Event Contracts Explained: The Financial Instrument Wall Street Doesn't Want You to Know About

There is a financial instrument that lets you trade on whether the Fed will cut rates, whether it will snow in New York tomorrow, or whether the S&P 500 will finish above a certain level — all with defined risk, no margin requirements, and a maximum loss that you know before you click buy. It is called an event contract, and if you have not encountered them yet, you are about to hear a lot more about them.

Event contracts are not new in concept — versions of them have existed in academic settings and offshore markets for decades. What is new is that they are now legally available to retail traders in the United States through CFTC-regulated exchanges. That changes everything about accessibility, legitimacy, and the kind of capital these markets attract.

What Exactly Is an Event Contract?

An event contract is a binary financial instrument that pays out based on whether a specific real-world event occurs. The structure is simple: a contract resolves to $1 if the stated event happens, and $0 if it does not.

The price of the contract at any given time reflects the market’s collective estimate of the probability that the event will occur. A contract trading at $0.70 implies the market believes there is approximately a 70% chance the event happens. A contract at $0.15 implies a 15% chance.

You can buy or sell these contracts at any time before they settle, and your profit or loss is the difference between your entry price and either the settlement value ($1 or $0) or the price at which you sell.

Here is a concrete example. Suppose Kalshi lists a contract: “Will the daily high temperature in Chicago exceed 40 degrees F on March 5?” The contract is currently trading at $0.65. If you buy one contract for $0.65 and the high temperature does exceed 40 degrees, the contract settles at $1.00 and you profit $0.35. If the temperature stays at or below 40 degrees, the contract settles at $0.00 and you lose your $0.65 stake.

That is the entire mechanic. No leverage, no margin calls, no complex Greeks to calculate. Your maximum loss is always your purchase price.

How Event Contracts Differ from Options and Futures

If you have traded stock options or futures, event contracts will feel familiar in some ways and radically different in others.

vs. Stock Options

Stock options give you the right to buy or sell an underlying asset at a specific price. Their value depends on multiple factors: the stock price, strike price, time to expiration, volatility, and interest rates. Pricing requires models like Black-Scholes, and the risk profile can be complex — especially for sellers.

Event contracts strip all of that away. There is no underlying asset to track. The payout is binary: $1 or $0. The price is intuitive because it directly represents a probability. You do not need to understand delta, gamma, theta, or vega. You need to understand one thing: is the market’s implied probability higher or lower than the true probability?

vs. Futures

Futures contracts obligate you to buy or sell a commodity or financial instrument at a future date. They involve margin, can result in losses larger than your initial investment, and require active risk management.

Event contracts have no margin requirement. You pay the full contract price upfront, and that is the most you can lose. There is no scenario where you owe more than you invested. This makes them accessible to traders who do not want or cannot manage the leverage inherent in futures trading.

vs. Sports Betting

Event contracts and sports bets are structurally similar — both are wagers on binary outcomes. But there are critical differences. Sports betting odds are set by a bookmaker who takes a built-in margin. Event contracts trade on an exchange where prices are set by supply and demand among participants. You can also sell event contracts before settlement to lock in profits or cut losses, which is not possible with most sports bets. For a deeper breakdown, see our comparison of prediction markets and sports betting.

How Pricing Works: Cents Equal Probability

This is the most elegant thing about event contracts. The price in cents is the implied probability in percentage points. A contract at $0.45 implies a 45% probability. A contract at $0.92 implies a 92% probability.

This means trading event contracts is fundamentally an exercise in probability assessment. If you believe the true probability of an event is higher than the market price, you buy. If you believe it is lower, you sell. Over a large number of trades, if your probability estimates are better calibrated than the market’s, you will profit.

The pricing also moves in real time as new information arrives. When a weather forecast shifts, the temperature contracts reprice. When an economic data release surprises, the Fed rate contracts move. The market is constantly updating its probability estimate, and your job as a trader is to determine whether it has updated correctly — or whether it has overreacted, underreacted, or missed something.

Settlement Mechanics

Every event contract has a clearly defined settlement source and time. This is non-negotiable and specified before the contract begins trading.

