Implied Probability
Definition
Implied probability is the probability of an event that a contract's price suggests. For a binary contract paying $1, a price of 60 cents implies a 60% probability before costs. The CFTC says 'a contract's price reflects traders' perceived probability of the event outcome.' The reading is an approximation: it depends on which price is used, on fees, and on how traders' beliefs and risk preferences combine.
Why it matters
Implied probability is a convenient summary, but trading decisions depend on the executable price after fees. Investors should convert the ask or bid they will actually trade at, add the fee for their size, and treat the result as the market's estimate rather than a measured probability.
Common misconceptions
- •The last trade is not necessarily tradable now.
- •Implied probability before fees understates what a buyer needs.
- •Prices across all outcomes may not sum exactly to 100% because of spreads.
- •A market's estimate can be biased, especially for longshots.
Technical details
Worked example: from price to break-even probability
Bid 58 cents, ask 62 cents; midpoint 60 cents, implying 60%.
Buy 100 yes at 62 cents: cost $62.00.
Kalshi standard fee: 0.07 x 100 x 0.62 x 0.38 = $1.6492, rounded up to $1.65.
Total cost $63.65 for a $100 payout: break-even probability 63.65%.
On a Polymarket finance-category market (taker fee rate 0.04), the fee on the same trade is about $0.94, for a break-even near 62.94%.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Does a contract priced at 60 cents mean a 60% chance?
- Approximately, as a market estimate, not as a fact. Research by Wolfers and Zitzewitz found that 'for a broad class of models prediction market prices are usually close to the mean beliefs of traders,' and that prices 'typically provide useful (albeit sometimes biased) estimates of average beliefs.' A 60-cent price says traders on average lean about 60% toward yes; it does not make the event 60% likely.
- Which price should I convert?
- The one you can trade at. The displayed price may be a last trade or a midpoint. With a bid of 58 cents and an ask of 62 cents, the midpoint implies 60%, but buying yes costs 62 cents, so the probability you need to justify buying is at least 62%.
- How do fees change it?
- They raise the probability you need. Kalshi's standard fee schedule, as read for AltStreet's Kalshi review, charges 0.07 x contracts x price x (1 - price), rounded up to the cent. Buying 100 contracts at 62 cents costs $62.00 plus a $1.65 fee, so the break-even probability is about 63.65%, not 62%.