Complete whitepaper — every feature explained in detail
Options on prediction markets bring TradFi-style derivatives to event-driven markets. Buy Calls or Puts on prediction outcomes, use the Greeks for risk management, and deploy complex strategies like Straddles, Iron Condors, and Butterflies — all adapted for binary events.
In traditional finance, options give you the right (not the obligation) to buy or sell an asset at a specific price. In prediction markets, options give you the right to buy or sell a prediction share at a specific probability level (strike).
Call Option
You profit when the prediction price goes UP (event becomes more likely).
Example: Buy a Call on "BTC > $100k" with strike at 60%. If the market moves to 80%, your Call is worth 20% more.
Put Option
You profit when the prediction price goes DOWN (event becomes less likely).
Example: Buy a Put on "BTC > $100k" with strike at 60%. If the market drops to 40%, your Put is worth 20% more.
Unlike traditional options which have continuous price ranges, prediction market options are bounded between 0% and 100%. This creates unique pricing dynamics and strategy opportunities.
Adapted Black-Scholes for Prediction Markets
Call Premium = f(Current Price, Strike, Time to Resolution, Implied Volatility)
Put Premium = Call Premium - (Current Price - Strike) x e^(-r x T)
Key difference: Prediction prices are bounded [0, 1], so we use a bounded diffusion model instead of log-normal.
Option premiums are determined by several factors:
| Factor | Effect on Call | Effect on Put | Explanation |
|---|---|---|---|
| Current Price rises | Premium UP | Premium DOWN | Higher probability = Call more valuable |
| Time to Resolution | Premium UP | Premium UP | More time = more uncertainty = higher premium |
| Volatility rises | Premium UP | Premium UP | More price movement = options more valuable |
| Strike closer to current | Premium UP | Premium UP | ATM options have highest time value |
For a market like "Bitcoin > $100k by March" currently trading at 68%:
| Strike | Call Premium | Call Delta | Put Premium | Put Delta | Status |
|---|---|---|---|---|---|
| 50% | $18.20 | +0.85 | $2.10 | -0.15 | Deep ITM Call |
| 60% | $12.40 | +0.65 | $5.80 | -0.35 | ITM Call |
| 70% | $6.10 | +0.42 | $12.30 | -0.58 | Near ATM |
| 80% | $2.80 | +0.19 | $21.60 | -0.81 | OTM Call |
| 90% | $0.90 | +0.06 | $32.10 | -0.94 | Deep OTM Call |
How much your option price changes when the prediction price moves 1%.
Delta ranges: Deep ITM Call: +0.85 to +1.00 ATM Call: +0.45 to +0.55 Deep OTM Call: +0.00 to +0.15 Deep ITM Put: -0.85 to -1.00 ATM Put: -0.45 to -0.55 Deep OTM Put: -0.00 to -0.15
Delta also approximates the probability that the option will expire in-the-money. A Delta of 0.65 means ~65% chance of profit.
The rate of change of Delta. Measures how quickly your exposure changes.
Gamma is highest for: - ATM options (strike ≈ current price) - Near expiration (time running out) Gamma is lowest for: - Deep ITM/OTM options - Far from expiration High Gamma = your Delta shifts fast → More risk but more convexity
How much value your option loses each day just from time passing.
Theta behavior for predictions:
- ATM options: highest time decay
- Accelerates near resolution date
- OTM options: lower absolute decay
but faster % decay
Example:
30 days out: Theta = -$0.15/day
7 days out: Theta = -$0.45/day
1 day out: Theta = -$2.10/day
→ Option sellers profit from Theta
→ Option buyers fight against ThetaHow much your option price changes when implied volatility moves 1%.
Vega is unique for predictions:
- News events spike volatility fast
- Prediction vol ≠ financial vol
- Binary outcome creates "vol crush"
as resolution approaches
High Vega moments:
- Before major announcements
- Early in market lifecycle
- During uncertainty spikes
Strategy: Buy options before
catalysts (high Vega exposure)Buy both a Call AND a Put at the same strike. You profit if the market makes a big move in either direction. Perfect when you expect high volatility but don't know which way.
Market: "BTC > $100k" @ 68% Strike: 68% (ATM) Buy 1 Call @ 68% strike → Premium: $8.50 Buy 1 Put @ 68% strike → Premium: $8.50 Total Cost: $17.00 Profit if market moves to: > 85%: Call profit covers both premiums → NET PROFIT < 51%: Put profit covers both premiums → NET PROFIT 51-85%: Loss (not enough movement) Max loss: $17.00 (both premiums lost) Max gain: Unlimited in either direction Best for: Pre-announcement trades, high uncertainty events
Risk
Medium
Max Loss
$17.00
Breakeven
51% or 85%
Sell options at two strikes (collecting premium) and buy protective wings further out. You profit when the market stays within a range. Like selling insurance on extreme moves.
Market: "BTC > $100k" @ 68% Sell 1 Put @ 55% strike → Collect: $3.20 Buy 1 Put @ 45% strike → Pay: $1.50 Sell 1 Call @ 80% strike → Collect: $4.10 Buy 1 Call @ 90% strike → Pay: $1.80 Net Premium Collected: $4.00 Profit zone: Market stays between 55% and 80% Max profit: $4.00 (if market stays in range) Max loss: $6.00 (wing width - premium) Best for: Low-volatility periods, markets with stable consensus
Risk
Low-Medium
Max Profit
$4.00
Range
55%-80%
Buy a Call at a lower strike and sell a Call at a higher strike. Reduces your premium cost but caps your upside. Perfect when you're moderately bullish.
Market: "Fed cuts rates in March" @ 14% Buy 1 Call @ 10% strike → Pay: $5.80 Sell 1 Call @ 25% strike → Collect: $2.10 Net Cost: $3.70 If market goes to 25%+: Profit: ($25-$10) - $3.70 = $11.30 If market stays below 10%: Loss: $3.70 (net premium paid) Risk/Reward: 1:3.05 (risking $3.70 for $11.30) Best for: Moderate directional conviction with limited downside, event catalysts
Risk
Medium
Max Profit
$11.30
Risk/Reward
1:3.05
Buy options at two outer strikes and sell double at a middle strike. Maximum profit when the market expires exactly at the middle strike.
Market: "S&P 500 ends 2025 positive" @ 72% Buy 1 Call @ 65% strike → Pay: $10.20 Sell 2 Calls @ 72% strike → Collect: $14.00 Buy 1 Call @ 79% strike → Pay: $4.50 Net Cost: $0.70 Max profit: $6.30 (if market expires at exactly 72%) Profit zone: 65.7% to 78.3% Max loss: $0.70 (very low risk) Best for: When you have strong conviction about where a market will settle, cheap exposure
Risk
Low
Max Profit
$6.30
Cost
$0.70
| Market View | Strategy | Risk | Best Scenario |
|---|---|---|---|
| Bullish | Bull Call Spread | Medium | Expect probability to rise moderately |
| Bearish | Bear Put Spread | Medium | Expect probability to fall moderately |
| Volatile | Straddle / Strangle | Medium | Before major announcements / catalysts |
| Range-bound | Iron Condor | Low-Medium | Stable consensus, low-activity period |
| Precise target | Butterfly | Low | Strong conviction on final probability |
| Income | Covered Call | Low | Hold shares and sell upside premium |
Important Disclaimer
These examples are simplified for educational purposes. In practice: probabilities fluctuate, basis risk exists (imperfect correlation between event and your real exposure), some hedges require rebalancing, and regulations vary by country. But the core principle holds: you can hedge almost any real-world risk with prediction markets, often better and cheaper than traditional insurance.