What Are Event Contracts

Read our Advertiser Disclosure.
Contributor, Benzinga
November 7, 2023

In 2022, a new financial asset hit the market: event contracts. 

Launched by groups like Kalshi and the Chicago Mercantile Exchange (CME), these contracts let investors trade predictions, not assets. Their unique construction limits risk, inviting small-time traders to dabble in volatile futures without losing their shirts.

Of course, there’s a catch: smaller payouts to match smaller risks. In this article, Benzinga explores how event contracts work, the pros and cons and how to trade them. 

How Do Events Contracts Work?

Event contracts, also called prediction or information contracts, are tradable futures contracts that expire daily. Instead of trading assets, however, event contracts trade the outcome of an event — things like whether an asset, like gold or crude oil, will close above or below a set price.

These contracts have a simple construction. Every issuer sets a per-contract payout limit and bid range. Investors bid on predicted outcomes by bidding “Yes” or “No” at the current bid price. When the contract expires, correct bidders receive the contract payout, while incorrect bidders receive nothing. 

Take CME, for example, which pays $20 per contract and sets a bid range of $0.25-$19.75 (variable by probability). Say CME issues a contract betting whether gold will close below $2,000. Bidding “Yes” costs $5; bidding “No” costs $10.

  • If you bid “No” and win, you’ll receive a $20 payout for a $10 profit.
  • If you bid “No” and lose, you’ll receive no payout and lose your $10 bid. 

Event contracts’ construction effectively limits their profit and risk potential. While you can’t earn more than the set payout, you can’t lose more than you bid. In other words, you know exactly how much you’ll profit or lose before you buy.  

Common Markets Traded

Most events contracts — those issued by CME Group — originate in key futures markets like:

  • Energy (crude oil, natural gas, etc.)
  • Metals (gold, silver, copper, etc.)
  • Equity indices (the DOW, S&P 500, Nasdaq-100, Russell 2000)
  • Currencies (forex, cryptocurrency, etc.) 

Kalshi, another event contract exchange, goes further. With Kalshi, you can buy and sell event contracts (maximum payout: $1) bidding on everything from inflation and interest rate movements to upcoming Oscar winners. 

How is Trading an Event Contract Different From Trading Stocks?

Trading event contracts differs drastically from trading stocks in several key ways.

  1. Event contracts don’t trade actual assets or represent company ownership. You’re betting on whether today’s events will push an asset’s price up or down. 
  2. Event contracts expire same-day, so you can’t make long-term plays. Today’s event outcome depends on today’s news, not a company’s fundamentals or annual performance. 
  3. Events contracts reveal your maximum profit or loss upfront based on bid and contract payout prices. Correct bidders receive the maximum per-contract payout, and incorrect bidders lose their bid. Conversely, trading stocks leaves your profits and losses unknown and open-ended.  

Advantages of Trading Events

Investors trade events for their numerous benefits, like:

  • Direct contracts: Unlike most investable contracts, event contracts don’t trade on an underlying asset. You’re bidding directly on that day’s price outcome. 
  • Limited-risk construction: Event contracts cap both bids and maximum payouts. Even before you bid, you know how much you stand to lose (or profit).  
  • Short-term trading: Daily expirations allow traders to quickly move in and out of market positions and eliminate overnight market risks. 
  • Increased accessibility: Futures are a notoriously volatile asset class. Thanks to their low prices, daily expirations and limited-risk construction, small-time investors can access the futures market with greater confidence. 
  • No pattern day trading restrictions: Unlike Normal day trading, you don’t have to fit certain qualifications (margin account funding, etc.) to trade. Bid on as many or few positions as you want, as often as you want.  

Risks of Trading Events

There’s no such thing as a risk-free investment, and risk-limited contracts are no exception. 

To start, there’s always the risk that you’ll lose money. Yes, the contract limits your losses, but that’s still money leaving your pocket. There’s also no wiggle room on how much you lose per contract, as your bid locks in your profit/loss potential.   

Additionally, it’s possible to compound your losses by bidding multiple times on the same event.  If you bid incorrectly on 100 identical contracts, you’ll lose money on all 100 contracts. 

Event contracts also don’t give you the right to buy or take possession of the underlying asset. While that’s not exactly a risk, you may still feel disappointed that you can’t buy a barrel of oil for $20.  

How to Trade Event Contracts

The first thing you need to trade event contracts is a brokerage firm that participates in trading contracts with CME or Kalshi. While CME and Kalshi traders can access different markets, this article focuses on CME’s futures-based contracts.

From there, you just need to take a few quick steps to start trading. 

Pick Your Market

Deciding what to trade can be tricky with event contracts. Since they expire on the same day, you can’t plan around their long-term risk-reward potential. Instead, you’ll have to focus your market research on the short-term view. 

Ask yourself questions like:

  • Do you have particular experience with or knowledge in one market, like energy or equity indices? 
  • If not, does any market appeal to your short-term goals or preferences?
  • What does each market’s short- and long-term price trend look like?
  • What kinds of news or global events move prices in each market?
  • How far do prices tend to move, on average?

After answering these questions, you’ll better identify a market to take for a test drive. Before trading each day, be sure to brush up on recent price trends and reports or regulations that could impact market movements. 

Then, you’re ready to start trading, $20 at a time. 

Trade Yes or No

Each event contract proposes a question, like: “Do you think gold will close above $2,000 today?”

If you think gold will close high, you’d bid “Yes” on your contract. If you think gold will close low, you’d bid “No” instead. 

Remember that whether you win or lose depends on an asset’s closing price. That means you can only trade Yes or No during market hours – not a moment before or after. Kalshi’s non-derivative contracts may set alternative hours. 

Earn Profit Based on Your Insights

Event contracts are binary, which means you receive a payout on correct bids and nothing on incorrect bids. When you bid right, you profit; when you bid wrong, you lose your bid price. 

Additionally, the price of each bid depends on the current probability that an event will occur and fluctuates throughout the day. So, you’ll want to bid early enough to get a good price, but late enough to feel confident in your prediction of market movements. 

Best Brokers for Event Contracts

Below, you can see some of the best brokers for trading event contracts. Some, like Kalshi, both originate and broker trades. Most partner with other brokers, like CME, to offer event contract opportunities. If you’re looking for traditional futures trading, you can try platforms like Interactive Brokers, NinjaTrader or Discount Trading in order to diversify your portfolio.

Trading Can be Eventful

The introduction of event contracts has opened up another avenue for investors to express a view on financial markets. By allowing trading based on predicted outcomes of events with a structure that caps potential profits and losses, event contracts can be useful for making bets and managing risk.

Event contracts may be relatively new, but they’ve already begun revolutionizing how individual investors access futures. No longer do you have to navigate excessive risks and a sea of margin requirements. Instead, you can jump in and out $20 at a time, limiting risk while increasing your diversification. To participate, investors need to select a market, decide a “yes or “no” position and trade through a brokerage that offers these contracts.

Frequently Asked Questions

Q

Can I trade event contracts in IBKR?

A

Yes! You can buy and sell event contracts in IBKR. Interactive Brokers is a brokerage that offers access to this financial product.

 

Q

Are event contracts risky?

A

As with all trading, event contracts carry some risk. However, each contract tells you exactly how much you stand to win or lose before bidding, limiting your risk.

 

Q

Is trading events profitable?

A

As with all trading, events contracts can be profitable when you bid correctly. Knowing your market and timing your bids carefully is key to turning a profit on these short-term trades.

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.