Implied Return

Implied return is the expected profit as a percentage of capital invested, calculated from the edge and the contract price. It converts edge points into a return metric traders can compare across opportunities.

CLI:sf edges --sort return

From Edge to Returns

Edge tells you how many cents of mispricing exist. Implied return tells you how profitable that mispricing is relative to your capital deployed.

Calculating Implied Return

Implied return = Edge / Entry Price

If your thesis says a contract should be at 45 cents and it's trading at 30 cents:

Edge = 15 points
Entry price = 30 cents
Implied return = 15 / 30 = 50%

This means if your thesis is correct, you expect a 50% return on invested capital.

Why This Matters

Two trades can have the same edge but very different returns:

Trade A: Edge = 10pt, entry at 20 cents → Return = 50%
Trade B: Edge = 10pt, entry at 80 cents → Return = 12.5%

Trade A is 4x more capital-efficient. If you have limited capital (most traders do), implied return should influence which opportunities you prioritize.

Risk-Adjusted Returns

Implied return doesn't account for the probability of being wrong. A more complete metric is:

Expected return = (thesis_prob × (1 - entry_price) - (1 - thesis_prob) × entry_price) / entry_price

This weights the upside by the probability of winning and the downside by the probability of losing.

Comparing Across Markets

The sf edges output can be sorted by implied return instead of raw edge, giving you a capital-efficiency perspective on your opportunities.

Example

Three opportunities with different return profiles:

Market            Entry  Thesis  Edge   Implied Return
KXRECSSNBER-26    $0.28  42%     +14pt  50.0%
KXGDP-26Q2-T2.0  $0.62  72%     +10pt  16.1%
KXWTIMAX-T150     $0.05  12%     +7pt   140.0%

By edge alone:   KXRECSSNBER-26 wins (14pt)
By return alone: KXWTIMAX-T150 wins (140%)
By expected value: KXRECSSNBER-26 likely still wins
  (higher confidence, better liquidity)

Risk-adjusted expected return for KXRECSSNBER-26:
  (0.42 × $0.72 - 0.58 × $0.28) / $0.28 = 50% expected return

Related Terms

Executable Edge

Executable edge is edge that can actually be traded — meaning the market has sufficient liquidity, tight enough spreads, and low enough fees for you to profitably capture the mispricing.

Edge

Edge is the difference between the market price of a prediction market contract and your estimated true probability. Positive edge means you believe the contract is mispriced in your favor.

Position Sizing

Position sizing determines how many contracts to buy based on your edge size, confidence level, and bankroll. The Kelly criterion is the mathematically optimal approach: bet a fraction of your bankroll proportional to your edge.

Cost Basis

Cost basis is your average entry price across all purchases of the same contract. If you buy 100 contracts at 28 cents and 100 more at 32 cents, your cost basis is 30 cents.

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