Weather contracts might settle based on NOAA-recorded temperatures. Economic contracts settle on official government data releases. Financial contracts settle on official closing prices from exchanges like the NYSE or CME. The settlement source is always an objective, third-party data provider — not the exchange itself.

Settlement typically occurs shortly after the relevant data becomes available. Weather contracts often settle the morning after the observation day. Economic contracts settle within minutes of the data release. Financial market contracts settle after the official close.

When a contract settles at $1.00, holders of Yes contracts receive $1.00 per contract. When it settles at $0.00, holders of No contracts receive $1.00 per contract (since buying No at $0.30 is equivalent to selling Yes at $0.70 — you profit $0.70 if the event does not occur).

Types of Events You Can Trade

The range of tradeable events has expanded dramatically since the first CFTC-approved event contracts launched. Here is what is available on major platforms today:

Financial Markets

S&P 500 above/below contracts, Bitcoin and Ethereum price ranges, individual stock earnings outcomes, and interest rate decisions. These are some of the most liquid event contracts available and attract traders who want simpler alternatives to options.

Economics

Federal Reserve rate decisions, CPI and inflation data, unemployment claims, GDP releases, and other macroeconomic indicators. These contracts are particularly interesting because they let you directly express a view on economic data without having to trade the downstream instruments (bonds, equities) that react to them.

Weather

Daily high and low temperature contracts for major US cities. These are surprisingly tradeable for anyone willing to learn basic weather forecasting and probability modeling. Check out our guide to weather market trading for the full breakdown.

Politics and Current Events

Election outcomes, policy decisions, geopolitical events, and more. The 2024 election cycle generated massive volume on prediction markets and proved that these contracts can aggregate information more accurately than traditional polling.

Sports and Entertainment

Some platforms offer contracts on game outcomes, award shows, and other entertainment events, though availability depends on regulatory status and platform.

A Brief History: How We Got Here

Event contracts existed in legal gray areas for years. Platforms like Intrade and PredictIt operated under limited regulatory frameworks or academic exemptions. The real breakthrough came when Kalshi received CFTC approval in 2020 to operate as a designated contract market (DCM) for event contracts.

This was a watershed moment. It meant event contracts were recognized as legitimate financial instruments under US commodities law. It opened the door for regulated trading, proper fund segregation, and the kind of institutional trust that attracts real capital.

Since then, the market has grown significantly. Kalshi has expanded its product lineup, Polymarket has become a major force in the crypto-based prediction market space, and other platforms have entered or are seeking regulatory approval. The total volume across prediction market platforms has grown from millions to billions of dollars annually.

The CFTC’s ongoing engagement with event contracts — including approvals for new contract types and enforcement actions against unregulated platforms — suggests this is not a fad. Event contracts are becoming a permanent part of the financial landscape.

Why Event Contracts Matter

Event contracts solve a real problem: they let you trade directly on outcomes rather than proxies. If you think the Fed is going to cut rates, you do not have to figure out which bond ETF to buy and how much duration risk to take. You buy a Fed rate cut contract and your thesis is directly expressed.

They also democratize access to markets that were previously available only to institutional players. Weather derivatives have existed for decades, but they traded in institutional OTC markets with million-dollar minimums. Now you can trade weather risk for less than a dollar per contract.

For retail traders, the defined-risk nature of event contracts is transformative. There is no scenario where a trade blows up your account overnight. You cannot get margin-called. You cannot lose more than you put in. That does not mean you cannot lose money — you absolutely can — but the losses are always bounded and known in advance.

If you are interested in getting started, our beginner’s guide to prediction markets covers the fundamentals, and our platform comparison guide will help you choose where to trade.

The Bottom Line

Event contracts are probability instruments with binary payoffs, defined risk, and intuitive pricing. They are not a get-rich-quick vehicle — fees are real, and mispricing edges are often slim. But for traders who think in probabilities, who want exposure to events without the complexity of traditional derivatives, and who appreciate the simplicity of “it either happens or it does not,” event contracts represent one of the most interesting developments in retail trading in years.

The asset class is still young. Liquidity is growing, new contract types are launching regularly, and the regulatory framework is solidifying. Getting familiar with event contracts now, while the market is still maturing, is a reasonable bet — if you will pardon the phrasing.