trades& tactics
THE PREDICTION TRADE
Making Rain Prediction markets will pay you to get the weather forecast right—something made easier if you know what to look for By Mike Reddy abylonians attempted to predict the weather as early as 650 B.C. by looking at cloud patterns in the sky. Today, meteorologists use images and data transmitted by satellites tens of thousands of miles above the Earth’s surface. Forecasting has come a long way. Event-based prediction markets represent yet another tool for weather forecasting, albeit a terrestrial one still in its infancy. But what makes prediction markets unique is that virtually anyone can participate in them, and a forecaster’s accuracy—or lack thereof—bears real financial consequences. In short, it pays to be a better weather bettor. On the federally regulated events exchange Kalshi, daily recurring markets attempt to fore-
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Chicago high temp <63°
Yes 44¢
No 56¢
63°- 64° Yes 31¢
No 69¢
>64°
No 75¢
Yes 25¢
— A daily weather market at kalshi.com cast high temperatures for New York City and Chicago. Other daily markets aim to forecast whether it will rain in New York City and Seattle. Market structures vary. For instance, a “Seattle rain” market may simply forecast whether the city will record greater than zero inches of rain on a given day. Traders could buy “Yes” or “No” shares for a fraction of a dollar, with share prices roughly representing the market’s fore-
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casted probability of a specific outcome. When the market ultimately resolves, correct shares pay out for the full dollar, and incorrect shares become worthless. Alternatively, high temperature markets may be broken up into multiple contracts, each with their own “Yes” and “No” shares. A “Chicago high temp” market, for example, may have contracts for “less than 63 degrees,” “63 degrees to 64 degrees” and “greater than 64 degrees.” To maximize profits, a trader convinced the temperature won’t break 63 degrees could buy “Yes” shares of the “less than 63 degrees” contract and “No” shares of all the others. Less confident traders could use the variety of contracts to hedge their forecasts. With advanced weather data just keystrokes away, it may seem tempting to dive headfirst into Kalshi’s climate markets. But the following tips are essential for first-time weather traders hoping to avoid rookie mistakes.
SEVEN-DAY FORECASTS can accurately predict the weather 80% of the time.
FIVE-DAY FORECASTS are accurate about 90% of the time.
1. Know what you’re forecasting New York City and Chicago are big cities—big enough that the weather in one part may differ from the weather in another. That’s why it’s critically important to read each market’s rules
Luckbox | July 2022
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6/17/22 10:00 AM
