Terms
#FAQ
#Is shorting in prediction markets risky?
Buying No shares has limited risk; you can only lose what you invest. Selling Yes without owning it can have greater risk if prices rise before settlement. Overall, shorting is no riskier than going long, just directionally opposite.
#Why would I short if I think an event probably will happen?
Because of mispricing. If an event has a 70% probability but the market prices it at 90%, the No shares (10% implied) are underpriced. You're not betting the event won't happen; you're betting the probability is lower than the market thinks.
#How do I short on Polymarket?
On Polymarket, you buy No shares directly. The No price is the cost; if the event doesn't happen, you collect $1. There's no need to "borrow" shares; No is a tradable asset like Yes.
#Can I get squeezed shorting prediction markets?
If you've sold Yes shares without covering, and the price rises sharply, you face unrealized losses and may need to close at bad prices. However, this is less common than in stock markets because prediction market shorts typically involve buying No rather than naked selling.
#What's the maximum I can lose on a short?
If you buy No shares, your maximum loss is 100% of what you paid; the No becomes worthless if the event happens. If you've sold Yes shares, your loss is the settlement amount ($1) minus what you received. Platform-specific rules determine exact mechanics.