How YES/NO Contracts Pay Out: Calculate Maximum Loss First

The Basic YES/NO Structure

Many event contracts have two outcomes: YES or NO.

If you buy YES, the contract settles at $1 if the event happens and $0 if it does not.

If you buy NO, the logic is reversed.

A Simple Example

Market question: Will this team win tonight?

YES price: $0.40.

You buy 100 YES contracts:

Cost = 100 × $0.40 = $40
If YES settles at $1: receive $100, profit $60
If YES settles at $0: receive $0, lose $40

Your maximum loss is not unlimited. It is the $40 you paid.

But that does not make the risk small, because the percentage loss can be 100%.

Breakeven Probability

Ignoring fees, a $0.40 YES contract needs the true probability to be above about 40% to have positive expected value.

In reality, there are also:

• Bid-ask spread
• Trading fees
• Slippage if you exit early
• Settlement waiting time
• Rule dispute risk

So “I think it is 45%” may not be enough. The edge may be too small.

Buying NO Is Not Like Shorting a Stock

A NO contract does not have unlimited short risk.

If NO costs $0.30 and you buy 100 contracts, your maximum loss is $30 and maximum payout is $100.

But check the rules. YES and NO prices may not add exactly to $1 because of fees, spreads, and liquidity.

Pre-Trade Calculation Table

Fill the table before trading.

Quiz

Q1. If you buy 100 YES contracts at $0.40, what is maximum loss?
A. $40　B. $100　C. Unlimited

Q2. If YES wins, it usually settles at:
A. $0　B. $1

Q3. Does a $0.40 price guarantee true probability is exactly 40%?
A. Yes　B. No, it is a market-implied price

Answer Key

Q1: A　Q2: B　Q3: B

Further reading: CFTC — Event Contracts · Investopedia — Expected Value

For education only. Prediction market contracts can lose the full amount paid.